The Australian Securities and Investments Commission (ASIC) has informed auditors of its initiative to use data-driven surveillance to inspect auditor independence and conflicts of interest.
This development follows demands for enhanced regulation within the sector, reported The Conversation.
The initiative aims to address concerns over the dual roles played by accounting companies, particularly the ‘big four’ – PricewaterhouseCoopers, Ernst & Young, KPMG, and Deloitte – which provide both auditing and consulting services.
Recent research titled ‘CEO performance targets: The impact of big four accounting firms versus other compensation consultants’ delves into the issue of chief executive pay and the potential conflicts of interest that arise when firms offer consulting alongside auditing services.
The study suggests that auditors might avoid rigorous scrutiny of clients to maintain profitable consulting agreements.
This practice could undermine an auditor’s objectivity and independence, potentially leading to issues with executive compensation structures.
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By GlobalDataThe research, published in the Australian Journal of Management, analysed compensation structures of CEOs from the 500 companies on the Australian Securities Exchange from 2005 to 2019.
It found that the big four, when acting as compensation consultants, upheld more stringent standards than smaller businesses, recommending performance measures that account for market-wide factors and reduce ‘pay for luck’ scenarios.
The study also suggests that the big four’s range of services across various industries may lessen their dependence on individual clients, allowing them to set more transparent performance metrics.
This contrasts with non-big four consultants, who often set less defined targets, potentially leading to decreased accountability.
Former Australian Competition and Consumer Commission chairman Graeme Samuel has highlighted the potential conflicts posed by the big four’s consulting services, which could affect their auditing responsibilities.
The findings indicate that the big four’s reputation and expertise might discourage practices that obscure performance metrics or lead to excessive chief executive pay.
The auditing sector is poised to closely observe the outcomes of ASIC’s upcoming regulatory efforts.
