Big 4 partnerships should be capped at 400, inquiry recommends

The parliamentary inquiry into consulting firms has urged the government to limit accounting partnerships to 400 partners, as is the case for legal partnerships.

The parliamentary joint committee on corporations and financial services has tabled its final report for its inquiry into the audit, assurance and consultancy industry, outlining 16 priority recommendations for immediate action and 40 in total.

Among the priority recommendations made by the inquiry, the committee has recommended that the Australian government reduce the allowable size of partnerships for accountants to a maximum of 400 partners to align with the limits of legal partnerships.

The committee said the 400 partner cap could be established with a suitable transition period of up to five years to minimise disruption to the sector.

“A review of progress to this end should be conducted after two years, if at that time the entity has not chosen to incorporate,” the final report said.

The committee has also called for large multidisciplinary accounting firms to be banned from supplying both audit and non-audit/consultancy services to the same client and their associated entities in both Australia and internationally.

Large multidisciplinary accounting firms should also be required to implement operational separation of their audit practice from their non-audit practice, the committee said in its final report.

“The principles of operational separation should be materially consistent with those applying in the United Kingdom or other global best practice,” it said.

The committee has also recommended that audit, accounting and consulting partnerships with greater than 3,000 staff be required to implement the Corporations Act 2001 requirements for governance and accountability, if appropriate, through the adoption of the Australian Securities Exchange Corporate Governance principles.

“This should include the requirement for multidisciplinary partnerships to prepare their own general purpose financial reports, including remuneration disclosures and other obligations which may be applicable to partnerships,” it said.

“The government should review the operation of this measure within three years, with a view to extending its scope to mid-size partnerships.”

The committee has also recommended that the Australian government legislate to enhance the Australian Securities and Investments Commission’s (ASIC) power to take enforcement action against audit firms, not just individuals, including for quality management standards.

It also wants the government to give further powers to ASIC to oversee audits to cover all partners within multidisciplinary firms regardless of which part of the firm they work in, as required in the UK Financial Reporting Council Audit Firm Governance Code.

It has also urged ASIC to re-establish a program of random audit inspections and supplement its existing risk-based approach by reviewing audit files where conflicts of interest arise from the big four firms providing other services to their audit clients.

The report noted that such conflicts will no longer occur once the operational separation of audit is implemented.

The committee also wants to increase the level of resources it devotes to financial report inspections and audit inspections until there is a significant improvement in audit quality.