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analysis A decline in the big four's auditing quality stokes fears of an Enron-style corporate collapse

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Summary

The big four accounting giants, EY, Deloitte, KPMG and PwC, are dominating auditing work in Australia's ASX 300 companies. These companies have paid an estimated $4 billion in auditing and consulting fees to the big four between 2018 and 2022. The quality of auditing in Australia is declining, which has caused concern that it could trigger another Enron-style corporate collapse. Labor Senator Deborah O'Neill has reopened a parliamentary inquiry to investigate the structure, deficient regulation and conflicts of the big four and why ASIC decided to abandon inspection reports. Whistleblower Tony Watson has accused his former client, Lendlease, of double dipping on tax, which he believes was wrong. He has taken legal action against his law firm and Lendlease, and tipped off the ATO, which is auditing the company. The big four have responded with statements regarding their audit practices.

Q&As

What is the impact of the big four accounting firms on Australia's ASX 300 companies?
The big four accounting firms have infiltrated the ASX 300 companies and have been dominating auditing, with 97% of the external audit work of the ASX 300 companies done by the big four. These companies shelled out an estimated $4 billion in auditing and consulting fees to the big four between 2018 and 2022.

How has the quality of auditing declined in recent years?
According to ASIC's inspection reports, deficiencies in a third of the biggest firms were found. Separate reviews found negative findings in 50% of Deloitte's auditing cases and 48% of KPMG's.

What potential consequences could arise from a decline in auditing quality?
If auditing fails, it can be catastrophic. The collapse of Enron torched tens of billions of dollars of shareholder and employee money after it emerged that its financial accounts were a sham and it couldn't pay the bills.

What role does the government have in regulating the auditing industry?
The government has a role in regulating the auditing industry by conducting parliamentary inquiries into the structure, deficient regulation and conflicts.

What are the conflicts of interest that may arise when auditing firms act in dual roles as both auditors and consultants?
When auditing firms act in dual roles as both auditors and consultants, their independence can be compromised, which can impact their appetite to stand up to clients if accounting irregularities are suspected. Non-audit fees as a proportion of audit work for the audit firms was 39% across the ASX300 companies between 2018 and 2022.

AI Comments

👍 This article provides important insight into the role of the big four accounting giants and their potential impact on the financial system. It is an important issue that needs to be addressed in order to prevent another Enron-style collapse.

👎 This article does not provide any concrete solutions to the problem of declining auditing quality and the potential for another corporate collapse. It is simply a warning with no actionable steps to take to prevent such a disaster.

AI Discussion

Me: It's an analysis about how the big four accounting giants have been racking up billions of dollars in auditing fees in the private sector as the quality of auditing has declined, heightening fears of another Enron-style corporate collapse. It also looks at how the big four have infiltrated government departments and their role in the boardrooms of corporate Australia.

Friend: Wow, that's really concerning. Do we know what the implications of this could be?

Me: Yes, the article talks about how this could trigger another global financial crisis, like what happened in 2008. It also raises questions about the conflicts of interest that arise when the big four act in the dual role of independent auditors and consultants. And there are legal actions underway alleging substandard auditing and advisory work across the big four firms.

Action items

Research the current regulations and oversight of the auditing industry in Australia.
Reach out to local government representatives to discuss the implications of the article and the need for increased regulation and oversight of the auditing industry.
Contact the whistleblower in the article to learn more about his experience and the potential for further action.

Technical terms

Big Four: The four largest accounting firms in the world, which are EY, Deloitte, KPMG, and PwC.
ASX 300: The Australian Securities Exchange 300 Index, which is a stock market index that tracks the performance of the top 300 companies listed on the Australian Securities Exchange.
Auditing: The process of examining and verifying the accuracy of financial records and statements.
Conflicts of Interest: A situation in which a person or organization is involved in multiple interests, one of which could possibly corrupt the motivation for an act in the other.
Enron: An American energy company that went bankrupt in 2001 due to accounting fraud and corruption.
Global Financial Crisis: A period of economic downturn that began in 2008 and affected markets around the world.
Tax Minimisation: The process of reducing one's tax liability by taking advantage of deductions, credits, and other tax benefits.
Cyber Security: The practice of protecting networks, systems, and programs from digital attacks.
Proxy Adviser: An independent third-party that provides advice to shareholders on how to vote on corporate matters.
Auditor: An independent third-party that examines and verifies the accuracy of financial records and statements.
Whistleblower: A person who reports illegal or unethical activities within an organization.