Reasons for Spotlight on Big Four Audit Firms in Australia

This essay discusses about the main reasons for which the Banking Royal Commission should put light in the big four audit firms in Australia. For this reason, certain aspects like auditor’s independence, audit quality, non-audit services and others are incorporated for this purpose.

Running head: AUDITING AND ASSURANCE SERVICES
Auditing and Assurance Services
Name of the Student
Name of the University
Author’s Note

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Synopsis
This essay discusses about the main reasons for which the Banking Royal Commission
should put light in the big four audit firms in Australia. For this reason, certain aspects like
auditor’s independence, audit quality, non-audit services and others are incorporated for this
purpose. This essay also shows the main opportunities and challenges that the Australian
auditors are facing in the 21st century. Some of the recent regulatory attempts for improving
the audit quality includes the introduction of key audit matters and others.

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Introduction
The audit profession involves in the methodical analysis as well as examination of the
financial reports of the audit clients so that material misstatements in them can be identified
that occur due to errors and frauds (Knechel & Salterio, 2016). There are certain
responsibilities of the auditors in the audit procedures. The audit responsibilities must be
fulfilled alongside maintaining ethics in the overall audit procedures (Chui & Pike, 2013).
There are four major accounting companies that do the audit of most of the large corporation;
these companies are called ‘Big Four’ audit firm. These companies are PwC, KPMG, Deloitte
and EY. The large accounts of the large companies are audited by these companies due to
their quality services and goodwill in the market. However, there is a major deterioration in
the provided auditing services to the audit clients by these audit companies (Mohamed &
Habib, 2013). Development of major concerns can be seen in the recent years regarding the
auditing services of these four companies and there are claims where it is said that the
Banking Royal Commission should examine and inspect the operations of these companies.
This essay takes an attempt to look into this matter for gaining valuable insight. This
particular essay consists of two parts. The first part analyses the fact that whether the Banking
Royal Commission should enquire the operations of Big Four audit firms. The second part
aims at analysing both the opportunities and challenges that the auditors face in Australia.
The recent regulatory attempts taken for improving the audit quality is another crucial aim of
this part. A conclusion is provided at the end of the essay.

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Reasons for Agreeing with the fact that the “big four” accounting firms should be under
the spotlight of the Banking Royal Commission
It can be seen from the provided article in ABC News that the big four accounting
firms of Australia should be put under the spotlight of the Banking Royal Commission
(abc.net.au, 2019). It is needed to examine the main reasons why the Banking Royal
Commission should put spotlight on the auditing operations of the big four Australian firms.
The enquiry of the Banking Royal Commission is considered as the ultimate form of enquiry
in different kinds of frauds and misconducts in the financial services, banking and
superannuation industry. The following discussion shows the main reason for the above
statement.
Auditor’s Independence, Audit Quality and Non-Audit Services
There are three major factors in the auditing profession that the auditors are needed to
take into consider yon; they are audit quality, auditor’s independence and non-audit services.
The auditors are required to maintain their internal and external indepdence from the audit
client and it implies that the auditors should not have any financial and non-financial interest
in the audit client (Sarwoko & Agoes, 2014). Integrity as well as objectivity are two crucial
aspects that need to be maintained in auditor’s independence. Proper maintenance of
auditor’s independence lead to the occurrence of quality that involves the methodical
inspection of the accounts of the client. Performing quality audit is possible when the auditors
maintain indepdence from the audit clients (Gul, Wu & Yang, 2013). Another crucial aspect
of the non-audit services which are separated from the auditing services and the auditors
provide these kinds of services to their clients apart from the auditing services for which they
charge separate fees to the audit client. Audit indepdence gets majorly affected with the
extensive delivery of non-audit services (Arruñada, 2013).

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Conflict of Interest Due to Non-Audit Services to the Same Client
It can be seen from the provided article in ABC News that there is the presence of
conflict of interest as a result of providing extensive non-audit and consultancy services to the
same audit clients where they have the respobslity to audit the financial statements of the
same clients (abc.net.au, 2019). According to Mr Brooks from the article, clients receive
some specific non-audit services from these Australian big four audit firms such as financial
transaction related advices, advices related to financial as well as derivative products and
others apart from auditing financial accounts (abc.net.au, 2019). Mr Book has pointed
towards a crucial fact that the these big four audit firms generate two-third of their total
incomes from the delivery of non-audit services which states that these audit firms are largely
dependent on the income from non-audit services (abc.net.au, 2019).
Negative Impact of Non-Audit Services on Auditor’s Independence
It needs to be mentioned that there are certain major negative impacts of the relation
between the delivery of non-audit services and auditor’s independence. It can be seen from
the case of Lehman Brothers that the auditors of the company issued unqualified opinion to
the company just before the company’s collapse (Mawutor, 2014). It indicates towards the
crucial fact that providing extensive non-audit services to the audit clients creates the threat
of audit indepdence and this aspect shows the capitalist nature of the business of these audit
companies which have large dependency on the audit clients for generating maximum of their
income (Tepalagul & Lin, 2015). It is noteworthy to mention in this aspects that the extensive
delivery of non-audit services creates a financial relation between the audit client and the
auditors and the presence of any kind of financial interest leads to the reduction in audit
objectivity. Occurrence of the same problem can be seen in case of big four audit firms
(Svanström, 2013).

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Effects of Non-Audit Services on Audit Reports and Opinion
It needs to be mentioned that the delivery of extensive non-audit services to the audit
clients in exchange of huge fees has major negative impact on the audit report and audit
opinion since the presence of personal interest of the auditors lead to the issue of wrong audit
opinion in the audit report in the favour of the audit clients. The main reason for the is the
absence of adequate audit objectivity due to the presence of large scope of earning huge fees
by providing extensive non-audit services to the audit clients; and thus, these audit firms
provide inappropriate audit opinion in the favour of the audit clients. As per the above, the
collapse of Lehman Brothers is a critical example in this situation where the auditors issued
unqualified audit opinion to the company by indicating towards the company’s good financial
condition. However, after the issue of unqualified audit report, Lehman Brothers had to face
corporate collapse in the presence of certain crucial financial issues (Wiggins, Bennett &
Metrick, 2014). For another example, the collapse of Thornburg Mortgage can be mentioned
which was regarded as the second largest independent mortgage provider of America. It can
be seen in this case that the auditors of this firm provided the company with an unqualified
audit opinion (Chorafas, 2014). However, in the safeguard, the auditors gave another letter to
the company stating that they should not rely on the provided audit opinion.
It is evident from the above discussion that the audit clients received unqualified or
clean audit opinion from the audit firms in spite of the presence of major financial issues
which ultimately contributed towards the business failure of these companies. The main
reason for this was the extensive delivery of non-audit services to the audit client in exchange
of huge audit fees and these aspects collectively contributed to reduced audit indepdence
(Causholli, Chambers & Payne, 2014). It implies that there is major threat of audit
independence in the big four audit firms since they are involved in providing extensive non-
audit services to their clients through compromising audit independence and audit objectivity.

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It is mentioned in the provided article that the big four audit firms are considering them as a
part of the Australian financial system where it is requirement of the profession that the
auditors must maintain outside status from the country’s financial system. However, the
operations of the big four audit firms are making them the insiders of the financial system.
Hence, the above discussion indicates towards the delivery of extensive non-audit
services by the auditors of the big four audit firms which is creating major negative impact on
auditor’s independence and audit objectivity. These are considered as the main reason behind
the business failure and corporate collapse of many companies. In addition, the big four audit
firms have become the insiders of the Australian financial system that is not good for
providing auditing services. All these reasons support the decision of the Banking Royal
Commission to put spotlight on the auditing operations of these big four audit firms.
Audit Opportunities
The main opportunities are discussed below:
Increased Need for Assurance Services – The presence of major opportunities of the
auditing profession in Australia can be seen due to the increase in the demand of assurance
services. This demand is the result of many business failures in the country due to the
presence of frauds as well as financial statements manipulation. These incidents majorly
contributed towards the decrease in public confidence that can only be regained with the help
of providing effective auditing and assurance services. This aspect provided major
opportunities to the auditing profession (Kend, Houghton & Jubb, 2014).
Increase in Business Failures and Corporate Collapses – Over the years, many large
corporate collapses took place in Australia where major financial frauds were involved such
as ABC Learning and others (Carnegie & O’Connell, 2014). This leads to increase in the
opportunity of Australian auditing profession so that the financial statements of the

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companies can be examined in proper manner. The auditors of Australian can ensure that
whether there is any material misstatement in the financial statements of these companies so
that effective audit steps can be undertake to reduce these audit risk (Carnegie & O’Connell,
2014).
Introduction of Artificial Intelligence – It needs to be mentioned that the introduction of
Artificial Intelligence (AI) has provided the Australian auditing profession with major
opportunities by adding value to the audit process. In the presence of AI, the auditors get
major opportunities in the transformation of unstructured data. In this manner, the auditors
become able in gaining the required financial information of the companies that is needed for
the successful completion of the audit operations. It implies that the major technological
development in Australia has provided the audit profession with major opportunities. In the
presence of all of these aspect, the auditing profession in Australia gets major opportunities
(ey.com, 2019).
Audit Challenges
At the same time, the Australian auditing profession has to face certain major
challenges in the current situation and they are discussed below.
Audit Reporting – Audit report is considered as a critical part of the audit process because of
the fact that this is the only touchable part in the whole audit operation. Due to the increase in
the complexity in financial reporting which encourages the users of the financial statements
to know more about the audit procedures, there is a major decrease in the communicative
value of the auditor’s report (Nicoll, 2016). Thus, in order to match up with the ever
increasing demand of the users of the financial statements of the companies, the auditors of
Australia are facing major challenge which is considered as the challenge of the profession in
Australia.

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Audit Quality – Audit quality is regarded as a crucial aspect to some of the key stakeholders
of the companies along with the people who can increase this and most of the users of the
auditor report do not put emphasis on the quality of audit (Sarens, Christopher & Zaman,
2013). There are certain aspects that ensures maintaining the audit quality; they are auditing
standards, audit ethics, quality control, professional judgment, effective training and
professional scepticism since the auditors are needed to ensure the presence of all these
aspects in the audit engagement (Sarens, Christopher & Zaman, 2013). Thus, it becomes a
major challenge for the Australian auditors to maintain all these inputs together.
Increased Disclosure – The increase in financial reporting complexities has also contributed
towards the increased disclosure of the necessary aspects of financial reporting. Due to this,
now the auditors are needed to decide the fact that which financial disclosures they need to
audit (Fu, Carson & Simnett, 2015). This is a major challenge for the auditors of Australia
since it has increased the burden of their works.
Recent Regulatory Attempts
There has been certain regulatory attempts for improving the audit quality in
Australia; they are discussed below.
Key Audit Matters – The introduction of ASA 701 Communicating Key Audit Matters in the
Independent Auditor’s Report is considered as a major regulatory attempt where the auditors
are needed to include matters that were of major significance in the audit as per the auditor’s
judgements. In this, the auditors are needed to consider the areas with highest risk of material
misstatement and with significant judgements of the management. The aspects that need to be
included are reference to the related disclosure, reasons for which they are considered as key
audit matters and the ways in which the matters are disclosed (cpaaustralia.com.au, 2019).

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Going Concern – Another major regulatory attempt is the revision in ASA 570 Going
Concern. This puts the obligation on the auditors disclose the existence of any uncertainty
related to the company’s going concern. The auditors are also needed to challenge the
disclosure adequacy for the close call where there is major doubt on the ability of the
company to continue as a going concern (cpaaustralia.com.au, 2019).
Auditor’s Independence – Revision in ASA 700 Forming an Opinion and Reporting on a
Financial Report is considered as another major regulatory attempt for improving the audit
quality. It requires from the auditors to include a statement about auditor’s indepdence along
with the fulfilment of ethical responsibilities in the presence of correct reference to the
relevant Code of Ethics (cpaaustralia.com.au, 2019).
Auditor’s Responsibility – Revised ASA 700 also puts the obligation on the auditor to
provide a description on the responsibility of the auditors along with the main features of the
audit which can be presented in the appendix (cpaaustralia.com.au, 2019).
Conclusion
The above discussion provides some major reasons for which the Banking Royal
commission should put light on the operations of big four audit firms. Some of these reasons
are the extensive delivery of non-audit services, comprise of auditor’s independence as well
as audit objectivity, issue of inappropriate audit report as well as audit opinion and others.
For these reasons, the auditing operations of these big four audit firm need to be enquired by
the Banking Royal Commission. The above discussion also discusses about the major
opportunities and challenges in the Australian auditing profession in 21st century. It can be
seen from the above discussion that the increase in corporate collapses along with the
increase in the demand for assurance services provides major opportunities to the audit
profession in Australia. In addition, the auditors face major challenges due to the increase in

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the complexity of financial reporting and others. As per the above discussion, the recent
regulatory reforms to improve audit quality include introduction of ASA 701, revision in
ASA 570 and others.

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