BUACC5935: Auditing and Assurance Services - Semester 1, 2019

This essay examines the auditing and assurance services landscape, focusing on the 'big four' accounting firms (KPMG, PwC, Deloitte, and EY) and their impact on the Australian auditing profession. It discusses the conflict of interest arising from these firms providing both auditing and consultancy services, raising concerns about industry domination and quality control. The essay supports the viewpoint that these firms should be under scrutiny, citing examples like Carillion and BHS collapses due to audit failures. It further explores the challenges, including cybersecurity risks with new technologies like blockchain, and the opportunities presented by artificial intelligence and data analytics to improve auditing processes. The essay also addresses regulatory attempts to improve audit quality, the proposal to break up the big four, and the influence of the firms on government and international markets. The student supports their arguments with references to articles, and discusses the challenges and opportunities for the Australian auditing profession in the 21st century, including the adoption of new technologies and the impact of globalization.

Running Head: AUDITING AND ASSURANCE SERVICES 1
Auditing and Assurance Services
Name
Institution

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Auditing and Assurance Services
Accounting firms act as the audit watchdogs of company financial statements and
show the strengths and weaknesses of financial statements. But when they fail to do their
primary objective and involve themselves in the affairs of the company, then they show a
conflict of interest. In an article written by Cannane (2018), Australia's "big four"
accountancy firms should be put under the spotlight of the Banking Royal Commission.
KPMG, PricewaterhouseCoopers (PwC), Deloitte and Ernst & Young (EY) are the leading
auditing firms which audit 98% of the companies in Australia. They have shown a massive
conflict of interest because they offer consultancy service to the same organizations whose
accounts are meant to be audited by them (Cannane, 2018). We agree with the article that
Australia’s “big four” accountancy firm should be put under the spotlight.
Australian Securities and Investments Commission (ASIC) has called the 'big four'
accounting firms, which in many years have audited and approve sensitive financial reports to
be brought before the Banking royal commission to prove their independence. ASIC believes
that most of the big four have failed in compliance framework and the recent past, they have
approved financial reports for their benefits. Advisory and consultancy services have
generated a lot of profits to the big four compared to audit assurance and taxation services
(Sikka & Filling, 2009). Conflict of interest arises when a company receives advisory and
consultancy service from the same company that will audit them. There would be bias in one
of the services provided.
Quality Control
The financial reporting standards of the “big four” have generated a conflict of
interest amongst the companies. The industry domination is one of the main issues raised,
the “big four” signs off 98% of the financial statements of the major corporations in the

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world. This shows that their main objective is getting the money for themselves and not the
auditing process. Auditors tend to develop a close relationship with the client, and this often
leads to poor adherence to auditing and financial reporting standards (Shore & Wright, 2018).
For example, Carillion (construction contractor) collapsed due to poor decisions made as a
result of the audit report provided by KPMG. A senior KPMG auditor failed to raise concerns
in the story that could have saved the construction contractor. The KPMG auditing firm had
been selling its services to Carillion construction contractor for some years and as a result,
developed a close relationship. This made the auditing firm to withheld vital information on
the future of Carillion construction contractor.
The quality of audit depends on the experience, expertise, and resources of the
auditing firm, and the big four has proven to be competent. They have all the necessary
resources to conduct a proper audit process. This has allowed the big four to do great work
over the years, and in doing so, developed a close relationship with their clients. However,
having a too close audit working relationship with their clients can compromise audit
objectivity (Anderson, 2017). For example, the collapse of retailer BHS was as a result of
audit failure, a PwC auditor backdated his audit opinion, and the retailer was unable to make
the right decision. If the PwC auditor had correctly reported, the financial crisis at BHS
would not have happened. Industry domination and quality control are some of the reasons
why the big four should be put under the spotlight. The close working relationship between
the auditing firm and the client that develop over the years can compromise the audit
objectivity (Duff, 2017).
Industry Domination
The industrial domination of the big four accountancy form has been felt worldwide.
In 2008, PricewaterhouseCoopers (PwC) manipulated the Caterpillar Company to allow the

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business of spare parts to move from the United States to Switzerland. The business was
conducted in the United States; however, the financial statements and profits were all
recorded in Switzerland. The corporate taxes paid by Caterpillar is 6% per year in
Switzerland compared to 29%rate in the United States. This ensured that Caterpillar made
billions of dollars through the tax savings plan designed by PricewaterhouseCoopers. The
influence of these companies is international, and their main focus is generating more profits
for themselves regardless of the audit objectives. Thomas Quinn, PwC representative and
Steve Williams, managing director- Caterpillar orchestrated the plan to makes millions of
profit from tax evasion.
The government allowed multinational audit firms to operate in the country to bring
about competitive business growth and new investors into the country. The big four being
part of the multinational corporations, means that they will also come in and make the market
more competitive (Belloc, 2013). For example, in Mumbai, the government passed the
companies act of 2013 that allows multinationals auditing firms to do business in the country.
The big four took over of the auditing, and most of the local auditors ran out of business. The
introduction of multinational corporations came in with a lot of challenges, for example,
Infrastructure Leasing & Financial Services was accused of fraud, and EY audited it. Despite
the positive completion brought by the big four, there international industrial dominance can
put out small auditors out of business.
Challenges
The adoption of new technology in the auditing profession has enhanced auditing
process, and generated quality audited reports. However, there has been some negative
implication in the adoption of a blockchain system for auditing. The shared access of the
database and datasets of the financial statements have opened doors for unauthorised access.

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A highly integrated blockchain system is very profitable for business; however, the access
given to auditors has made the system vulnerable to cyber-attacks. Despite all the security
measures of the blockchain system, cybersecurity is very dynamic, and it can lead to loss of
confidential information. Technology is used to steal sensitive information to gain unfair
market advantage by competitors or put false evidence like misappropriation of assets. For
example, Landmark White Company in Australia lost millions of dollars to cybercrime due to
unauthorised access to their systems. Companies and auditing firms need to invest more in
data security to prevent digital crime (Wilkins & Esteban, 2017).
Security and privacy issues relating to companies' information is of high importance
to both auditor and its client. This information should be highly protected because a loss of
this data can cause catastrophic events to both auditor and the client (Wong & Ho, 2012). The
frequent communication between different business entities and sharing of confidential
information via a network pose a significant threat to the privacy of the information. Auditing
firm should evaluate the security and privacy risk frequently to ascertain the cause of data
breaches and potential risk. Data and information shared via the network should be highly
encrypted so that in case of a data breach, the information would be useless to the attacker.
To avoid potential damage, a cybersecurity professional can be hired to install security
measures that can detect cyber-attacks before they happen. Technology is one of the most
critical tools in auditing but can cause catastrophic damage to the wrong hands (Cameron,
2011).
Opportunities
The implementation of artificial intelligence is one of the essential technological
advancement that can be viewed as an opportunity to improve the auditing process (Boillet,
2018). Artificial intelligence is a computer system that has human knowledge and can be

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programmed to work in the auditing and accounting department. Artificial intelligence can be
used analyse large volumes of data; for example, the system can analyse a large number of
contracts such as leases in a short time compared to the manual method. Auditors can work
smart and better because artificial intelligence saves them a lot of time. Interaction between
auditors and chief finance officer of the company will contribute to better quality audits
because one on one interaction allows an auditor to make his judgment (Imoniana & Perera,
2016).
In the technological advancement, data analytics presents itself as one of the
opportunities that can be implemented to improve the outcome of an audit process.
Accountants and auditors can help in the development of a system that can be used in data
analytics (Zeng & Desai, 2016). A conceptual framework based on the structure of data and
the problem at hand is developed can be implemented in data analytics. The large volumes of
data become challenging to the auditors to analyze them one by one, which means it will
consume a lot of time. Big data analytics focuses on efficiency, effectiveness, and quality of
an audit. Accuracy of the numbers captures during auditing if of high importance; therefore,
to avoid human errors, data analytics comes in. However, Data analytics have not been
implemented by most of the companies. Artificial intelligence and data analytics holds the
key to future auditing processes (Boillet, 2018). This is an opportunity that can improve the
audit process and the quality of the audit.
The use of Blocked chain technology presents a lot of opportunities and advantages
for audit companies and their clients. Blockchain is a global ledger that can be accessed by
anyone, and its data cannot be altered. Blockchain takes to the next step the reliability and
efficiency of an audit by ensuring proper interpretation of business logic (Messier, 2007). It
offers real-time auditable log which is available instantly for the auditors. The data entered
into the blockchain system and has been approved becomes permanent and part of the ledger,

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therefore accuracy and availability of data are guaranteed. The time and cost of conducting an
audit would be cut down because blockchain technology allows auditors to verify large
volumes of data accurately. The implementation of blocked chain technology and the data
analytics system can change future auditing processes by cutting audit cost and providing
accuracy of data (Botica & Redmayne, 2012).
Cloud computing is the most recent technological advancement that can help change
the process of auditing in the future. Cloud computing is where financial data is stored and
arranged in a particular manner in the cloud and can be accessed from anywhere in the world.
This gives a lot of flexibility in obtaining required information at any time. During auditing
retrieving of data is much faster, accurate, and efficient. Traditional methods allowed
financial records are stored manually and during audits, one or two files would be missing
due to human errors, but with cloud computing provided that the information stored was
accurate then retrieving it would be more comfortable (Le Mire, 2018). Cloud computing
presents new auditing procedures and guarantees the accuracy of data and information. The
only challenge to cloud computing would be the impact of globalization and multiple
accounting systems, in other countries, accounting standards slightly differ when dealing with
foreign investments (Kiger & Scheiner, 2014).
Breaking the Big Four
There has been a proposal to break the big four to reduce their influence in
government, and the international market. The big four have controlled most local and
international markets in auditing, business consultancy, and other legal services. This has
blocked the growth of the local business because of market domination by big four. The UK
competition commission generated strict rules to govern auditing and curb the big four
influence, and in contrary, the big four market share continues to increase. The big four has

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power over the government because it has done business with the government; therefore, any
laws published by the government will be in line with the agenda of the big four. Therefore
most governments are in business with the big four and can't be dependable in breaking the
big four. Auditing and Assurance Standard Board (AUASB) and Financial Accounting
Standards Board (FASB) can come up with a regulation to control the big four (Jones &
Cobham, 2016).
The Competition and Markets Authority (CMA) is concerned with market domination
and control by the big four and made some proposals to change the legislation to improve the
auditing sector. The Competition and Markets Authority has proposed the break up between
audit and non-audit businesses into separate entities. This means that a company will only
specialize in either auditing or advisory and consultancy services but not both. In this case,
the big four will have to split up because currently, the big four offers a wide range of
services from auditing, legal, consultancy, and advisory services. The CMA also proposed
that the most significant companies should be audited by at least two auditors to give the mid-
tier firms access to large clients to gain experience in auditing (Maijoor & Roebuck, 2015).
Australia’s audit regulatory framework is well designed in the legislation and outline
the professional accounting bodies that will check the quality of auditing in the country. The
Auditing and Assurance Standards Board (AUASB) is given the legislative mandate to
conduct quality controls in auditing firms in Australia. Australian Securities and Investment
Commission (ASIC) have the responsibility for the surveillance and enforcement of financial
reporting requirements under the corporations' act. AUASB and ASIC check audit quality
requirements by conducting audit firms inspection. An audit form license can be revoked if
the firm is not in compliance with the rules and regulations of auditing enforced by the ASIC.

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The Corporations Legislation Amendment (Audit Enhancement) Act 2018 was passed
to enhance the quality of auditing in Australia. The act defines audit quality as “meeting
investor’s needs for reliable audits." Companies require the going concern warnings,
assurance about internal control, and confidentiality in handling financial statements
(Lombardi, l., & Dimovski, 2017). The regulation was passed to ensure that auditing firms
have the necessary natural and human resources to conduct a proper audit. The rise of the big
four has set examples for the small auditing firms and what should be done to produce quality
audit reports. The big four has challenged the Australian government to ensure that small
companies comply with auditing regulations. Despite the big four have a lot of influence in
developing audit quality controls, ASIC and AUASB have made legislation that protects the
small auditing firms as well as ensuring quality auditing is done in the country.
In conclusion, the “big four” companies have industry market domination worldwide
not only in auditing but also in advisory, legal, and consultancy services. The big four has set
the pace for other developing businesses globally; however, the industry market domination
hurts the growing firms. The “big four” has led to the collapse of several business entities in
auditing and other professions. For example, the collapsing of BHS retailing company and
Carillion construction Contractor Company is as a result of the “big four” influence. The
Competitions and market authority proposed the breaking down of the big four into smaller
companies. CMA proposed that companies should specialize in one area, e.g., auditing or
legal services. They also recommended that large companies should be audited by at least
two companies, one in the big four and another from the mid-tier firm to break the market
domination. Finally, the Australian government should pass the legislation that limits the
influence of the big four on small auditing firms. The bill should protect small firms for a
sustainable and competitive market environment.

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Boillet, J. (2018). Artificial intelligence and soft computing for planning and scheduling: how
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