Australia weighs break-up of Big Four accounting firms after scandals

[SYDNEY] The Australian government said on Wednesday it was considering breaking up the Big Four accounting firms and bringing them under the corporate regulator’s purview following some high-profile scandals in the sector.

The proposals, outlined in an options paper from the Treasury department, also include caps on the size of partnerships to 400 from 1,000 and a mandatory rotation of audit firms.

The paper said the recent conduct of the Big Four accounting firms — Deloitte, EY, KPMG and PwC — had exposed gaps in Australia’s regulatory framework. It drew comparisons with the way the industry is regulated in Britain and the United States.

“In recent years, we have seen behaviour from some large accounting, auditing and consulting firms in Australia that is not fair and honest,” Assistant Treasurer Daniel Mulino said in a statement.

“This has undermined trust in the firms themselves and raised broader questions about the resilience of the frameworks meant to uphold market integrity.”

The potential interventions broadly mirror those recommended by parliamentary inquiries triggered by the PwC tax leaks scandal in 2023, in which confidential government policy was shared to win clients.

Most of those recommendations have yet to be implemented. KPMG is also currently embroiled in a scandal over whistleblower allegations it shared confidential ​company information with prospective private-sector clients to bid for auditing work.

‘Big four’ respond

“We welcome the release of the options paper by Treasury and the opportunity to engage constructively on any measures, which strengthen trust in the profession,” a Deloitte spokesperson said.

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EY Oceania CEO David Larocca said the firm was supportive of many of the options outlined in the paper. “We have an important role to play in restoring and maintaining trust in the sector,” he said in a statement.

PwC said the paper was an “important opportunity to contribute to strengthening and rebuilding trust in our industry”. “Our firm has undergone significant transformation across the past few years, and that work continues,” a spokesperson said.

KPMG said it supported reforms that strengthened governance, transparency, auditor independence, firm-level regulatory oversight and public confidence in the profession.

Structural or operational separation

The Big Four in Australia are regulated as partnerships ⁠rather than companies. That means they are not subject to supervision by the Australian Securities and Investments Commission, which has strict reporting requirements. Instead they are regulated by state-based laws.

Mulino said among the strongest options under consideration was structural separation, which would force the firms to split their audit and consulting arms to reduce conflicts of interest.

]An alternative would involve operational separation, preventing firms from offering both audit and non-audit services to the same client.

The government will also examine whether to reduce the current cap of 1,000 partners in accounting firms, aligning the industry more closely with the 400-partner limit imposed on law firms, and options to improve audit market diversity such as mandatory firm rotation every two decades.

The Treasury paper noted the Big Four audited 96 per cent of the top 200 companies in Australia in 2022.

“There are other changes as well — providing ASIC with more powers, more oversight and stronger penalties,” Mulino told reporters in Canberra.

Deborah O’Neill, a senator from the ruling Labor party who made the whistleblower allegations against KPMG public in March, said the “unethical” culture exposed by successive scandals needed to be disrupted.

She warned the firms would “fight tooth and nail” to keep their existing structures, “because it is in their financial interest to do so”. Barbara Pocock, a Greens senator who has campaigned for tougher regulation of the sector, said the government already knew what the solutions were from its previous inquiries, and called for urgent action.

“Labor needs to put an end to the Big Four’s special treatment and regulate them like other Australian businesses,” she said in a statement.

Brendan Lyon, a former KPMG partner who also blew the whistle on ethical breaches he witnessed, said the current proposals were merely “tinkering around the edges” and the firms needed to be regulated as companies. “We are the global epicentre of Big Four misconduct. We’ve seen two Big Four CEOs forced from their roles, disgraced over material misconduct, and the cover-ups that have followed,” he said.

“The government admits that the system is broken. It identifies many of the factors, but it doesn’t deal with the key issue, which is the competitive advantage and opportunity for misconduct that’s created when you operate completely unmonitored, unbound and unsanctioned.” REUTERS