Widespread auditor independence breaches revealed in regulatory surveillance
Recent regulatory surveillance conducted by ASIC has exposed significant deficiencies in how auditors across firms of all sizes demonstrate compliance with independence and conflict of interest obligations. The findings underscore that auditor independence is not merely a procedural requirement but that it is fundamental to the integrity of financial reporting and the maintenance of stakeholder confidence.
Summary of Findings
A comprehensive regulatory review examined 48 auditors from 19 audit firms. The review assessed compliance with independence obligations concerning the provision of non-audit services, mandatory rotation requirements, and relationships between auditors and clients or their officeholders.
The results revealed widespread deficiencies. Multiple auditors were unable to effectively demonstrate compliance with fundamental independence requirements, while others failed to identify and critically evaluate potential threats to their independence.
The Breaches
The review identified 15 auditors in likely breach of prescriptive independence requirements. Nine auditors failed to demonstrate compliance with mandatory rotation requirements that prevent auditors from auditing a listed client for more than five consecutive years. Five auditors held prohibited relationships with clients, including one auditor who was also an officeholder of their client – a fundamental breach of independence principles. Additionally, auditors were found providing services explicitly prohibited under independence rules, creating conflicts that compromise objectivity.
What was found to be most troubling was that none of the 15 auditors had proactively reported the potential breaches to the regulator, despite prior reminders about reporting obligations.
The “Tick-Box” Problem
The review identified a systemic deficiency: many auditors adopt a perfunctory, checklist-driven approach to independence compliance. This superficial methodology is fundamentally inadequate. Auditors must critically evaluate whether they are genuinely independent in fact and appearance and remain vigilant to circumstances that may give rise to even a perception of compromised independence.
Enforcement Action
- One company auditor’s registration was cancelled for independence failures
- A $78,250 infringement notice was issued to Nexia Perth over prohibited services
- Three court enforceable undertakings were entered into with Hall Chadwick (NSW) auditors over rotation failures
- Additional inquiries into potential breaches remain ongoing
These widespread compliance failures indicate a systemic deficiency within the audit profession. A perfunctory approach to independence obligations is demonstrably insufficient – such obligations require continuous vigilance, rigorous analysis, and comprehensive documentation of decision-making processes.
As regulatory surveillance becomes increasingly sophisticated and data-driven, the consequences of inadequate independence compliance will escalate. Organisations are well advised to undertake comprehensive reviews of their audit relationships, independence monitoring systems, and compliance frameworks, not merely to mitigate regulatory risk, but to preserve the trust and confidence upon which financial reporting integrity depends.
If you require assistance reviewing auditor independence obligations, compliance frameworks, or responding to regulatory inquiries, please contact Chris Mee at cmee@cnmlegal.com.au or call 07 3211 4010.