Aussies advise Lords on ‘proportionate’ liability

THE INSTITUTE of Chartered Accountants in Australia told the House of Lords this week of their experience regulating their audit market, suggesting, among other things, that their mandatory proportionate liability model – as opposed to the UK limited liability model – could help in reducing audit market competition.

Lee White and Andrew Stringer, the institute’s officials, told the hearing via videolink that the UK model has “a discretionary element [which] may be working against mid-tier or smaller audit firms seeking to engage with significantly larger clients.”

“In the last five or six years there’s been four significant changes to the policy framework in Australia – the creation of a government audit oversight body (similar to the FRC in the UK); making auditing standards legally enforceable; independent rules for auditors written into our law; and the creation and development of professional standards legislation and proportionate liability,” White explained.

Big Four firms, however, still dominate the audit market in Australia, though to a lesser extent than the UK. White believes the policy changes have been a factor, though he also noted “the geographical spread of Australia helps firms remain competitive.” 

The raft of new regulations, however, caused some smaller firms to drop out of providing audit services, unable to cope with the changes. Rather than leading to greater concentration in the Big Four, White said: “The work available didn’t flow up to large firms, only to the next layer up in size.” The main concerns regulators expressed, White added, came from the practice of discounting audit fees, which they felt could lead to a decrease in audit quality.

White and Stringer told the hearing the role of audit needed to expand from its current “retrospective examination of financial statements” and advised the UK should ensure “regulation of cross-border activities does not become a barrier to those wishing to enter the audit market.”

Asked by Lord Best if auditing rules had gone too far, however, they responded: “We think in Australia it’s been a fairly good balance. The combination of government oversight, professional standards and capping of liability have bought about the right framework.”


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