Audit independence is a cornerstone of audit quality, but it does not stand alone. It operates alongside the expertise of highly skilled practitioners, rigorous professional standards, and strong company reporting and governance frameworks, writes Chris Freeland AM.
Last week, ASIC released a report summarising its review of auditor compliance with independence and conflict of interest obligations under the Corporations Act 2001.
While the report identified likely breaches and issued prudent calls to action – which has, understandably, garnered critical media attention – it should not be seen as a condemnation of the audit profession. Rather, it presents an opportunity to reflect, improve and strengthen trust in the system that is so crucial to upholding the integrity of our financial markets.
To understand the findings, it’s important to consider the scope of ASIC’s review, the nature of the breaches and the potential for targeted improvements.
Understanding the scope
ASIC regulates a significant portion of the audit industry in Australia, specifically registered company auditors (RCAs) and authorised audit companies that audit entities under the Corporations Act. According to ASIC’s 2023–24 annual report, fewer than 3,200 RCAs fall under its remit.
From a population of about 2,900 auditors, ASIC used a data-driven, risk-based approach to conduct a desk-based review of 109 auditors. This group was further narrowed to a survey of 48 auditors, of whom 15 were found to have likely breached independence obligations.
The nature of the breaches
The independence requirements under the Corporations Act, supported by the APESB Code of Ethics, are complex. It’s therefore not surprising that nearly one-third of a risk-flagged sample failed to comply. Of the 15 auditors identified, nine had likely breached the auditor rotation requirements under Part 2M.4 of the act. This specific issue accounted for 60 per cent of the breaches.
This highlights the complexity of rotation rules, particularly around the judgement required when considering extensions to the mandatory rotation period. ASIC’s current guidance, set out in RG 187 Auditor Rotation, was issued in 2007. Given the evolving nature of audit practice and expectations, it may be timely to revisit and update RG 187 to provide clearer criteria for relief and better support practitioners navigating these judgement calls.
The report found that the breaches were concentrated among small to medium-sized firms and sole practitioners. This insight is valuable for tailoring future awareness campaigns and support initiatives to those who need it most.
ASIC also observed that many auditors approached independence compliance as a ‘tick-the-box’ exercise. CPA Australia strongly agrees that this mindset is inadequate. Independence – both actual and perceived – is fundamental to audit integrity. We support ASIC’s call for ongoing assessment of threats to independence and the implementation of appropriate safeguards, especially in a small audit market like Australia.
The broader pillars of audit quality
Audit independence is a cornerstone of audit quality, but it does not stand alone. It operates alongside the expertise of highly skilled practitioners, rigorous professional standards, and strong company reporting and governance frameworks. Each of these elements plays a vital role in supporting high-quality financial reporting and, in turn, the strength of our capital markets.
Independence requirements are particularly complex, spanning legislation, ethical codes, and auditing standards. They are designed not only to address actual conflicts but also to safeguard against perceived ones. ASIC’s recent findings reinforce the need for continuous improvement, not alarm.
CPA Australia supports its recommendations for better documentation of independence assessments and clearer communication with the regulator. There is also a clear opportunity for collaboration between ASIC and professional bodies to reinforce the importance of ethics and independence through targeted education and updated guidance. Together, these efforts will help strengthen the broader system that supports audit quality and public trust.
Chris Freeland AM is the chief executive of CPA Australia.
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