Melissa Clarke:
Turning to federal politics, and the government’s flagging changes to the regulation of accounting, auditing and consulting firms in the wake of misconduct scandals at PwC and more recently KPMG.
KPMG in recent weeks has been facing scrutiny from regulators, from parliament and its own clients as investigations continue into whistleblower allegations that the firm misused confidential client information.
The government says gaps exist in the regulation of the audit sector, including in relation to independence and ethics.
Daniel Mulino is the Assistant Treasurer and Minister for Financial Services and joins me in the Parliament House studio. Welcome back to Radio National Breakfast.
Daniel Mulino:
Thanks for having me on, Mel.
Clarke:
Now, what are some of the options that the government is considering in this new Treasury paper that you have out to ensure that the big professional services firms do a better job of keeping their audit functions separate and clearly different from their accounting and consultancy arms. What might be some of the ways that could be tackled?
Mulino:
Well, look, thanks very much. And can I just say that what we’ve seen from both the inquiry into PwC and KPMG was behaviour by large firms that simply isn’t good enough. And it’s in relation to some of the services that underpin our entire financial services system; audit functions, core accounting and consulting functions, where information, confidential information is being misused across different parts of the firm.
So the nature of the kinds of activities that have been alleged against PwC and KPMG mean that some of the options we need to look at include separation of functions. One of them is operational separation where, for example, a large audit firm might be told by the regulations that it cannot provide both audit and non‑audit services to the same client.
A stronger intervention would be structural separation whereby a firm might have to separate its functions and not be able to provide non‑audit functions if it is an audit firm.
Clarke:
So you’d sort of have 2 separate entities almost?
Mulino:
They’d have to be separate firms, yes, so that would be a stronger regulatory intervention.
Another form of regulatory intervention would be to look at the size of firms. At the moment there’s a 1,000 partner limit. In other areas, like the law, for example, the limit is much lower at 400. The Parliamentary Joint Committee that looked into these matters recommended that a lower limit be examined, so one of the options we’re looking at is 400.
Clarke:
Can you talk me through that? Why is it that these big auditing firms have been able to have a much bigger member partnership base than other similar professional firms like, you know, legal firms, or veterinary groups or architecture groups? Why have they traditionally been given this much greater ability to have a much larger partnership base than other professional services?
Mulino:
I think it’s probably just history, and that a lot of those firms just grew over time, that the kinds of, the nature of audit work is that quite often when you’re dealing with very large clients. Like, for example, a big 4 bank or a very large corporation, that that involved large numbers of auditors. And so, you know, these firms have grown very substantially, and that was accommodated by current regulatory settings. That is one of the settings that we will look at, whether that should be brought down to be more in line with other professional services.
Clarke:
It sounds like that’s something that you might be inclined to do. Do you have a view on whether that is unacceptable in the current circumstances and it’s a matter of how much to bring it back by, or are you open to the potential of leaving the status quo as it is when it comes to the partnership cap?
Mulino:
Well, look, I think it’s important when you put out an options paper not to go into it with too strong a predisposition. I’m genuinely interested to receive submissions from a range of stakeholders on these matters.
But what is absolutely clear to me is that there have been a number of instances now of behaviour that is simply not good enough. There have been a number of instances of opportunistic behaviour, of breaches of trust, of confidential information being used in ways that is highly inappropriate. So it is clear to me that we need to look at strengthening arrangements.
Now, as to the particulars, we need to take care and step through and look at all the potential consequences of different options, but to me it’s clear that we need to strengthen arrangements.
Clarke:
Those go to issues around the regulatory and governance environments, but what about penalties when these services firms are doing the wrong thing? Is there more that the federal or state governments can do to penalise companies when they are found to do the wrong thing?
Mulino:
Well, so the penalties that can be applied will be one of the things that we will look at, and also the role of ASIC. At the moment some of the peak bodies play a role in some of the day‑to‑day management of ethics, of conflicts of interest, and there is an important role there for them to play. But I think there’s a question over whether ASIC needs to step in more as the federal regulator.
Clarke:
I think Treasury first announced that it was going to undertake an examination of this around 3 years ago after we first had the PwC issues. How come it’s taken until now, nearly 3 years later, to get to the point of having an options paper to examine this?
Mulino:
Well, so what we’ve been doing in the meantime, and just very recently we passed a law that brings together the accounting and the auditing standards bodies, but also sets more stringent requirements on who’s on the governing council of that body. And makes that a much stronger set of arrangements.
So the External Reporting Australia is a really important step forward, and that only recently passed the parliament, but that took a lot of work, that took work over a couple of years to draw together.
We also are about to introduce into parliament laws that will strengthen the Tax Practitioners Board sanctions arrangements and that’s partly in response to the PwC scandal, and the ways in which information was being used inappropriately by PwC when they were advising the government on tax laws and then passing that on to clients. And I also have a –
Clarke:
So was it a capacity issue, was it the fact that you were doing these other reforms that meant you couldn’t put out this options paper at the same time? Was it a sequencing thing?
Mulino:
Yeah, we’re trying to step through a series of reforms, and the other set of reforms that is related here is the whistleblower reforms, so looking at strengthening whistleblower protections in the corporate and tax realm.
We have a discussion paper out in relation to that, and again, there’s been a bit of work undertaken over the last few months on that.
So, look, since I’ve come into this role I’ve really tried to prioritise drawing together a lot of strands of work that were already in play, and especially now that we’ve seen what’s happened with KPMG, we’re now accelerating a lot of the government’s work.
Clarke:
You’re listening to Radio National Breakfast where the Assistant Treasurer, Daniel Mulino is my guest. You mentioned KPMG. Last month KPMG agreed to freeze any bidding on new federal government contracts while there was ongoing investigation into the issues that it’s facing. The government’s reviewing whether KPMG has breached any of its standards expected of government suppliers. Do you have any update you can give us at this stage on that investigation?
Mulino:
Well, so this is a process that’s being managed by the Minister for Finance. Essentially there’s been a material incident declared. And that means that all government departments with contracts with KPMG are now obliged to reach out to the contractors that they work with and ensure that all arrangements are appropriate. It also will stop new work being bid for, for a period of time. And then my understanding is that the Department of Finance is going to undertake a review of arrangements across the board with KPMG.
Clarke:
Is there any prospect of the government tearing up any existing contracts with KPMG?
Mulino:
Look, I’m not aware of any specifics on that front.
Clarke:
Okay. When it comes to trying to regulate this sector, it is really dominated by a small number of very large firms. Is that just a product of the demographics of Australia, that we’re a smaller population country, you know, a smaller number of very large firms that require extensive auditing, or is that not a given; could we have a financial services sector and auditing sector that is more diverse and not so concentrated?
Mulino:
Look, it’s deep question that you raise, Mel. What I would note is that the big 4, the so‑called big 4 accounting firms are a global phenomenon, they are a dominant presence in many markets around the world. There would appear to be, to a degree, economies of scale in some of what’s going on.
Having said that, I think we should always be looking at ways that we can move towards more competitive markets. And I think some of the options that we’re looking at here, greater oversight, stronger governance, but also some of the separation options, I think would go some way to achieving a more competitive market with more options for people looking to use these services.
Clarke:
And just before you go, we’ve seen today the latest housing figures that are out, it’s showing the housing market was weakened further again, in June national home values falling by 0.4 per cent, so the biggest monthly decline we’ve seen in several years. How much of these falling prices should be attributed to the government’s taxation changes?
Mulino:
Well, I just note a couple of things. One is that, even when we look at these national figures, we have to drill down, I think, and look at the fact that – acknowledge the fact that different markets across Australia, different capital cities and different regional areas are moving in different ways.
Clarke:
Prices are falling in Melbourne, Sydney and Canberra, but not –
Mulino:
Yeah, auction‑clearance rates might be ticking up in one capital city and ticking down in another. So I just think we have to take care in reading too much into an aggregation of markets when they’re moving in different directions.
Secondly, I do think it’s important to bear in mind that housing markets are complicated. They’re affected by many factors, including the business cycle, interest rates, broader consumer sentiment. And so there are many factors come in to play, so I think it would be simplistic to say that a government policy that has been modelled by Treasury as having only a very modest impact on house price movements is going to be the sole determinant –
Clarke:
In a general sense, are you saying that taxation changes and perhaps concern around them before they were legislated is a minor factor compared to interest rates, say, being a major factor; would that be the government’s view?
Mulino:
Well, what I would say is that the Treasury modelling is clear in that it’s likely that there will be roughly a 2 per cent moderation in house price changes for a couple of years. But that there’s an expectation that on average, again acknowledging the fact that different housing markets move in different directions sometimes, that house prices will still over the medium term continue to increase. There will be a very slight moderation, but what that’s going to lead to is over the medium term 75,000 people owning their home rather than renting.
So that’s the bigger kind of picture of the Treasury modelling, but that’s modelling which takes out the effect of this policy alone, trying to in a sense normalise –
Clarke:
Disaggregated from all the other factors.
Mulino:
– for all the other things.
Clarke:
Indeed. We’ll keep an eye on it. Daniel Mulino, thanks very much for talking me through the work you’re doing around professional services firms. Thank you.
Mulino:
Thanks so much, Mel.