Audit quality continues to fall short: ASIC

The corporate regulator has called for improvements in audit quality and financial reporting after its latest surveillance found companies, including superannuation funds, are still not getting the fundamentals right.

Report 842 ASIC's oversight of financial reporting and audit 2025-26 noted the current focus on the conduct of auditors and concerns about trust and confidence in the profession.

Concerns across the sector have grown this year, after KPMG admitted that its treatment of a whistleblower, and its investigation into the whistleblower's allegations, had fallen short.

The whistleblower alleged KPMG misappropriated confidential Lendlease board papers and used them to pursue major audit tenders, including those for Westpac and Dexus. Serious concerns have also been raised about independence and integrity in KPMG's pursuit of the Macquarie audit contract.

Several institutional clients have recently dropped KPMG. Macquarie's board rejected KPMG as its auditor starting from 2027 and will instead proceed with incumbent auditor PricewaterhouseCoopers (PwC).

Australian Ethical is the latest to drop KPMG and will soon begin the competitive tender process for a new external auditor from FY28.

ASIC commissioner Kate O'Rourke said preparers of financial reports and auditors need to lift their performance, particularly when reports depend heavily on judgement.

"Our surveillance found that some report preparers and auditors did not challenge significant judgements, including for revenue recognition, impairment and asset valuations," O'Rourke said.

"Getting these areas right is essential to providing investors with information they can rely on. Auditors need to be independent, obtain stronger evidence, challenge management assumptions and document their conclusions."

ASIC's report reviewed the top auditors including BDO, Deloitte, Ernst & Young, Grant Thornton, Hall Chadwick, HLB Mann Judd and KPMG.

As a result of concerns raised by ASIC, 10 companies made or agreed to improve the disclosure of material business risks in their operating and financial reviews.

Companies also made or agreed to make changes to asset recognition and valuations, financial report disclosures, deferred tax assets and employee benefit provisions.

"This year we have attributed audit surveillance findings to large audit firms by name," O'Rourke said.

"Greater transparency helps investors, directors and other stakeholders better understand where audit quality concerns arise and strengthens accountability across the profession."

ASIC has also requested the six largest audit firms to undertake self-assessments and develop action plans to address their individual firm findings. It will monitor the effectiveness of their action plans.

"Audit firms now need to demonstrate that their action plans are producing meaningful and lasting improvements to independence practices," O'Rourke said.