Treasury looks to reform regulation on consulting firms

Treasury has released an options paper to improve the regulation of accounting, consulting and auditing firms after the blowout from KPMG's whistleblower probe that found it used confidential client data in the pursuit of more tenders.

The consulting paper considers multiple options to improve accountability from firms, including requiring them to receive a licence from ASIC and operational separation to reduce conflicts of interest.

"We've seen a pattern of opportunistic and unethical and unfair behaviour in recent years from some of our largest accounting, auditing and consulting firms," assistant treasurer Daniel Mulino said.

In 2022, there were allegations PwC used confidential information in helping to design certain tax laws to help certain clients avoid tax.

Multiple KPMG executives including the chief executive Andrew Yates and chair Martin Sheppard have resigned since the start of the probe to take accountability for the misappropriation of client data.

There is currently a parliamentary committee investigating the allegations against KPMG, including misappropriation of confidential Lendlease board papers which were used by KPMG to pursue major audit tenders including Westpac and Dexus. There were also serious concerns regarding independence and integrity during the pursuit of the Macquarie audit contract.

The Treasury paper said there is "strong and compelling evidence" to impose enforceable obligations on audit firms in relation to firm-level decisions affecting audit quality.

One option, Treasury said, would be to require reporting entities to obtain audit services only from audit firms licensed by ASIC, with quality management and ethical obligations imposed as ongoing conditions of holding their licence.

Another option would be to build operational separation. Mulino noted this could take the form of saying that if you have an audit firm, it can't provide non audit services, like consulting services or broader accounting services to its audit clients.

"That would reduce the likelihood of conflicts," Mulino said.

"A stronger form of that would be structural separation, which would say the same firm can't offer both audit and non-audit functions. So, if you're going to be an audit firm, that's all you do. So that would be a stronger kind of regulatory intervention."

Another argument the paper suggests would be to limit partnerships as some firms have become too big. Accounting partnerships are permitted to have up to 1000 partners, at present.

"The partnership limit on law firms, for example, is 400 and the Parliamentary Joint Committee on Financial Services Corporations recommended that we look at that same limit of 400. So that's one of the options that we have included in the paper," Mulino said.

Mulino added prominent policy experts like Allan Fels and Graeme Samuel have suggested the government to look at structural separation options in the past.

"Structural separation is clearly a cleaner and neater way to deal with some of these conflict issues than saying that firms should manage them more clearly within the firm," he said.

He noted he think this wouldn't "ruin" the firms as a lot of firms operate in a specialised way in all sorts of professional services and it should not be seen as the "end of the world".

The government is also reviewing its corporate whistleblowing laws on the back of the KPMG probe. It is considering introducing financial incentives for whistleblowers as the current regime does not include financial incentives or rewards for whistleblowers as it relies on perceived moral and civic obligations.