Accounting firms could be split post KPMG audit scandal

Accounting firms could be asked to split their lucrative consulting services from their audit functions and individual firm partners could face far greater scrutiny and penalties for legal breaches, under a shake up of the industry being consulted on by the federal government.

Assistant Treasurer Daniel Mulino has vowed to address gaps in regulation of audit firms in the wake of the recent PwC tax leaks saga, and the more recent scandal at KPMG.

Mr Mulino will on Wednesday release a Treasury options paper on the regulation of accounting, auditing and consulting firms in Australia.

"In recent years, we have seen behaviour from some large accounting, auditing and consulting firms in Australia that is not fair and honest,"

Mr Mulino said.

"This has undermined trust in the firms themselves and raised broader questions about the resilience of the frameworks meant to uphold market integrity."

Under allegations raised in parliament, partners at KPMG leaked client information and mishandled a whistleblower who raised the alarm.

Since then, a host of partners at the firm, including its CEO Andrew Yates and chairman Martin Sheppard have resigned.

And on Tuesday, two men were sacked from Ernst and Young after the prime minister's personal banking information was allegedly breached.

The claims against KPMG were first formally made by a whistleblower in May 2024, dismissed by KPMG, then came to light when Labor senator Deborah O'Neill aired them under parliamentary privilege earlier this year.

The claims include that the firm's partners misused board papers from Lendlease to pitch for and win external audits of Westpac and Dexus.

After decades as a client of KPMG, Lendlease will put its external auditing contract out to tender next year.

Lendlease chairman John Gillam told a recent parliamentary hearing into the scandal that the alleged behaviour by KPMG was as "a fundamental breach of trust" and "a grave misuse".

Separation of audit and consulting functions

The PwC controversy and more recent saga at KPMG has also reignited a global debate about whether accounting firms need to split their lucrative consulting services from their audit functions.

As the options paper notes, most firms are making money off their consulting functions but that can create conflicts if they are also the same firm doing company audits.

"Non-audit services may dominate the overarching culture of the firm, and this culture may be at odds with an auditor's role in challenging management and client perspectives,"

the paper said.

It suggests various options to lift accountability and ensure greater audit independence and ethical standards.

This includes a "structural separation" — in other words split — between a firm's auditing function and non-auditing (consulting) arms.

It notes how the money incoming from consulting is far higher compared to audits and that creates the potential for conflicts in the audit space.

Audit revenue comprised, on average, 20 per cent of total revenue in the four largest audit firms in Australia in 2025.

"For the largest auditing, accounting, and consulting firms, the trend has been for non-audit revenue to consistently outpace audit revenue growth, with non-audit revenue growing from 73 per cent to 82 per cent of total revenue between 2013 and 2018," the paper said.

"Risks may arise from internal competition for resources within a multidisciplinary firm.

"More broadly, firms may not have effective controls on client information,"

the paper said.

Another option is that audit firms, including partnerships, be licensed by ASIC to provide audit services, with quality management and ethical obligations imposed as ongoing conditions of holding their licence.

Audit firms would have to show their independence from audit clients, and have systems and controls to manage client information, including safeguards to protect confidentiality.

More scrutiny on firm partners and management

The government's options paper notes a big problem with big four firm partnerships determining their own governance arrangements.

"In a traditional partnership structure, accountability is shared amongst partners, who are jointly exposed to the liabilities, assets, and risks of the partnership's operations," it said.

"As a result, partners are expected to hold each other to account. Recent events suggest that this may not be happening as desired."

The paper suggests imposing new governance requirements on large audit firms or reducing the current partnership limit for accounting firms and requiring a percentage of partners to be registered to deliver regulated services, or ensuring at audit services only are delivered from an authorised audit company.

The paper also suggests that "there is scope for ASIC's audit surveillance program to more effectively incentivise audit quality". This could be via mandating the frequency of audit reviews, increasing the level of surveillance, and publishing findings.

Greater sanctions for auditor breaches

Corporate watchdog ASIC is investigating auditors at the firm.

ASIC chair Sarah Court told a parliamentary inquiry held in June that concerns raised about KPMG show an "egregious and serious breach of trust" and that she thinks the regulator's scrutiny powers should extend to consultancy firms.

The government's options paper suggests greater disciplinary processes and sanctions against auditors that break the rules.

"The current penalty framework is limited,"

the paper said.

"Criminal penalties, or issuing infringement notices, are currently the only means for ASIC to seek pecuniary regulatory penalties for breaches of auditor requirements.

"The maximum amount of audit-related pecuniary penalties are low both by international standards and relative to other Corporations Act penalties."

It suggests an option to introduce civil penalties for contraventions of auditor requirements, and another to "provide ASIC with additional administrative and remedial powers relating to auditor registration and deficient audit work".

Mandatory audit firm rotation

The paper also notes that audit services to large Australian companies is highly concentrated in Australia, with about 96 per cent of the top 200 entities and 76 per cent of the next 300 largest entities being audited by the top four firms in 2022.

It says while there are no regulatory barriers for mid-tier firms to take on such engagements, "some stakeholders noted that 'preferential bias' toward large audit firms, resource constraints, skill gaps, and insurance costs may act as a barrier to entry".

It suggests mandatory audit firm rotation whereby firms would have to publicly tender for audit services every 10 years.

This could help promote audit market diversity and resilience and allow tendering firms to exit relationships that may give rise to a conflict of interest.

Consultation on the options paper will close on August 12.