Australia’s corporate watchdog has found widespread shortcomings in auditors’ compliance with independence and conflict-of-interest rules, following a risk-based review that has already triggered penalties and other enforcement action.
In Report 817, Building trust: Auditor compliance with independence and conflict of interest obligations (REP 817), the Australian Securities and Investments Commission (ASIC) said multiple auditors across firms of all sizes were unable to effectively demonstrate they met key independence obligations.
ASIC Commissioner Kate O’Rourke said the sector must observe independence requirements given its role in the quality and integrity of corporate financial reporting. “Auditor independence underpins stakeholder trust and confidence in the audit process and the reliability of the financial information being audited. Unfortunately, our review found that many auditors failed to meet the basic independence requirements, and others failed to identify and critically evaluate potential threats to their independence.
‘It is not enough for auditors to adopt a tick-a-box approach to complying with these important obligations. They must think more critically about whether they are independent and be alive to even the perception that their independence is compromised,’ said Ms O’Rourke.
ASIC identified a disappointing number of likely breaches of prescriptive independence requirements. Fifteen auditors were flagged for likely breaches of rotation rules, relationship prohibitions or providing a prohibited non-audit service. Nine failed to demonstrate how they complied with mandatory rotation limits that prevent auditing a listed client for more than five consecutive years. Five appeared to hold prohibited relationships with clients, including one auditor who was also an officeholder of their client.
None of the 15 auditors had proactively reported the potential breaches to ASIC, despite a reminder issued in October last year. “‘The failure of these auditors to report breaches to ASIC, including of the longstanding prescriptive independence obligations, is concerning,’ said Ms O’Rourke.”
Following the review, ASIC:
– accepted the cancellation of a company auditor’s registration for independence failures
– issued a $78,250 infringement notice to Nexia Perth over prohibited services
– entered into three court enforceable undertakings with auditors associated with Hall Chadwick (NSW) and the firm over audit rotation failures.
ASIC said it is conducting additional inquiries into potential breaches uncovered by the work.
‘Auditor independence is fundamental to audit quality and integrity. A strong focus on independence not only builds trust, it also fosters more rigorous challenge in the audit process thereby enhancing the preparation of high-quality financial information.
‘We expect auditors to carefully consider this report and use its findings to address gaps in their compliance,’ Ms O’Rourke said.
The review examined 48 auditors and 19 audit firms selected through a data-driven, risk-based methodology that assessed information on 2,900 auditors for indicators of potential independence threats arising from non-audit services, long association with clients (including rotation), and relationships between auditors and clients or their officeholders.
The cohort included individual auditors as well as auditors from BDO Audit, Deloitte Touche Tohmatsu, Ernst & Young, Grant Thornton Audit, Hall Chadwick (NSW), KPMG Australia, Nexia Perth Audit Services, PKF Melbourne Audit & Assurance, PricewaterhouseCoopers, RSM Australia Partners, and others.
REP 817 is the second publication from ASIC’s expanded programme to improve financial report and audit quality, following Report 816 on the financial reporting and audit of super funds. An annual report on financial reporting and audit surveillance of companies and auditors is due later in October. For 2025–26, ASIC plans to increase the number of audit surveillances, including reviews of audit files where there are potential independence concerns.
