Gap between ‘big four’ auditors and the rest perception not reality, NZICA says

Companies' Registrar Neville Harris

Any gap in quality between the 'big four' four audit firms and their smaller rivals is perception rather than reality, according to the New Zealand Institute of Chartered Accountants, which says the industry is in line with international experience operating under a new regulatory regime.

The Financial Markets Authority's first audit quality review report found the majority of firms required significant improvements to comply with the auditing and assurance standards, saying there appeared to be a major gap between the big four - PwC, KPMG, Deloitte and Ernst & Young - and other auditors.

NZICA general manager of technical and quality assurance John Hodge said the difference in quality between the major firms and the rest was more a perception than reality, and there was no actual difference between them.

"It's a lot harder for a smaller audit firm to go to a regulated market in the same way as a bigger firm," Hodge told BusinessDesk. "Bigger firms have got more scale, a bit more resource to complete their audits."

The big four dominate audits for locally listed companies, accounting for almost 90 percent of the 110 domestic equities.

Within the benchmark NZX 50 index, BDO Spicers is the lone mid-tier auditor servicing Property For Industry, which paid $57,000 in audit and other consulting fees in its latest financial year. Diligent Board Member Services has switched to Deloitte since filing its last annual report, having spent US$393,000 with Holtz Rubenstein Reminick in 2012.

According to the latest annual reports from the top 50 companies on the NZX, auditors reaped fees of some $31.2 million from 44 local issuers, dwarfed by the A$55.96 million Australian dual-listed Australia & New Zealand Banking, Westpac Banking Corp, and AMP spent. The other audits in the NZX 50 netted fees of US$1.88 million and 2.18 million British pounds.

NZICA's Hodge expects to see fewer firms competing for regulated auditing work, rather than bearing higher compliance costs. So far, there are about 140 registered auditors, which Hodge says is a manageable number.

The government had been working with the accounting sector to end the self-regulating auditing regime since 2001, when the collapse of Enron led to the dissolution of accounting firm Arthur Andersen and sparked concerns about the oversight of auditing processes.

It got a new lease of life in a 2009 report by former Companies' Registrar Neville Harris on the series of failed finance companies, which slated auditing of the local finance sector as lacking "the rigour and analytical depth one would expect one would expect for entities managing substantial public investments."

The big four firms largely left the sector alone, leaving second-tier accounting firms which lacked the capability and experience to review the "complex and elaborate company and business structures," the Harris report said.

Since they first started looking at a new regime, auditors have had to deal with new accounting standards during that period, such as the 2007 introduction of controversial international financial reporting standards requiring recognition of the market value of assets, and that meant firms needed time to adjust, NZICA's Hodge said.

"I don't think it's as easy to say we've had 10 years to prepare for it," he said.

From February this year until June, NZICA, acting as a delegate for the FMA, reviewed 33 audits by nine registered firms, of which 19 audits needed significant improvements. The regulator plans to conduct follow-up or spot reviews of those firms.

Audits were tagged with needing significant improvement if the FMA had concerns over the sufficiency or quality of audit evidence in key areas, if there were significant concerns over the appropriateness of audit judgements in key areas or if the implications of relating to other areas were seen as individually or collectively significant.

Just nine were acceptable with some improvement needed, while five were deemed to be good.

NZICA's Hodge said the industry compliance matches international experience, and he would expect that to improve as firms adjust.

"What we're seeing in New Zealand is quite consistent with what's happening overseas - we're just starting our regime," he said. "We're not experiencing fundamental problems in those audits."


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2 Comments & Questions

Commenter icon key: Subscriber Verified

I suspect someone is an optimist or dreaming
The gap between the four 1st tier and the balance is major
Having worked with all firms the gap in technical competence and understanding of IFRS is profound
the due diligence of second tier firms is poor when planning and conducting the Audit

the FMA is exactly correct and perception in this case is reality ...

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Ah...aren't blanket generalisations such wonderful things!

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