In the 81st University of Melbourne-CPA Australia Annual Research Lecture, Professor Stephen Taylor called for evidence-based regulation of the audit sector.
On Wednesday, 30 September 2020, Professor Stephen Taylor, UTS Distinguished Professor of Accounting, The University of Technology, Sydney, and a member of the Australian Accounting Standards Board, presented the 81st CPA Australia–University of Melbourne Annual Research Lecture, the oldest continuous lecture series in the University’s Calendar and the world’s longest-running annual lecture in the accounting discipline.
Watch the lecture below:
In its history, the lecture has witnessed the evolution of presentation technologies from “chalk and talk” through the use of overhead projectors to PowerPoint. In a development necessitated by COVID-19 restrictions, the 2020 lecture was delivered online via Zoom, accompanied by the unusual start time of mid-day.
The theme of the lecture was whether past and proposed regulatory interventions into the audit market were based on solid evidence, or primarily reflected the "intuitive beliefs" of politicians, regulators and the financial press. Professor Taylor commenced by lauding the “evidence-based” approach of medical research and treatments, exemplified by strategies developed by public-health practitioners and researchers to combat COVID-19 which he saw as a model for audit stakeholders to follow.
Among the current challenges faced by auditors were calls to (i) restrict the provision of non-audit services (NAS), (ii) limit the terms of audit engagements, (iii) restructure the audit market, and (iv) restructure Big 4 audit firms either by splitting them into separate audit and consulting enterprises or dividing them into smaller firms. Driving these calls was what was described as an ethos of the “sky falling in” in relation to audit quality attributed to fees from NAS compromising audit quality
Professor Taylor’s analysis of audit-related headlines in the UK’s Financial Times during 2018–19 showed that they were invariably critical of audit quality and auditors. No headline reflected praise. He cautioned against making assumptions about systemic problems with audit quality on the basis of a handful of sensational cases such as Enron, Carillion or HIH, while the vast majority of audits were unproblematic.
Professor Taylor’s critique of these calls drew on descriptive and causal research studies of the audit market, supplemented by references to underlying market theory. He argued that the belief that the declining proportion of audit fees in Big 4 revenues potentially compromised audit quality by making firms more dependent on NAS was mistaken. The major source of revenue growth has been in services provided to non-audit clients. Further, there was a lack of clarity about what NAS actually comprised.
Regarding alleged audit-market concentration involving Big 4 firms, he pointed to the absence of any compelling theory that this level of concentration inhibited competition, pointing to the example of house auctions in which all that was required for an “active” market was two keen bidders. Similarly, in regard to the beliefs that low-balling by firms to gain audit clients, and long tenures of audit partners and/or firms, impacted on audit quality, he pointed to the lack of evidence supporting these assumptions. He also queried whether the appointment of auditors by external parties such as governments would produce enhanced audit quality.
In his concluding comments, Professor Taylor called for additional descriptive, theoretical and empirical research into factors influencing audit quality, while warning of the dangers of “overweighting anecdote and recent experiences” when revising audit and assurance standards.
Following the presentation, the chair for the lecture, Professor Matt Pinnuck, was the conduit for a lively Q&A session in which questions about the role of ASIC, and the body’s transparency in relation to its investigations, were prominent. In closing proceedings, Mr Piotr Jakubicki, President of the Victorian Division of CPA Australia, emphasised the rich tradition of the lecture as well as complimenting the speaker on the presentation.