Submission to Parliamentary Joint Committee on Corporations and Financial Services My name is David Stow and I am a member of the Australian Citizens Party. I have made submissions to the Royal Commission into Banking and associated Senate enquiries at every opportunity because under the current economic policies, I see this country sleep walking toward economic Armageddon. I will address some of the terms of reference provided by the Parliamentary Joint Committee as shown below. Input forming the basis of the submission is shown in red. The relationship between auditing and consulting services and potential conflicts of interests. Other potential conflicts of interests.

The four largest auditing companies, EY, Deloitte, KPMG and PwC, are private companies that are unique in that they enjoy a guaranteed business because financial services auditing is a state-mandated function.

In recent decades the above Big Four companies have expanded into much more profitable consulting services to the same companies they audit, which is now more than two-thirds of their global income. These services involve, among other things, products/advice on tax minimisation and capital effectiveness maximisation. It is easy to see the potential for the type of conflict of interests that could produce effectively worthless audits, ultimately resulting in, for example, the litany of scandals involving the Big Four auditors and spectacular corporate failures and criminality, such as the 2008 collapses of Bear Sterns, Lehman Brothers, and HBOS soon after receiving clean audits. There have been multiple corporate failures caused by management looting in the UK in the last decade, criminal scandals such as money laundering by HSBC and . In the Australian context, we need only look at the misconduct and fraud in the Australian banking system exposed at the banking royal commission. Why has so little of this come to light through audits performed by the Big Four auditors?

The level and effectiveness of competition in audit and related consulting services.

After decades of mergers, the big four mega-firms now audit 98 per cent of ’s public companies in addition to 97 per cent of US, all the UK’s top 100 companies and 80 per cent of Japanese listed companies. This dominance is entrenched because now only the Big Four are big enough to audit large multinational corporations.

Is there sufficient competition with just 4 mega-firms? If anyone believes that “market forces” and competition alone will ensure companies will act ethically, legally and in the interests of the Australian public, one only has to look at the “big 4” Australian and what has been exposed by the banking Royal Commission.

Audit quality, including valuations of intangible assets.

I don’t not know whether Australia’s banks have to disclose the value of holdings in financial derivatives and I don’t know whether the auditors have been able to determine what these holdings are for Australia’s banks. What I do know is that auditors appeared to have no knowledge of impending financial crises such as the GFC. Is it the case that they have advised government of the risks posed by banks having more than 60% of their books centered around the housing market and government has ignored them? I doubt it. That would be against the interests of the Australian people and the economy, wouldn’t it?

The quality of an audit should not be measured by the weight of its final report. Nor should it be assessed by those who either can’t or otherwise don’t understand the issues. So, what of audit quality? The current audit regime seems to rely on the auditor winning business based on products it offers outside of auditing and on giving “favourable” audit results to its customers. With a truly impartial auditor, the banks do not have to either like or even agree with the audit result. That said, an audit can only accurately reflect the true state of ’s finances if banks have disclosed all relevant information to the auditor.

Many people now hold the view that full and accurate disclosure by banks can only be achieved through legislative changes relating to how regulators operate as well as changes to how auditors currently operate. In either not warning or knowing of impending financial crises, the auditors have clearly demonstrated that they cannot do an adequate job.

The role and effectiveness of audit in detecting and reporting fraud and misconduct.

See above points concerning conflicts of interest.

The effectiveness and appropriateness of legislation, regulation and licensing.

I believe that at the present time the only way to keep banks in good financial order and acting in an honest and ethical way is through better regulation. The same applies to the auditing function. To allow huge for-profit companies to please their clients through tax minimisation and capital use maximisation financial products and advice is a recipe for the type of corruption found by the recent Australian banking Royal Commission. Those that think this type of corruption is new or just a one-off situation need only to review the US Pecora Commission’s investigation into US banks in the 1930’s. Bankers were imprisoned for fraud and the Glass-Steagall law was introduced in response to the Commission’s findings.

New and much needed legislation regarding the Big Four auditors should involve a separation of the auditing function from the financial products and advice function. Such legislation could operate in much the same way as the separation of from commercial banking, the principle being that both functions cannot be legally operated by the one company.

Any related matter.

Investigative journalist Michael West documents consulting fees received by the Big Four from the Australian government have grown from slightly less than $300 million in 2012, to more than $700 million in 2017 and 2018. In turn, the Big Four have become major donors to the major political parties. More than half of their consultation fees have come from one department, the Department of Defence - little surprise then that EY gave retired Defence Industries Minister Christopher Pyne a plum job straight after he left Parliament.

Treasurer Josh Frydenberg’s “High Level Advisory Panel” on tax is dominated by five executives from EY, three from Deloitte, five from KPMG and seven from PwC. Some may say these people are “uniquely qualified” for their positions or the appointments are just an extension of “networking” rather than conflict of interest or “jobs for the boys”. I wonder…

Of immediate concern to Australians should be the health of our financial system. Under the audits conducted by the Big Four accounting firms, we can have no confidence in the state of the major banks, especially in the event of what further declines in housing prices will lead to. The Big Four’s audits ignore the banks’ skyrocketing derivatives, the true value of the mortgage loans that account for 65 per cent of the business of each of the major banks and the endemic inaccuracies in bank mortgage lending practices. If the government guarantees the banks and their deposits as it claims, why not make the vitally important task of auditing institutions that have been found wanting ethically and, in some instances, legally, by no less than a Royal Commission, an unequivocal Government responsibility, via the Attorney Generals department? To this end, the Australian Citizens Party, formerly the Citizens Electoral Council, has drafted a bill for Parliament to order the Auditor-General to conduct an independent audit of the major banks to assess the systemic risks they pose.

David Stow