EY is also engaged in a legal battle over its audits of former sandalwood grower Quintis and now-liquidated miner Penrice Soda Holdings.
According to the ASIC report, EY and KPMG both improved their performance across the two years by 8 and 7 percentage points respectively.
ASIC identified problems in just 14 per cent of EY’s audit files in the 2020 financial year the best result from a big four firm by a significant margin while it flagged issues in 26 per cent of KPMG’s files.
But it also found that both EY and PwC failed to do enough work to support their audit opinions on every important aspect of at least one client’s financial reports.
Conflicts of interest continued to be a key concern for ASIC, after multiple Australian and international probes into audit quality in 2019 revealed that the big four risked the independence of their audit opinions by also taking on lucrative consulting and tax work for the same companies.
The regulator found that there could be the appearance that Deloitte’s independence was compromised at two of the clients whose audit files it reviewed.
For one company, Deloitte was its largest trade debtor as well as its auditor. The matter was flagged during the firm’s independence compliance testing.
For another audit client, ASIC found Deloitte continued to compile information for lenders relating to debt covenant compliance for an investee in which the company had a significant investment and where a takeover was ripe.
ASIC said it failed to adequately assess the threat this posed to its independence as an auditor.
It also identified a risk that EY’s independence could be perceived to be compromised at one client, where the fees the firm earned for non-audit services were more than nine times the audit fees it took in.
Firms must strengthen existing initiatives and implement further new initiatives to improve audit quality.
Cathie Armour, ASIC commissioner
The non-audit services provided by EY to the company included tax advisory work that supported figures in the financial report.
ASIC commissioner Cathie Armour said that the inspection results showed that the large firms were not doing enough to improve audit quality on their own.
A parliamentary inquiry made several recommendations for forcing change on the industry this year, but their implementation risks being delayed by the pandemic.
“The current findings suggest firms action plans have not sufficiently improved audit quality,” Ms Armour said.
“Firms must strengthen existing initiatives and implement further new initiatives to improve audit quality.
“This includes enhancing a culture focused on audit quality, the experience and expertise of partners and others, supervision and review of audits, and accountability of partners and others for audit quality.”
National mid-tier firms Grant Thornton and BDO also did not do sufficient work in 20 and 27 per cent respectively of the audit files reviewed by ASIC.
The two firms and big four combined are responsible for the audits of 96 per cent of ASX-listed companies based on market capitalisation.
Overall, ASIC found that auditors failed to obtain reasonable assurance that financial reports were free from material misstatement in 27 per cent up from 26 per cent last year of the 179 key audit areas that ASIC reviewed.
The failures were largely related to auditing asset values, particularly of revenue and the impairment of non-financial assets.