Foxes guarding the henhouse?
Key takeaways:
- Big audit firms are inherently conflicted in providing remuneration and governance advice.
- The Corporations Act is ineffective in preserving independence.
- Australia would benefit from US-style exchange rules or full fee disclosure to mitigate conflicts of interest.
Guerdon Associates recently provided a submission in response to the Treasury’s regulation of accounting, auditing and consulting firms in Australia options consultation paper published in July 2026.
In our submission paper we provide well-informed observations of the behaviour of firms that provide both remuneration and governance services as well as other services, and the consequences of that behaviour. We also consider solutions.
What is the conflict?
Major audit firms source most of their revenues from non-audit services. This includes big ticket taxation, IT, and risk management services as well as modest fees for remuneration and governance advice. When the firm is the auditor, fee data analysis suggests that fees from other services are not significant as a proportion of overall firm revenues. Audit firms argue this is not a conflict for audit work that would breach the Corporations Act 2001 requirements for independence.
However, almost all ASX 200 companies will be receiving multiple consulting services from one or more of the big 4 audit firms. The concentration and dominance of the 4 providers presents conflicts of interest that single service line providers do not have.
Most of Guerdon Associates’ advice is commissioned by and provided to the board remuneration committee. This is necessary because management has a conflict of interest in setting their own pay, performance metrics and hurdles and incentive arrangements.
Nevertheless, ASX 200 boards often delegate the process for selecting their board adviser to management. The big 4 audit firms are already providing a range of services to management and the fees they derive from these services are almost always many multiples of the fees they would derive from remuneration advice.
A broad-based audit firm can therefore benefit from providing board remuneration advice that benefits management because:
- The audit firms discount board remuneration advice fees as a lever to win work for more lucrative non-board related services;
- Management is more likely to be favourably disposed to audit firms that they currently employ and can more directly influence the board advice delivered regarding their own pay;
- Audit firms are less likely to challenge the advice management provides to the board regarding their own pay;
- Audit firms are more likely to provide board advice that positions them as better placed to win or retain the more lucrative fees from management commissioned work.
Existing Corporations Act 2001 provisions intended to address these conflicts are ineffective due to broad exemptions for accounting, legal, and actuarial advice. Most advisers also provide advice that is not captured by the narrowly defined “remuneration recommendation” in the Act so in effect, there is no transparency or disclosure of conflicted fees.
What is a potential remedy?
Overseas markets maintain stronger safeguards, such as the UK Remuneration Consultants Group Code of Conduct and US stock exchange listing rules governing compensation adviser independence.
We maintain that there should be disclosure of fees for board advice, and fees for other advice to management. This, in the absence of regulation like that for US stock exchanges, will enable stakeholders to assess the potential for conflicts of interest.
The bottom line
The Treasury paper’s suggestions for resolving conflicts of interest tend to focus on applying corporate disclosure standards on audit firms. Audit firms have, in effect, a corporatised operating model so disclosure of the model would not resolve conflicts of interest. In addition, they have no agency issue, as partners are owners and management in one.
A better model would be akin to that used by US stock exchanges to minimise conflicts of interest associated with board remuneration advice.