AUDIT REPORTS IN AUSTRALIA : PRELIMINARY FINDINGS

1 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS AUDIT REPORTS IN AUSTRALIA 2005 2013: PRELIMINARY FINDINGS SEPTEMBER 2014 BE HEARD. BE RECOGNISED.

2 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS AUTHORS Elizabeth Carson (Research team leader), University of New South Wales Yuyu Zhang, Queensland University of Technology Neil Fargher, The Australian National University CPA Australia would like to thank for their ongoing support: The Auditing and Assurance Special Interest Group of the Accounting and Finance Association of Australia and New Zealand (AFAANZ) Robyn Moroney (AFAANZ project co-ordinator), Monash University Amir Ghandar FCPA (CPA Australia project leader), CPA Australia CPA Australia Ltd ( CPA Australia ) is one of the world s largest accounting bodies representing more than 150,000 members of the financial, accounting and business profession in 121 countries. For information about CPA Australia, visit our website cpaaustralia.com.au First published 2014 CPA Australia Ltd ACN 008 392 452 Level 20, 28 Freshwater Place Southbank Vic 3006 Australia Copyright CPA Australia Ltd 2014. CPA Australia owns all copyright in these materials or uses it under licence or applicable law. For permission to reproduce any material, a request in writing is to be made to the Legal Business Unit, CPA Australia Ltd, Level 20, 28 Freshwater Place, Southbank, Victoria 3006. DISCLAIMER CPA Australia Ltd has used reasonable care and skill in compiling the content of these materials. However, CPA Australia Ltd makes no warranty that the materials are accurate and up to date. These materials do not constitute the provision of professional advice whether legal or otherwise. Users should seek their own independent advice prior to relying on or entering into any commitment based on the materials. The materials are purely published for reference purposes alone. CPA Australia, their employees, agents and consultants exclude completely all liability to any person for loss or damage of any kind including but not limited to legal costs, indirect, special or consequential loss or damage (however caused, including by negligence) arising from or relating in any way to the materials and/or any use of the materials. Where any law prohibits the exclusion of such liability, then to the maximum extent permitted by law, CPA Australia s liability for breach of the warranty will, at CPA Australia s option, be limited to the supply of the materials again, or the payment of the cost of having them supplied again.

3 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS CONTENTS 1. Introduction 4 2. Sample 5 3. Types of Audit Reports 6 4. Trends in Audit Reports 8 5. Going Concern 10 6. Commentary 20 References and Further Reading 21 Data tables 22 Appendix 1: Economic Trends in Australia 26

4 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS 1. INTRODUCTION This paper provides a preliminary summary of audit reports for Australian listed public companies for the period 2005 to 2013, focusing on auditor reporting in the most recent period 2011 to 2013. Prior research has shown that audit reports modified for uncertainty relating to the going concern assumption increased following the shock of the Global Financial Crisis (GFC) in late 2007. This occurred in Australia from 2008 where Xu et al. (2011) find that reports modified for going concern uncertainty increase from 12% in 2005 to 2007 to 18% in 2008 and 22% in 2009. Similar trends are observable for the United States as shown by an increase from 14% in 2003 to 21% in 2008 (Cheffers et al. 2010, Geiger et al. 2014). To the extent that the Australian economy has recovered from the initial impact of the GFC with the associated shocks to equity and credit markets, reduced overall risk might be expected to translate into lesser uncertainty regarding a company s ability to continue as a going concern. However, the recent period 2011 to 2013 also includes reductions in some commodity prices, competitive pressure on manufacturers, and other uncertainties regarding real growth in the economy. The aim of this report is to examine the frequency of the various types of audit reports issued in Australia during the period 2011 to 2013, with a focus on reports emphasizing significant uncertainty in regard to the going concern assumption. Our initial analysis indicates a substantial increase in unmodified audit reports with emphasis of matter paragraphs rising from 13% in 2005 to 22% by 2009 following the GFC, and a continuation of this trend to 25% in 2012 and 32% in 2013. The increase is strongest for smaller companies and particularly for companies in the mining and energy sector. Serious qualifications of audit reports remain around the 3-5% level. FIGURE 1 THE DISTRIBUTION OF AUDIT REPORTS BY TYPE OF AUDIT OPINION 2005 2013 10 8 Unmodified Unmodified with an Emphasis of Matter Total Modified This paper is organised as follows. Section 2 summarises the sample examined in this study. Section 3 provides a brief summary of the types of audit reports in Australia. Section 4 provides a summary of the trends in audit reports. Section 5 provides a greater focus on trends in the reports modified for going concern uncertainty. Section 6 concludes the report.

5 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS 2. SAMPLE We reviewed 15,855 audit reports for Australian publicly listed companies, representing around 98% of the companies listed on the Australian Stock Exchange 1 over the period 2005-2013. The number of companies in the sample ranges from 1,489 in 2005 to a peak of 1,861 in 2011, declining to 1,819 in 2012 and 1,837 in 2013. Our sample period covers the years 2005-2013. Implicitly we note three sub-periods in the analyses: 1. the pre-2007 period, which is the period before the onset of the GFC; 2. the period 2008-2010, which is the period during the GFC, although Australia has outperformed economically compared to most of the other developed nations; and 3. the period 2011 2-2013, which represents the period more remote from the direct GFC impact; however, we note that this period includes a slowdown in Chinese economic growth commencing in 2011 and parts of the mining boom after 2011. Although Australia has recorded 21 years of consistent economic growth with no recessions since 1993 3, the Australian economy has weakened since 2011-2012 with warnings of slower economic growth, primarily due to the slowdown of Chinese investment and the mining boom, competitive pressure on manufacturers, and other uncertainties regarding real growth in the economy. During 2011 to 2013, ASIC s areas of focus for financial reports included ensuring that directors were realistic about their assumption about the entity s future obligations and that auditors should carefully consider their reporting obligations with respect to the going concern assumption. 4 ASIC (2012) also raised the issue of the need for auditors to consider sufficient and appropriate evidence in assessing the appropriateness of the going concern assumption and in particular with regard to mining and energy entities (ASIC 2012, page 16). 1 Companies with audit opinions signed outside Australia are excluded from our analysis. 2 The cut-off year 2011 is an estimate rather than a clear cut-off. 3 Source: http://thediplomat.com/2014/03/australias-economic-luck-21-years-and-counting/ See also Economic growth at slowest pace since 2011, http://www.afr.com/p/national/economic_growth_at_slowest_pace_gavwqx2ezosdwc9swyd2bl Source: http://thediplomat.com/2014/03/australias-economic-luck-21-years-and-counting/ See also Economic growth at slowest pace since 2011, http://www.afr.com/p/national/economic_growth_at_slowest_pace_gavwqx2ezosdwc9swyd2bl 4 See ASIC s areas of focus for 30 June 2011 financial reports MR11-139 (7 July 2011), 31 December 2012 financial reports MR12-292 (27 November 2012), and 31 December 2013 financial reports MR13-293 (30 October 2013).

6 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS 3. TYPES OF AUDIT REPORTS 3.1 AUDITING STANDARDS AND CLASSIFICATION OF AUDIT REPORTS Current requirements for audit reports in Australia are set out in ASA 700 Forming an Opinion and Reporting on a Financial Report, ASA 705 Modification to the Opinion in the Independent Auditor s Report, and ASA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor s Report. ASA 700 deals with the auditor s responsibility to form an audit opinion and also the form and content of the auditor s report. 5 ASA 705 and ASA 706, 6 which replaced the pre-existing ASA 701 as a result of the clarity project, focus on the modifications to the audit opinion and Emphasis of Matter paragraphs and Other Matter paragraphs respectively. Compliance with the current Auditing Standards enables compliance with the corresponding International Standards on Auditing (ISAs). Based on the definitions employed in current Auditing Standards, we classify the audit opinions into Modified Opinions and Unmodified Opinions. Unmodified Opinions are further divided into Unmodified and Unmodified with an Emphasis of Matter Paragraph. Modified opinions are further categorized as Except for, Adverse Opinion, and Disclaimer of Opinion. Modified opinions may also contain an Emphasis of Matter Paragraph. To be consistent with the Australian Auditing Standards, we use the same terminology as used in ASA700, ASA705 and ASA706. Unmodified vs Modified Opinion Based on ASA 700, the audit opinion is firstly classified as either an unmodified opinion or a modified opinion. Unmodified Opinion: Under normal circumstances when the auditor concludes that the financial report is prepared, in all material respects, in accordance with the applicable financial reporting framework, the auditor shall express an unmodified opinion (ASA 700.16). Modified Opinion: If the auditor concludes that the financial report, as a whole, is not free from material misstatement or if the auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial report as a whole is free from material misstatement, the auditor shall modify the opinion (ASA 700.17). Types of Modified Opinions Once an audit opinion is modified, three types of modified opinions are established for use in ASA 705, including a qualified (Except for) opinion, an adverse opinion, and a disclaimer of opinion. Except For: The auditor shall issue a qualified opinion when there is (are) material but not pervasive misstatement(s), or when the possible effects of the inability of the auditor to obtain sufficient appropriate audit evidence on the financial report of undetected misstatements are concluded as material but not pervasive (ASA 705.7). Except for statement is required in the Basis for Qualified Opinion paragraph (ASA 705.23) 7. Adverse Opinion: An adverse opinion shall be expressed if the auditor concludes the individual and/or the aggregated misstatements are both material and pervasive (ASA 705.8). Disclaimer of Opinion: If a limitation on the scope is validated due to the auditor s inability to obtain sufficient appropriate audit evidence and its possible effects on the financial report of undetected misstatements is both material and pervasive, the auditor shall issue a disclaimer of opinion. Another situation for a disclaimer of opinion is in extremely rare circumstances involving multiple uncertainties, when the auditor concludes that it is not possible to form an opinion due to the potential interaction and the cumulative effects of the uncertainties on the financial report. 5 For the period covered by this paper (2005-2013), the auditing standards on audit opinions have been substantially revised from the initial AUS 702 Audit Report on a General Purpose Financial Report (operative until 1 July 2006), ASA 700 (operative on or after 1 July 2006 due to the requirements of CLERP 9 Act that codify Australian Auditing Standards as legislative instruments), to the current ASA 700 that has been revised and redrafted by using the equivalent clarity versions of the International Standards on Auditing (ISAs) as the underlying standards (operative on or after 1 January 2010). 6 ASA 701 Modifications to the auditor s report was effective from 1 July 2006, and then replaced by ASA 705 and ASA 706 as a part of the clarity project in 2009, effective from 1 January 2010. 7 Subject to phrases are not appropriate for a qualified opinion as these are regarded as insufficiently clear or forceful (ASA705. A22).

7 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS Emphasis of Matter Paragraph An Emphasis of Matter (EoM) paragraph shall be used when the auditor considers it necessary to draw user s attention to a matter presented or disclosed in the financial report that, in the auditor s judgement, is of such importance that it is fundamental to users understanding of the financial report (ASA 706.6). The auditor shall include an Emphasis of Matter paragraph to draw attention to the additional disclosures when the financial report has been prepared in accordance with Australian Accounting Standards but necessarily additional disclosures have been made in the financial report to ensure the financial report as a whole is comparable and understandable (ASA 706. Aus7.1). An EoM can be included in an unmodified or a modified audit report. 3.2 AUDITING STANDARDS ON EMPHASIS OF MATTER PARAGRAPHS Before ASA706 became effective in 2010, Emphasis of Matter paragraphs were governed by ASA701 which outlined the following circumstances in which an EoM paragraph is required: Significant Uncertainty Going Concern Significant Uncertainty Other Significant Uncertainty Going Concern and Other Additional Disclosures Inconsistent Other Information Subsequent Events Resulting in a New Auditor s Report on a Revised Financial Report Other Reporting Responsibilities Under ASA 706, operative for financial reporting periods commencing on or after 1 January 2010 the circumstances under which an EoM paragraph was appropriate were amended as follows: ASA 706.A1 identifies three types of circumstances in which an EoM paragraph may be necessary including (1) an uncertainty relating to the future outcome of exceptional litigation or regulatory action, (2) early application (where permitted) of a new accounting standard (for example, a new Australian Accounting Standard) that has a pervasive effect on the financial report in advance of its effective date, and (3) a major catastrophe that has had, or continues to have, a significant effect on the entity s financial position. An uncertainty, if its resolution may materially affect the financial report, would warrant an EoM paragraph in the auditor s report (ASA 706. Aus A1.1). ASA 706 lists four Auditing Standards where circumstances may arise which require an EoM paragraph to be included in the auditor s report (ASA 706. Appendix 1). These are (1) ASA 210 Agreeing the Terms of Audit Engagements paragraph 19(b), (2) ASA 560 Subsequent Events paragraphs 12(b) and 16, (3) ASA 570 Going Concern paragraph 19, and (4) ASA 800 Special Considerations Audits of Financial Reports Prepared in Accordance with Special Purpose Frameworks paragraph 14. Of relevance for our study is that Going Concern has been identified as a typical circumstance for an EoM paragraph. In addition, ASA 706 requires auditor to disclose a paragraph in the auditor s report, with the heading Other Matter, or other appropriate heading if necessary. An Emphasis of Matter paragraph does not indicate a modification to the auditor s opinion or affect the auditor s opinion (ASA 706.7(d), ASA706.A3-A4). As stated in ASA 706.A2, a widespread use of EoM paragraphs diminishes the effectiveness of the auditor s communication of such matters; and unnecessarily excessive information in the EoM paragraph may imply that the matter has not been properly presented or disclosed.

8 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS 4. TRENDS IN AUDIT REPORTS 4.1 TYPES OF AUDIT REPORTS Table 1 shows the distribution of audit reports classified by type of audit opinion for the period 2005-2013. Figure 1 (on page 1) graphs data from Table 1 to highlight the declining trend in unmodified reports and the increasing trend in the use of an emphasis of matter paragraph. This table shows: There is a declining trend of standard unmodified audit reports over the period, dropping from 84.75% in 2005 to 64.29% in 2013. Compared with the pre-2007 period in which the percentage of unmodified audit reports is around 85%, there is a relatively large drop in the percentage of unmodified audit reports in 2008 (to 77.77%), corresponding with the onset of the GFC. This trend has not reversed [2009 (73.25%), 2010 (74.54%), 2011 (75.39%), 2012 (70.59%)] with the proportion declining further in 2013 (64.29%). The decline in the ratio of unmodified audit reports are mainly attributable to the increase in the audit reports unmodified with emphasis of matter paragraphs, rising from 12.96% in 2005 to 32.34% in 2013. The frequency of more severe modified reports changes over 2005-2013 from an average of 2.79% in 2005-2007 to an average of 4.3 in 2008-2010, and 3.97% in 2011-2013. 4.2 TYPES OF EMPHASIS OF MATTER PARAGRAPH Table 1 Panel B shows the types of Emphasis of Matter (EoM) paragraph issued in 2005-2013. As discussed above there is a change on EoM paragraph in the standards, from ASA701 to ASA706 in 2010, with our study period prior to 2010 covered by ASA701 (2005-2010). We classify the types of EoMs in accordance with the ASA701 classifications in Table 1 Panel B. Figure 2 highlights that the majority of the EoMs are associated with Going Concern issues. For the period 2005-2007, 8-9 of EoMs are due to Going Concern related uncertainty; the ratio surges to 94.93% in 2008 and stays over 9 after 2009. In 2012 and 2013, the ratio of EoMs in relation to Going Concern experiences another increase to 95. and 95.96% respectively. Except for the circumstances associated with significant uncertainties (including uncertainties on Going Concern, and uncertainties other than Going Concern), other types of EoMs are rarely observed in the study period. Before 2010, there are few audit reports with other types of EoMs; after 2011, the number of other types of EoMs has increased but still stays fewer than eight observations per year. The findings are consistent with those suggested in Xu et al. (2013). Xu et al. (2013) also conduct a brief content analysis on the EoM paragraphs to explain the underlying financial reasons included when reporting an unmodified opinion with EoMs. We could examine this issue further in the next stage.

9 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS FIGURE 2 TYPES OF EMPHASIS OF MATTER AND/OR OTHER MATTER PARAGRAPHS 2005-2013 10 8 Others Significant Uncertainty other than Regarding the Ability to Continue as a Going Concern Significant Uncertainty Regarding Ability to Continue as a Going Concern

10 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS 5. GOING CONCERN 5.1 AUDITING STANDARDS ON GOING CONCERN Under the going concern assumption, an entity is viewed as continuing in business for the foreseeable future. A general purpose financial report is prepared on a going concern basis, unless management either intends to liquidate the entity or to cease operations, or has no realistic alternative but to do so. When the use of the going concern assumption is appropriate, assets and liabilities are recorded on the basis that the entity will be able to realise its assets and discharge its liabilities in the normal course of business (ASA 570.Para2). Going concern can be associated with an unmodified opinion, an unmodified opinion with an Emphasis of Matter paragraph, a qualified opinion, an adverse opinion, or a disclaimer of opinion. The determination of the appropriate audit opinion is based on consideration as to whether there is a material going concern uncertainty, whether the use of the going concern assumption is appropriate, whether the disclosure is adequate, and/or whether there is a limitation of scope imposed by the management to obtain sufficient appropriate audit evidence on going concern. Specifically, in regard to: An unmodified opinion with an Emphasis of Matter paragraph on Going Concern An unmodified opinion with an Emphasis of Matter paragraph on going concern uncertainty shall be expressed when significant going concern uncertainty exists while the auditor concludes that the going concern assumption is appropriately used and the adequate disclosure has been made (ASA 570. Para18 & 19). An unmodified opinion with an Emphasis of Matter paragraph on alternative basis other than going concern assumption is appropriate if the going concern assumption is not appropriate and the management has prepared the financial report on an appropriate alternative basis with adequate disclosure (ASA 570. A26). A Modified Opinion in relation to Going Concern A qualified opinion or an adverse opinion on Going Concern uncertainty shall be issued if the going concern assumption is appropriate with the appearance of significant going concern uncertainty, but the disclosure of the material uncertainty in the financial report is not adequate (ASA 570.Para 20). An adverse opinion shall be expressed if the financial report has been prepared on a going concern basis but, the use of Going Concern assumption is inappropriate (ASA 570.Para 21). A qualified or disclaimer of opinion may be appropriate due to management s unwillingness to make or extend their going concern assessments when these assessments are necessary to provide additional audit evidence (including considerations of mitigating factors) in determination of whether a material going concern uncertainty exists and the auditor has requested the management to do so (ASA 570.A27). A disclaimer of opinion may be considered appropriate instead of adding an Emphasis of Matter paragraph due to multiple material uncertainties on going concern are involved that are significant to the financial report as a whole (ASA 570.A22 & ASA 705).

11 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS 5.2 REPORTS WITH GOING CONCERN RELATED ISSUES Table 1 Panel C and Figure 3 shows the distribution of going concern related opinions across the years. The Going Concern related opinions are classified into Modified in relation to Going Concern, and Unmodified with EoMs on Going Concern. The Table shows: In 2005-2007, the percentage of Going Concern related audit reports is stable at around 12%, with the majority of these being unmodified with an EoM paragraph on Going Concern. Over the period 2008-2010, the percentage of Going Concern related audit reports increases to around 22%, consistent with the occurrence of the GFC and its associated economic impact on Australian entities. There is an increasing trend in Going Concern related audit reports for the period 2011-2013 with a peak in 2013 of 33.32%. We speculate that it is attributable to the pause of the mining boom and the slowdown of China s economic growth, and their impact on Australian Economy, but further investigation is needed. For the study period, a Modified Opinion on Going Concern is available but rarely used by the auditing practitioners. FIGURE 3 GOING CONCERN RELATED REPORTS: QUALIFICATION AND EMPHASIS OF MATTER PARAGRAPHS 2005-2013 10 9 8 7 5 3 1 Qualified in relation to GC Unqualified with EoM on GC

12 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS 5.3. AUDIT REPORTS ISSUED BY DIFFERENT AUDIT FIRMS Table 2 reports the types of audit reports over the period 2005-2013 for Big 4 and non-big 4 audit firms. Big 4 firms include the four largest international accounting firms, including: PriceWaterhouseCoopers, Ernst and Young, KPMG and Deloitte. All other accounting firms are classified as non-big 4 firms. Over the study period, the percentage of Modified Opinions (1.67%) and the percentage of Unmodified with EoMs (13.07%) are lower for Big 4 audit firms, compared to the percentages for these types of audit reports issued by non-big 4 firms (Modified Opinions 5.16% and Unmodified with EoMs 24.81%). Big 4 audit firms: For the period 2005-2007, the percentage of Unmodified with EoMs is steady at around 7%; the ratio rises to over 13% in 2008 and remains stable over the years 2008-2011; in 2012 and 2013, the ratio jumps again to 17% and respectively. There is no significant change in the percentage of Modified Opinions issued by Big 4 audit firms throughout the period, ranging between 0.5% and 2%. Non-Big 4 audit firms: For the period 2005-2007, the percentage of Unmodified with EoMs ranges from 15% to 19%; the percentage increases to 22% - 27% for the period 2008-2011; the years 2012 and 2013 report the highest percentage of Unmodified with EoMs at 31% and 41% respectively. The percentage of Modified Opinions issued by Non-Big 4 firms is around 3%-7% over the years. Non-Big 4 firms report significantly higher rate of Going Concern related Modifications and EoMs, compared to the Big 4 group. Moreover, the gap seems to have increased during the past decade. For 2005-2007, Big 4 firms report around 7% Going Concern related audit opinions; while Non-Big 4 firms issue around 15%-18% of their clients with Going Concern opinions. In 2008-2011, Big 4 firms issue around 15% Going Concern opinions; while Non-Big 4s issued Going Concern related audit reports to 25% of their clients. In 2012-2013, the percentages for Big 4 firms are 18. and 20.8% respectively; for the same years, the percentages for Non-Big 4s are 32.5% and 42.3%. We would expect that the primary difference in reporting pattern between Big 4 and non-big 4 firms is due to the differences in client size as Big 4 firms tend to have a client base with a larger average size and lower levels of risk (Xu et al. 2011).

13 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS 5.4 TYPES OF AUDIT REPORTS BY ENTITY SIZE Table 3 and Figure 4 investigate the reporting patterns of entities of different size. The sampled listed companies are divided into groups of the Largest 200, Middle, and Smallest 500 companies based on their total assets. FIGURE 4 GOING CONCERN RELATED REPORT BY ENTITY TOTAL ASSETS 7 5 3 1 Top 200 Middle Bottom 500 Findings: As would be expected, entity size is strongly associated with the likelihood of receiving a report modified for going concern uncertainty. By their nature, small companies have less financial flexibility to respond to macro- and micro-economic changes. Generally, small companies (Smallest 500) report a much higher percentage of audit reports modified for going concern issues (average 37.93%) than the other two groups; large companies (Largest 200, 2.83%). Largest 200 companies: The percentage of Going Concern related audit reports for the largest 200 companies ranges from in 2005 and 2006, to the peak of 6%-7% in 2008 and 2009. The ratio declines quickly after the GFC period to 2.5% in 2011, and declines to 1.5% in 2013 Middle companies: The ratio of Going Concern related reports for the Middle group of companies has consistently increased from 2005 (6.97%) to 2009 (17.67%). After a slight drop in 2011 (14.9), the ratio rises again to 28.06% in 2013. Smallest 500 companies: For the smallest 500 companies, the lowest ratio of Going Concern is reported in 2007 (19.) and peaks at 2013 (58.). Similar to the other two categories of companies, there are significant increases in the ratio in 2008 and 2012 respectively. This large increase warrants further investigation of the underlying factors leading to this significant increase in reports modified for going concern issues. Overall, the trend of the three categories of companies by size shows similar pattern: the first significant rise in 2008, corresponding to the occurrence of the GFC, and the second rise in 2011 or 2012, corresponding to the slowdown of Australian economy. Specifically, large companies have been influenced significantly by the GFC but do not appear to have been heavily influenced by the recent local economic slowdown. For small companies the uncertainty of continuing as a going concern increases with both the GFC and the recent local context.

14 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS 5. 5 TYPES OF AUDIT REPORTS BY INDUSTRY Table 4 summarises the types of audit reports by industry and by year. The trends are summarized in Figure 5, with the following findings: Most of the industries, including Energy, Materials, Consumer Staples, Industrials, Health Care and Utilities, generally show an upward trend in terms of Going Concern Opinion. Specifically, Energy has seen a consistent increase in GCOs since 2007; a similar (but less consistent) pattern applies to the Materials industry. ASIC (2012) warned that entities in the mining and energy industries are of high risk when auditors are assessing the going concern assumption. Our data supports this view and indicate that the two industries sensitively respond to the economic changes, e.g., the GFC (2008) and the suspected pause of mining boom (since 2011). Financial industry reports the highest unmodified rate and the lowest modification rate and the lowest GCOs over the study period. Australia s financial industry has been marked with the stable financial system and the most profitable banks in the world 8. We attribute the low modification and GCO ratios to the strong Australian financial system and the outperformance of Australian banks during the recent years. Telecommunications industry is notable for its downward trend in Unmodified with EoMs, GCOs and Modifications, which is opposite to most other industries. 8 Source: http://www.abc.net.au/news/2014-06-30/australian-banks-most-profitable-but-still-vulnerable/5559960

15 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS FIGURE 5 TYPES OF AUDIT REPORT BY INDUSTRY 5.1 ENERGY 10 8 Unmodified EoMs GCO Modified 5.2 MATERIALS 10 8 Unmodified EoMs GCO Modified

16 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS FIGURE 5 TYPES OF AUDIT REPORT BY INDUSTRY 5.3 INDUSTRIALS 10 8 Unmodified EoMs GCO Modified 5.4 CONSUMER DISCRETIONARY 10 8 Unmodified EoMs GCO Modified

17 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS FIGURE 5 TYPES OF AUDIT REPORT BY INDUSTRY 5.5 CONSUMER STAPLES 10 8 Unmodified EoMs GCO Modified 5.6 HEALTH CARE 8 7 5 3 1 Unmodified EoMs GCO Modified

18 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS FIGURE 5 TYPES OF AUDIT REPORT BY INDUSTRY 5.7 FINANCIALS 10 8 Unmodified EoMs GCO Modified 5.8 INFORMATION TECHNOLOGY 8 7 5 3 1 Unmodified EoMs GCO Modified

19 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS FIGURE 5 TYPES OF AUDIT REPORT BY INDUSTRY 5.9 TELECOMMUNICATION 10 8 Unmodified EoMs GCO Modified 5.10 UTILITIES 10 8 Unmodified EoMs GCO Modified

20 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS 6. COMMENTARY Based on the above preliminary analyses, the following points come to our attention. As expected there is a surge in GCO and EoMs in 2008, attributable to the onset of the GFC. Another notable surge in GCO rates is observed in 2012 and 2013. At this stage, we speculate that it is attributable to reduced growth prospects arising from China s economic slowdown, higher exchange rates and the pause in mining boom since 2011. The graphs on job vacancies and unemployment rate over the last 30 years (available in the Appendix) seem to support this view. Although there are multiple reasons for EoMs available in ASA706, the Going Concern issue is the issue that is referenced most frequently in explanations for EoMs. Big 4 audit firms report significantly lower ratio of GCOs and EoMs than the non-big 4 audit firms, probably attributable to the difference in their client size and characteristics. This gap does seem to have increased during the past decade. Large companies have been influenced significantly by the GFC but not heavily influenced by the recent prolonged uncertain economic environment. The issuance of emphasis of matter for going concern for small companies increases for both the global crisis and the subsequent period of economic uncertainty. The pattern of audit reports differs in terms of the industry category. Energy and Materials industries have experienced a generally consistent increase in reports with an emphasis of matter for Going Concern. The two industries have been identified by ASIC as being highly risky in relation to the appropriateness of the going concern assumption (ASIC, 2012). The Financial industry has been notably strong over the period, reporting the lowest GCO ratios, and the highest unmodified percentages.

21 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS REFERENCES AND FURTHER READING Auditing and Assurance Standards Board (AUASB), 2007, Auditing Standard ASA 701: Modifications to the Auditor s Report. Auditing and Assurance Standards Board (AUASB), 2009, Auditing Considerations in an Uncertain Economic Environment, AUASB Bulletin, AUASB, [cited 8 May, 2014], Available at: http://www.auasb.gov.au/admin/file/content102/ c3/auditing_considerations_booklet.pdf. Auditing and Assurance Standards Board (AUASB), 2010, Explanatory Guide: Auditor s Reports. Auditing and Assurance Standards Board (AUASB), 2011a, Auditing Standard ASA 705: Modifications to the Opinion in the Independent Auditor s Report. Auditing and Assurance Standards Board (AUASB), 2011b, Auditing Standard ASA 706: Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor s Report. Auditing and Assurance Standards Board (AUASB), 2012, Auditing Considerations in a Prolonged Uncertain Economic Environment, AUASB Bulletin, AUASB, [cited 8 May, 2014]. Available at: http://www.auasb.gov.au/admin/file/ content102/c3/aug12_auasb_bulletin_auditing_ Considerations_in_a_Prolonged_Uncertain_ Economic_Environment.pdf. Auditing and Assurance Standards Board (AUASB), 2013a, Auditing Standard ASA 570: Going Concern. Auditing and Assurance Standards Board (AUASB), 2013b, Auditing Standard ASA 700: Forming an Opinion and Reporting on a Financial Report. Australian Securities and Investments Commission (ASIC), 2012, Report 317: Audit Inspection Program Public Report for 2011-12. Carson, E, N Fargher, M Geiger, C Lennox, K Raghunandan and M Willekens, 2013. Audit Reporting for Going-Concern Uncertainty: A Research Synthesis, Auditing: A Journal of Theory and Practice 32 (Supplement 1): 353-384. Carson, E., Ferguson, A. and Simnett, R. 2006, Australian Audit Reports: 1996-2003, Australian Accounting Review, 16 (3): 89-96. Cheffers, M., Whalen, D. and Thrun, M. 2010. Going Concerns: A Ten Year Review, Audit Analytics, Sutton, MA. Geiger, M. A., Raghunandan, K. and Riccardi, W. 2014. The Global Financial Crisis: U.S. Bankruptcies and Going-Concern Audit Opinions, Accounting Horizons, 28 (1): 59-75. Xu. Y., Carson, E., Fargher, N., and A. Jiang, 2013. Auditor Responses to Changes in Business Risk: The Impact of the Global Financial Crisis on Auditors Behaviour in Australia, Accounting and Finance, 53(1): 301-338. Xu, Y., Jiang, L., Fargher, N. and Carson, E. 2011, Audit Reports in Australia during the Global Financial Crisis, Australian Accounting Review, 21 (1): 22-31.

22 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS DATA TABLES TABLE 1 TYPES OF REPORTS TABLE 1 TRENDS OF AUDIT OPINION ISSUANCE FOR THE PERIOD 2005-2013 Types of Audit Opinions 2005-2013 Unmodified No. (%) No. (%) No. (%) No. (%) No. (%) No. (%) No. (%) No. (%) No. (%) Unmodified 0 1262 84.75% 1357 84.76% 1494 85.62% 1413 77.77% 1342 73.25% 1382 74.54% 1403 75.39% 1284 70.59% 1181 64.29% Unmodified with an Emphasis of Matter 1.1-1.7 193 12.96% 194 12.12% 199 11. 335 18.44% 411 22.43% 383 20.66% 381 20.47% 455 25.01% 594 32.34% Total Unmodified 1455 97.72% 1551 96.88% 1693 97.02% 1748 96. 1753 95.69% 1765 95. 1784 95.86% 1739 95. 1775 96.62% Modified Except for - Other 3 12 0.81% 12 0.75% 22 1.26% 23 1.27% 20 1.09% 23 1.24% 27 1.45% 23 1.26% 15 0.82% Except for - Going Concern 3.1 2 0.13% 8 0.5 0 0.0 13 0.72% 9 0.49% 5 0.27% 1 0.05% 4 0.22% 0 0.0 Adverse Opinion - Other 4 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 1 0.05% 0 0.0 0 0.0 Adverse Opinion - Going Concern 4.1 1 0.07% 2 0.12% 1 0.06% 5 0.28% 3 0.16% 1 0.05% 0 0.0 1 0.05% 2 0.11% Disclaimer - Other 5 1 0.07% 4 0.25% 10 0.57% 8 0.44% 7 0.38% 15 0.81% 13 0.7 10 0.55% 3 0.16% Disclaimer - Going Concern 5.1 6 0. 6 0.37% 6 0.34% 6 0.33% 13 0.71% 12 0.65% 9 0.48% 11 0. 8 0.44% Qualification Plus Emphasis of Matter - Other 6 0 0.0 3 0.19% 0 0.0 1 0.06% 2 0.11% 0 0.0 0 0.0 2 0.11% 2 0.11% Qualification Plus Emphasis of Matter - Going Concern 6.1 12 0.81% 15 0.94% 13 0.74% 13 0.72% 25 1.36% 33 1.78% 26 1. 29 1.59% 32 1.74% Total Modified 34 2.28% 50 3.12% 52 2.98% 69 3.8 79 4.31% 89 4.8 77 4.14% 80 4. 62 3.38% Total number of audit reports 1489 100.0 1601 100.0 1745 100.0 1817 100.0 1832 100.0 1854 100.0 1861 100.0 1819 100.0 1837 100.0 Types of Emphasis of Matter and/or Other Matter Paragraphs 2005-2013 Significant Uncertainty Regarding Ability to Continue as 1.1 157 81.35% 170 87.63% 174 87.44% 318 94.93% 379 92.21% 358 93.47% 345 90.55% 435 95. 570 95.96% a Going Concern Significant Uncertainty other than Regarding the Ability 1.2 35 18.13% 24 12.37% 23 11.56% 16 4.78% 31 7.54% 24 6.27% 28 7.35% 16 3.52% 17 2.86% to Continue as a Going Concern Additional Disclosure with Which the Auditor Concurs 1.3 0 0.0 0 0.0 0 0.0 1 0.3 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 Inconsistent with Other Information 1.4 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 Subsequent Event Createds New Conditions 1.5 0 0.0 0 0.0 1 0.5 0 0.0 0 0.0 1 0.26% 1 0.26% 0 0.0 0 0.0 Revised Financial Report 1.6 1 0.52% 0 0.0 1 0.5 0 0.0 1 0.24% 0 0.0 4 1.05% 1 0.22% 0 0.0 Other Matter* 1.7/1.8 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 3 0.79% 3 0.66% 7 1.18% Total number of audit reports with an emphasis of matter Audit Reports Regarding Going Concern 2005-2013 193 100.0 194 100.0 199 100.0 335 100.0 411 100.0 383 100.0 381 100.0 455 100.0 594 100.0 Reports qualified or unqualified regarding GC 178 11.95% 201 12.55% 194 11.12% 355 19.54% 429 23.42% 409 22.06% 381 20.47% 480 26.39% 612 33.32% Unmodified with EoM on GC 157 10.54% 170 10.62% 174 9.97% 318 17.5 379 20.69% 358 19.31% 345 18.54% 435 23.91% 570 31.03% Modified in relation to GC 21 1.41% 31 1.94% 20 1.15% 37 2.04% 50 2.73% 51 2.75% 36 1.93% 45 2.47% 42 2.29% * ASA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor s Report is operative for financial reporting periods commencing on or after 1 January 2010. This regulation requires auditor to disclose a paragraph in the auditor s report, with the heading Other Matter, or other appropriate heading if necessary.

23 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS DATA TABLES TABLE 2 TYPES OF AUDIT REPORTS BY AUDIT FIRM 2007-2013 TABLE 2 CONTINUED 2005 2006 Total Unmodified GCO EoMs Other EoMs GCO quals Other quals Total Unmodified GCO EoMs Other EoMs GCO quals Other quals PricewaterhouseCoopers 204 192 94.1% 9 4.4% 1 0.5% 1 0.5% 1 0.5% 204 196 96.1% 4 2. 1 0.5% 1 0.5% 2 1. Ernst and Young 270 244 90.4% 22 8.1% 1 0.4% 2 0.7% 1 0.4% 274 245 89.4% 23 8.4% 1 0.4% 2 0.7% 3 1.1% KPMG 184 167 90.8% 13 7.1% 3 1.6% 1 0.5% 0 0. 201 183 91. 16 8. 0 0. 0 0. 2 1. Deloitte Touche 112 102 91.1% 3 2.7% 2 1.8% 3 2.7% 2 1.8% 140 124 88.6% 9 6.4% 0 0. 6 4.3% 1 0.7% Big Four Average 192.5 176.3 91.6% 11.8 6.1% 1.8 0.9% 1.8 0.9% 1.0 0.5% 204.75 187 91.3% 13 6.3% 0.5 0.2% 2.25 1.1% 2 1. BDO 86 56 65.1% 22 25.6% 3 3.5% 5 5.8% 0 0. 70 43 61.4% 12 17.1% 9 12.9% 4 5.7% 2 2.9% Grant Thornton 63 52 82.5% 10 15.9% 0 0. 1 1.6% 0 0. 75 62 82.7% 11 14.7% 1 1.3% 1 1.3% 0 0. Crowe Horwath 0 0 0 0 0 0 0 0 0 0 0 0 WHK 10 8 80. 2 20. 0 0. 0 0. 0 0. 7 5 71.4% 2 28.6% 0 0. 0 0. 0 0. HLB Mann Judd 34 25 73.5% 7 20.6% 1 2.9% 1 2.9% 0 0. 38 29 76.3% 8 21.1% 0 0. 1 2.6% 0 0. PKF 93 74 79.6% 14 15.1% 3 3.2% 0 0. 2 2.2% 99 80 80.8% 13 13.1% 0 0. 4 4. 2 2. Pitcher Partners 35 30 85.7% 3 8.6% 1 2.9% 0 0. 1 2.9% 36 27 75. 5 13.9% 2 5.6% 1 2.8% 1 2.8% Other 398 312 78.4% 52 13.1% 21 5.3% 7 1.8% 6 1.5% 457 363 79.4% 67 14.7% 10 2.2% 11 2.4% 6 1.3% Non-Big Four Average 89.9 69.6 77.5% 13.8 15.3% 3.6 4. 1.8 1.9% 1.1 1.3% 97.8 76.1 77.9% 14.8 15.1% 2.8 2.8% 2.8 2.8% 1.4 1.4% Total 1489 1262 84.8% 157 10.5% 36 2.4% 21 1.4% 13 0.9% 1601 1357 84.8% 170 10.6% 24 1.5% 31 1.9% 19 1.2% 2007 2008 Total Unmodified GCO EoMs Other EoMs GCO quals Other quals Total Unmodified GCO EoMs Other EoMs GCO quals Other quals PricewaterhouseCoopers 199 184 92.5% 10 5. 1 0.5% 1 0.5% 3 1.5% 188 163 86.7% 20 10.6% 1 0.5% 0 0. 4 2.1% Ernst and Young 266 242 91. 20 7.5% 2 0.8% 0 0. 2 0.8% 260 217 83.5% 36 13.8% 2 0.8% 2 0.8% 3 1.2% KPMG 204 186 91.2% 18 8.8% 0 0. 0 0. 0 0. 202 170 84.2% 23 11.4% 4 2. 4 2. 1 0.5% Deloitte Touche 147 130 88.4% 12 8.2% 0 0. 3 2. 2 1.4% 143 118 82.5% 20 14. 0 0. 4 2.8% 1 0.7% Big Four Average 204 185.5 90.9% 15 7.4% 0.75 0.4% 1 0.5% 1.75 0.9% 198.3 167.0 84.2% 24.8 12.5% 1.8 0.9% 2.5 1.3% 2.3 1.1% BDO 138 106 76.8% 20 14.5% 2 1.4% 4 2.9% 6 4.3% 172 108 62.8% 51 29.7% 2 1.2% 6 3.5% 5 2.9% Grant Thornton 70 57 81.4% 10 14.3% 1 1.4% 1 1.4% 1 1.4% 132 102 77.3% 24 18.2% 2 1.5% 4 3. 0 0. Crowe Horwath 0 0 0 0 0 0 0 0 0 0 0 0 WHK 36 29 80.6% 6 16.7% 0 0. 0 0. 1 2.8% 48 44 91.7% 3 6.3% 0 0. 0 0. 1 2.1% HLB Mann Judd 52 41 78.8% 6 11.5% 0 0. 1 1.9% 4 7.7% 72 51 70.8% 15 20.8% 1 1.4% 2 2.8% 3 4.2% PKF 117 98 83.8% 13 11.1% 2 1.7% 1 0.9% 3 2.6% 120 90 75. 20 16.7% 1 0.8% 5 4.2% 4 3.3% Pitcher Partners 44 34 77.3% 6 13.6% 4 9.1% 0 0. 0 0. 41 31 75.6% 7 17.1% 2 4.9% 1 2.4% 0 0. Other 472 387 82. 53 11.2% 13 2.8% 9 1.9% 10 2.1% 439 319 72.7% 99 22.6% 2 0.5% 9 2.1% 10 2.3% Non-Big Four Average 116.1 94.0 80.9% 14.3 12.3% 2.8 2.4% 2.0 1.7% 3.1 2.7% 128.0 93.1 72.8% 27.4 21.4% 1.3 1. 3.4 2.6% 2.9 2.2% Total 1745 1494 85.6% 174 10. 25 1.4% 20 1.1% 32 1.8% 1817 1413 77.8% 318 17.5% 17 0.9% 37 2. 32 1.8%

24 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS TABLE 2 TYPES OF AUDIT REPORTS BY AUDIT FIRM 2007-2013 (CONTINUED) TABLE 2 BY AUDIT FORM 2009 2010 Total Unmodified GCO EoMs Other EoMs GCO quals Other quals Total Unmodified GCO EoMs Other EoMs GCO quals Other quals PricewaterhouseCoopers 181 161 89. 19 10.5% 0 0. 1 0.6% 0 0. 176 156 88.6% 19 10.8% 0 0. 1 0.6% 0 0. Ernst and Young 254 205 80.7% 42 16.5% 3 1.2% 2 0.8% 2 0.8% 259 210 81.1% 43 16.6% 1 0.4% 4 1.5% 1 0.4% KPMG 205 168 82. 27 13.2% 5 2.4% 3 1.5% 2 1. 197 169 85.8% 18 9.1% 4 2. 4 2. 2 1. Deloitte Touche 141 110 78. 29 20.6% 0 0. 1 0.7% 1 0.7% 182 145 79.7% 31 17. 2 1.1% 1 0.5% 3 1.6% Big Four Average 195.3 161.0 82.5% 29.3 15. 2.0 1. 1.8 0.9% 1.3 0.6% 203.5 170.0 83.5% 27.8 13.6% 1.8 0.9% 2.5 1.2% 1.5 0.7% BDO 187 112 59.9% 61 32.6% 4 2.1% 9 4.8% 1 0.5% 198 115 58.1% 62 31.3% 3 1.5% 11 5.6% 7 3.5% Grant Thornton 133 94 70.7% 25 18.8% 4 3. 7 5.3% 3 2.3% 127 92 72.4% 25 19.7% 2 1.6% 3 2.4% 5 3.9% Crowe Horwath 1 0 0. 1 100. 0 0. 0 0. 0 0. 1 0 0. 1 100. 0 0. 0 0. 0 0. WHK 43 37 86. 6 14. 0 0. 0 0. 0 0. 42 31 73.8% 9 21.4% 0 0. 1 2.4% 1 2.4% HLB Mann Judd 77 52 67.5% 19 24.7% 1 1.3% 2 2.6% 3 3.9% 88 73 83. 13 14.8% 0 0. 1 1.1% 1 1.1% PKF 121 93 76.9% 22 18.2% 1 0.8% 3 2.5% 2 1.7% 84 53 63.1% 26 31. 1 1.2% 4 4.8% 0 0. Pitcher Partners 29 21 72.4% 7 24.1% 0 0. 1 3.4% 0 0. 25 20 80. 4 16. 1 4. 0 0. 0 0. Other 460 289 62.8% 121 26.3% 14 3. 21 4.6% 15 3.3% 475 318 66.9% 107 22.5% 11 2.3% 21 4.4% 18 3.8% Non-Big Four Average 131.4 87.3 66.4% 32.8 24.9% 3.0 2.3% 5.4 4.1% 3.0 2.3% 130.0 87.8 67.5% 30.9 23.8% 2.3 1.7% 5.1 3.9% 4.0 3.1% Total 1832 1342 73.3% 379 20.7% 32 1.7% 50 2.7% 29 1.6% 1854 1382 74.5% 358 19.3% 25 1.3% 51 2.8% 38 2. 2011 2012 Total Unmodified GCO EoMs Other EoMs GCO quals Other quals Total Unmodified GCO EoMs Other EoMs GCO quals Other quals PricewaterhouseCoopers 172 151 87.8% 11 6.4% 10 5.8% 0 0. 0 0. 176 156 88.6% 18 10.2% 2 1.1% 0 0. 0 0. Ernst and Young 251 207 82.5% 40 15.9% 1 0.4% 1 0.4% 2 0.8% 239 182 76.2% 52 21.8% 0 0. 4 1.7% 1 0.4% KPMG 191 160 83.8% 27 14.1% 1 0.5% 2 1. 1 0.5% 176 143 81.3% 31 17.6% 1 0.6% 1 0.6% 0 0. Deloitte Touche 182 150 82.4% 25 13.7% 1 0.5% 3 1.6% 3 1.6% 171 137 80.1% 29 17. 1 0.6% 2 1.2% 2 1.2% Big Four Average 199.0 167.0 83.9% 25.8 12.9% 3.3 1.6% 1.5 0.8% 1.5 0.8% 190.5 154.5 81.1% 32.5 17.1% 1.0 0.5% 1.8 0.9% 0.8 0.4% BDO 201 128 63.7% 56 27.9% 5 2.5% 4 2. 8 4. 238 140 58.8% 80 33.6% 2 0.8% 8 3.4% 8 3.4% Grant Thornton 139 101 72.7% 31 22.3% 0 0. 4 2.9% 3 2.2% 162 111 68.5% 46 28.4% 0 0. 3 1.9% 2 1.2% Crowe Horwath 36 27 75. 6 16.7% 0 0. 2 5.6% 1 2.8% 32 18 56.3% 11 34.4% 0 0. 1 3.1% 2 6.3% WHK 7 4 57.1% 2 28.6% 0 0. 0 0. 1 14.3% 3 1 33.3% 1 33.3% 0 0. 0 0. 1 33.3% HLB Mann Judd 97 78 80.4% 12 12.4% 1 1. 3 3.1% 3 3.1% 99 75 75.8% 16 16.2% 3 3. 4 4. 1 1. PKF 77 48 62.3% 25 32.5% 1 1.3% 1 1.3% 2 2.6% 11 8 72.7% 3 27.3% 0 0. 0 0. 0 0. Pitcher Partners 29 21 72.4% 8 27.6% 0 0. 0 0. 0 0. 30 19 63.3% 9 30. 1 3.3% 0 0. 1 3.3% Other 479 328 68.5% 102 21.3% 16 3.3% 16 3.3% 17 3.5% 482 294 61. 139 28.8% 10 2.1% 22 4.6% 17 3.5% Non-Big Four Average 133.1 91.9 69. 30.3 22.7% 2.9 2.2% 3.8 2.8% 4.4 3.3% 132.1 83.3 63. 38.1 28.9% 2.0 1.5% 4.8 3.6% 4.0 3. Total 1861 1403 75.4% 345 18.5% 36 1.9% 36 1.9% 41 2.2% 1819 1284 70.6% 435 23.9% 20 1.1% 45 2.5% 35 1.9% 2013 Total Unmodified GCO EoMs Other EoMs GCO quals Other quals PricewaterhouseCoopers 177 144 81.4% 32 18.1% 0 0. 0 0. 1 0.6% Ernst and Young 241 183 75.9% 51 21.2% 1 0.4% 6 2.5% 0 0. KPMG 179 141 78.8% 34 19. 3 1.7% 0 0. 1 0.6% Deloitte Touche 172 134 77.9% 35 20.3% 0 0. 2 1.2% 1 0.6% Big Four Average 192.3 150.5 78.3% 38.0 19.8% 1.0 0.5% 2.0 1. 0.8 0.4% BDO 243 126 51.9% 107 44. 0 0. 6 2.5% 4 1.6% Grant Thornton 164 91 55.5% 65 39.6% 2 1.2% 4 2.4% 2 1.2% Crowe Horwath 29 15 51.7% 12 41.4% 0 0. 0 0. 2 6.9% WHK 0 0 0. 0 0. 0 0. 0 0. 0 0. HLB Mann Judd 101 54 53.5% 42 41.6% 1 1. 3 3. 1 1. PKF 4 3 75. 0 0. 0 0. 1 25. 0 0. Pitcher Partners 33 22 66.7% 11 33.3% 0 0. 0 0. 0 0. Other 494 268 54.3% 181 36.6% 17 3.4% 20 4. 8 1.6% Non-Big Four Average 133.5 72.4 54.2% 52.3 39.1% 2.5 1.9% 4.3 3.2% 2.1 1.6% Total 1837 1181 64.3% 570 31. 24 1.3% 42 2.3% 20 1.1%

25 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS DATA TABLES TABLE 3 AUSTRALIAN MODIFIED AUDIT REPORT TYPES BY ENTITY TOTAL ASSETS Full Sample Top 200 Middle Bottom 500 Year n No. GCO GCO% n No. GCO GCO% n No. GCO GCO% n No. GCO GCO% 2005 1489 178 11.95% 200 0 0.0 789 55 6.97% 500 123 24. 2006 1601 201 12.55% 200 0 0.0 901 67 7.44% 500 134 26.8 2007 1745 194 11.12% 200 3 1.5 1045 95 9.09% 500 96 19. 2008 1817 355 19.54% 200 12 6.0 1117 143 12.8 500 200 40.0 2009 1832 429 23.42% 200 15 7.5 1132 200 17.67% 500 214 42.8 2010 1854 409 22.06% 200 9 4.5 1154 192 16.64% 500 208 41. 2011 1861 381 20.47% 200 5 2.5 1161 173 14.9 500 203 40. 2012 1819 480 26.39% 200 4 2.0 1119 237 21.18% 500 239 47.8 2013 1837 612 33.32% 200 3 1.5 1137 319 28.06% 500 290 58.0 Total 15855 3239 20.43% 1800 51 2.83% 9555 1481 15.5 4500 1707 37.93%

26 AUDIT REPORTS IN AUSTRALIA 2005 2013: A PRELIMINARY ANALYSIS DATA TABLES TABLE 4 TYPES OF AUDIT REPORTS BY INDUSTRY 2007-2013 2005 2006 2007 Industry Code Total Unmodified GCO EoMs OtherEoM GCO quals Other quals Total Unmodified GCO EoMs OtherEoM GCO quals Other quals Total Unmodified GCO EoMs OtherEoM GCO quals Other quals Energy 10 114 97 85.09% 13 11. 2 1.75% 0 0.0 2 1.75% 139 121 87.05% 12 8.63% 4 2.88% 1 0.72% 1 0.72% 180 161 89.44% 16 8.89% 0 0.0 0 0.0 3 1.67% Materials 15 413 352 85.23% 42 10.17% 17 4.12% 1 0.24% 1 0.24% 464 395 85.13% 47 10.13% 12 2.59% 5 1.08% 5 1.08% 543 471 86.74% 51 9.39% 14 2.58% 3 0.55% 4 0.74% Industrial 20 165 144 87.27% 17 10.3 0 0.0 2 1.21% 2 1.21% 176 154 87.5 15 8.52% 2 1.14% 3 1.7 2 1.14% 184 168 91.3 9 4.89% 1 0.54% 2 1.09% 4 2.17% Consumer discretionary 25 166 140 84.34% 15 9.04% 2 1. 7 4.22% 2 1. 162 135 83.33% 15 9.26% 3 1.85% 7 4.32% 2 1.23% 161 133 82.61% 13 8.07% 3 1.86% 5 3.11% 7 4.35% Consumer staples 30 49 41 83.67% 8 16.33% 0 0.0 0 0.0 0 0.0 49 37 75.51% 10 20.41% 1 2.04% 1 2.04% 0 0.0 52 41 78.85% 8 15.38% 1 1.92% 0 0.0 2 3.85% Health care 35 142 111 78.17% 25 17.61% 5 3.52% 1 0.7 0 0.0 148 110 74.32% 30 20.27% 1 0.68% 4 2.7 3 2.03% 152 117 76.97% 28 18.42% 3 1.97% 3 1.97% 1 0.66% Financials 40 269 251 93.31% 8 2.97% 5 1.86% 1 0.37% 4 1.49% 288 273 94.79% 9 3.13% 0 0.0 2 0.69% 4 1.39% 303 280 92.41% 15 4.95% 0 0.0 2 0.66% 6 1.98% Information technology 45 124 91 73.39% 23 18.55% 2 1.61% 6 4.84% 2 1.61% 121 90 74.38% 23 19.01% 0 0.0 6 4.96% 2 1.65% 115 83 72.17% 25 21.74% 2 1.74% 2 1.74% 3 2.61% Telecommunication 50 29 21 72.41% 4 13.79% 2 6.9 2 6.9 0 0.0 34 25 73.53% 6 17.65% 1 2.94% 2 5.88% 0 0.0 31 20 64.52% 7 22.58% 1 3.23% 2 6.45% 1 3.23% Services Utilities 55 18 14 77.78% 2 11.11% 1 5.56% 1 5.56% 0 0.0 20 17 85.0 3 15.0 0 0.0 0 0.0 0 0.0 24 20 83.33% 2 8.33% 0 0.0 1 4.17% 1 4.17% Total 1489 1262 84.75% 157 10.54% 36 2.42% 21 1.41% 13 0.87% 1601 1357 84.76% 170 10.62% 24 1.5 31 1.94% 19 1.19% 1745 1494 85.62% 174 9.97% 25 1.43% 20 1.15% 32 1.83% 2008 2009 2010 Industry Code Total Unmodified GCO EoMs OtherEoM GCO quals Other quals Total Unmodified GCO EoMs OtherEoM GCO quals Other quals Total Unmodified GCO EoMs OtherEoM GCO quals Other quals Energy 10 207 167 80.68% 31 14.98% 1 0.48% 5 2.42% 3 1.45% 211 160 75.83% 38 18.01% 5 2.37% 5 2.37% 3 1.42% 217 162 74.65% 47 21.66% 4 1.84% 1 0.46% 3 1.38% Materials 15 596 440 73.83% 129 21.64% 7 1.17% 9 1.51% 11 1.85% 617 435 70.5 148 23.99% 12 1.94% 13 2.11% 9 1.46% 656 482 73.48% 138 21.04% 6 0.91% 18 2.74% 12 1.83% Industrial 20 183 156 85.25% 19 10.38% 2 1.09% 4 2.19% 2 1.09% 189 145 76.72% 34 17.99% 3 1.59% 4 2.12% 3 1.59% 192 152 79.17% 25 13.02% 6 3.13% 5 2. 4 2.08% Consumer discretionary 25 156 125 80.13% 20 12.82% 1 0.64% 6 3.85% 4 2.56% 155 123 79.35% 24 15.48% 3 1.94% 3 1.94% 2 1.29% 152 118 77.63% 22 14.47% 2 1.32% 6 3.95% 4 2.63% Consumer staples 30 56 40 71.43% 12 21.43% 2 3.57% 1 1.79% 1 1.79% 52 36 69.23% 10 19.23% 1 1.92% 2 3.85% 3 5.77% 53 31 58.49% 15 28.3 1 1.89% 2 3.77% 4 7.55% Health care 35 148 97 65.54% 43 29.05% 3 2.03% 4 2.7 1 0.68% 149 93 62.42% 46 30.87% 2 1.34% 7 4.7 1 0.67% 145 94 64.83% 43 29.66% 0 0.0 3 2.07% 5 3.45% Financials 40 301 268 89.04% 24 7.97% 0 0.0 3 1.0 6 1.99% 290 237 81.72% 37 12.76% 4 1.38% 8 2.76% 4 1.38% 272 228 83.82% 30 11.03% 3 1.1 6 2.21% 5 1.84% Information technology 45 109 74 67.89% 30 27.52% 0 0.0 3 2.75% 2 1.83% 108 66 61.11% 30 27.78% 2 1.85% 7 6.48% 3 2.78% 106 73 68.87% 24 22.64% 3 2.83% 5 4.72% 1 0.94% Telecommunication 50 31 20 64.52% 7 22.58% 1 3.23% 2 6.45% 1 3.23% 29 22 75.86% 5 17.24% 0 0.0 1 3.45% 1 3.45% 28 19 67.86% 6 21.43% 0 0.0 3 10.71% 0 0.0 Services Utilities 55 30 26 86.67% 3 10.0 0 0.0 0 0.0 1 3.33% 32 25 78.13% 7 21.88% 0 0.0 0 0.0 0 0.0 33 23 69.7 8 24.24% 0 0.0 2 6.06% 0 0.0 Total 1817 1413 77.77% 318 17.5 17 0.94% 37 2.04% 32 1.76% 1832 1342 73.25% 379 20.69% 32 1.75% 50 2.73% 29 1.58% 1854 1382 74.54% 358 19.31% 25 1.35% 51 2.75% 38 2.05% 2011 2012 2013 Industry Code Total Unmodified GCO EoMs OtherEoM GCO quals Other quals Total Unmodified GCO EoMs OtherEoM GCO quals Other quals Total Unmodified GCO EoMs OtherEoM GCO quals Other quals Energy 10 223 156 69.96% 49 21.97% 7 3.14% 8 3.59% 3 1.35% 230 154 66.96% 66 28.7 3 1.3 4 1.74% 3 1.3 239 136 56.9 88 36.82% 5 2.09% 6 2.51% 4 1.67% Materials 15 732 551 75.27% 144 19.67% 14 1.91% 11 1.5 12 1.64% 729 460 63.1 230 31.55% 10 1.37% 19 2.61% 10 1.37% 752 388 51. 336 44.68% 7 0.93% 18 2.39% 3 0. Industrial 20 192 151 78.65% 29 15.1 3 1.56% 2 1.04% 7 3.65% 177 133 75.14% 27 15.25% 1 0.56% 9 5.08% 7 3.95% 174 134 77.01% 29 16.67% 3 1.72% 4 2.3 4 2.3 Consumer discretionary 25 138 112 81.16% 21 15.22% 0 0.0 2 1.45% 3 2.17% 135 105 77.78% 22 16.3 0 0.0 3 2.22% 5 3.7 139 115 82.73% 20 14.39% 0 0.0 3 2.16% 1 0.72% Consumer staples 30 42 25 59.52% 13 30.95% 0 0.0 1 2.38% 3 7.14% 46 32 69.57% 11 23.91% 0 0.0 2 4.35% 1 2.17% 44 28 63.64% 11 25.0 1 2.27% 3 6.82% 1 2.27% Health care 35 130 84 64.62% 36 27.69% 1 0.77% 2 1.54% 7 5.38% 114 81 71.05% 27 23.68% 1 0.88% 2 1.75% 3 2.63% 114 75 65.79% 37 32.46% 1 0.88% 1 0.88% 0 0.0 Financials 40 259 219 84.56% 23 8.88% 9 3.47% 4 1.54% 4 1.54% 250 221 88. 20 8.0 3 1. 2 0.8 4 1. 244 218 89.34% 18 7.38% 4 1.64% 1 0.41% 3 1.23% Information technology 45 97 68 70.1 21 21.65% 2 2.06% 5 5.15% 1 1.03% 91 61 67.03% 23 25.27% 1 1.1 4 4. 2 2. 84 55 65.48% 19 22.62% 1 1.19% 5 5.95% 4 4.76% Telecommunication 50 21 15 71.43% 4 19.05% 0 0.0 1 4.76% 1 4.76% 20 17 85.0 3 15.0 0 0.0 0 0.0 0 0.0 20 17 85.0 3 15.0 0 0.0 0 0.0 0 0.0 Services Utilities 55 27 22 81.48% 5 18.52% 0 0.0 0 0.0 0 0.0 27 20 74.07% 6 22.22% 1 3.7 0 0.0 0 0.0 27 15 55.56% 9 33.33% 2 7.41% 1 3.7 0 0.0 Total 1861 1403 75.39% 345 18.54% 36 1.93% 36 1.93% 41 2. 1819 1284 70.59% 435 23.91% 20 1.1 45 2.47% 35 1.92% 1837 1181 64.29% 570 31.03% 24 1.31% 42 2.29% 20 1.09%