The “big four” audit and consulting firms face a likely crackdown that could even lead to the firms being broken up, following a string of ethical failures.The federal government has released a new consultation paper proposing stricter regulation of the firms, including increased oversight and heavier penalties. Many of its proposed reforms are welcome – and long overdue.It follows a series of scandals about inappropriate use of confidential information that have hit three of the big four professional services companies: KPMG, PwC, EY and Deloitte.But one big question remains: even if tougher rules and penalties are introduced, will Australia’s corporate watchdog have the resources to properly audit the auditors?Why the government is acting nowJust this week, it emerged that two junior EY employees had been sacked over allegedly accessing Prime Minister Anthony Albanese’s private bank information while working as contractors at Commonwealth Bank.That followed more serious recent admissions from KPMG that its senior partners had accessed confidential client information to help them bid for other companies’ work. These scandals come just three years after another rival firm, PwC, admitted to using confidential government information about new corporate tax avoidance rules to help other corporate clients dodge the new rules.That led to a federal inquiry, which made 40 recommendations for action back in 2024. This new Treasury consultation paper is a follow-up – and it’s unusually blunt, declaring:In recent years, we have seen behaviour from large accounting, auditing, and consulting firms in Australia that is not fair and honest. Finally cracking down on firms, not individualsOne of the most important reforms proposed by the government in this paper is to finally start better regulating accounting and auditing firms – not just individual auditors who work for those firms.The inability of any Australian regulator to lay a glove on accounting and audit firms over their culture and senior management has been an ongoing sore point in both the PwC and KPMG scandals. This is the first option in the Treasury paper: that all audit firms, including partnerships, be licensed by the corporate regulator, the Australian Securities and Investments Commission (ASIC). That licence would impose audit quality management, ethical and governance obligations as a condition of holding an audit licence. The idea of a licence mirrors what’s already in place for financial services businesses.ASIC could then take enforcement action against audit firms for failing to comply with licence conditions. That could include imposing additional licence conditions, issuing infringement notices or revoking a firm’s licence.The government is also proposing a new penalty for licence breaches aimed at the biggest four firms, capped at $910 million.What about splitting the firms?Another significant new proposal is to potentially force companies to split up their auditing and consulting work into separate entities. This would limit the audit firms to just doing traditional audit work. They would no longer be authorised to perform the more profitable work of providing financial, accounting and governance advice to their audit clients.That work would need to be siphoned off to a separate business entity, much in the way PwC did with its government consultancy work a few years ago. There’s also a precedent from the banking royal commission, which led to the banks separating their financial advice and wealth businesses after misconduct was exposed.Playing devil’s advocate, there could be an argument against a similar break-up. One of the reasons why accounting or audit firms have often won consulting work is because they have a lot of deep corporate knowledge of how companies operate. If you separate them out, new firms will need to be hired to perform that work. That could take time.Smaller firms – which haven’t been tainted by recent scandals – would also have to obtain audit licences. Understandably, they would no doubt complain about the cost of these new regulatory obligations.If not managed carefully, this could have unintended consequences in unwittingly leading to bigger firms – including the big four – finding it easier to comply with those rules, simply because of their scale. Inspections have actually been fallingThe success of this proposed licensing system would depend on the corporate watchdog, ASIC, actively monitoring how well audit firms are complying with their licence obligations. And this new Treasury paper revealed a disturbing trend on that front. This table, from the paper, shows that despite the PwC scandal of a few years ago, the number of audit inspections undertaken by ASIC has actually fallen over the past decade.The paper notes the federal government’s own Financial Reporting Council said back in 2023 that:it considers the number of audit files reviewed by ASIC to be small, given there are over 3,000 registered company auditors (over 500 of whom are audit-listed entities) and 200 authorised audit companies (of which 50 are audit-listed companies).Tougher penalties aren’t much use without resources to monitor, investigate and enforce compliance. If we want to be confident that audit companies are meeting higher standards, ASIC will need more funding to do more checks. Just weeks ago, I wrote that rather than focusing on any one audit scandal, there were industry-wide problems that need to be addressed. This Treasury paper is a big step in the right direction. The audit and consulting firms will hate it. But after repeated, serious breaches of trust at our biggest firms, stronger action is needed to make them more accountable.Public submissions on how to better regulate Australia’s accounting, auditing and consulting firms are open until August 12. Read more: KPMG lost its clients’ trust, yet kept winning government contracts. Here’s what needs to change Helen is a former member of the ASIC Corporate Governance Stakeholder Panel (2020-2026). She is a current member of the Australian Law Council Corporations' Committee and a non-executive director of Market Forces Ltd, a not-for-profit climate activist company.