Top-tier accounting firms could face a historic, government-mandated break-up of their lucrative consulting and audit wings under proposed federal options designed to tackle the structural conflicts of interest plaguing the sector.
Assistant Treasurer Daniel Mulino has set his sights on addressing the significant gaps in regulation after a string of high-profile ethical scandals once again plunged the industry's culture and independence into the spotlight.
On Wednesday, the government released a Treasury options paper on the regulation of these large industry players. The paper serves as a consultation blueprint that outlines potential pathways for changes without yet locking them into law.
The sweeping regulatory response followed scandals involving the sector's big four, which led to KPMG being barred from bidding federal contracts until September 30, 2026.
The allegations were first raised in Parliament that KPMG partners leaked confidential client information and mishandled an internal whistleblower who attempted to raise the alarm.
Those claims were first brought forward by a whistleblower in May 2024, only to be dismissed by KPMG before Labor senator Deborah O'Neill who ultimately exposed it under parliamentary privilege.
In the political firestorm that followed, a number of senior partners at the firm resigned, including its chief executive Andrew Yates and chairman Martin Sheppard.
Separately, two Ernst & Young staff members were sacked and faced court after allegedly using their positions to breach Prime Minister Anthony Albanese's personal bank account.
Speaking on Radio National Breakfast, Dr Mulino said the inquiries into PwC and KPMG exposed "behaviour by large firms that simply isn't good enough", where confidential information was being misused across different parts of the firm.
"The nature of the kinds of activities that have been alleged against PwC and KPMG mean that some of the options we need to look at include separation of functions," Dr Mulino said.
"There have been a number of instances of opportunistic behaviour, of breaches of trust, of confidential information being used in ways that is highly inappropriate. So it is clear to me that we need to look at strengthening arrangements now."
Dr Mulino questioned the current self-regulation model of the sector, saying there was now "a question over whether ASIC needs to step in more as the federal regulator".
When pressed on the three-year delay after the initial PwC crisis, he cited a heavy legislative pipeline, saying the government had been intentionally sequencing its attack through whistleblower expansions and the creation of External Reporting Australia.
Addressing the current fallout at KPMG, Dr Mulino said that a formal material incident had been declared across government.
As a result, all federal departments holding existing contracts with the embattled firm were now "obliged to reach out to the contractors that they work with and ensure that all arrangements are appropriate", before a sweeping Department of Finance review.
The Treasury paper revealed a cultural imbalance driven by revenue. It showed audit revenue made up, on average, about 20 per cent of total revenue across the big four in 2025.
Between 2013 and 2018, non-audit consulting revenue outpaced audit growth, swelling from 73 per cent to 82 per cent of total firm intakes.
The paper warned this reliance on large advisory margins threatened to contaminate independent verification.
It said an overarching consulting culture "may be at odds with an auditor's role in challenging management and client perspectives".
Risks were heightened by internal competition for resources and a broader concern that large firms "may not have effective controls on client information".
Under the framework in place at the time, unincorporated partnerships could not be meaningfully sanctioned for internal, firm-level decisions that affected audit quality. Only the individual lead auditor bore personal criminal liability and the risk of deregistration.
To eliminate structural conflicts where firms effectively "reviewed their own work", the paper canvassed separating audit lines from non-audit divisions.
The proposed models ranged from a total ban on providing non-audit services to audit clients, to strict operational ring-fencing with separate chief executives and independent financial reports or fully mandated structural separation into completely independent entities.
To prevent firms from treating breaches as a cost of doing business, the government proposed supercharging enforcement by introducing a robust civil penalty regime, with maximum fines for significant global entities skyrocketing to 10 per cent of their annual turnover, capped at $910 million.
The paper took aim at severe market concentration. It showed the top four firms audited a staggering 96 per cent of the top 200 entities in Australia.
To address this dominance, the paper floated options to reduce the historical 1000-member accounting partnership limit down to 400.
It canvassed mandating a public audit tender process every 10 years, or forcing firms to operate exclusively as authorised audit companies under strict corporate directors' duties.
Other interventions described included requiring mandatory firm licensing by the Australian Securities and Investments Commission and implementing size-based surveillance frequencies to force immediate remediation of flawed corporate books.
The paper drew immediate criticism from the crossbench, with Greens finance spokesperson Barbara Pocock accusing the government of "kicking the can down the road" with further talks.
"Back in 2024, Labor issued a consultation paper and nothing came of it," Senator Pocock said. "Now we have another paper and the test for Labor is: will it act or will it tinker?"
Senator Pocock called on the government to subject the major partnerships to the same tax, transparency, and corporate rules as other large commercial business entities, while halting the flow of millions of dollars in ongoing public contracts to compromised operations.
"The Government needs to stop expressing 'deep concern' at corrupt practices of the Big Four while dishing out millions of dollars to them in contracts," Senator Pocock said.
"Labor needs to put an end to the Big Four's special treatment and regulate them like other Australian businesses."
Stakeholders and industry members have been given until August 12, 2026, to provide formal feedback on the proposed regulatory blueprint.
