THE corporate regulator has issued auditors with "a yellow card" as it moves to prevent another major company collapse.
Almost one in five auditors is not doing their job properly, leading to a significant deterioration in auditing standards over the past 18 months, a report by the Australian Securities and Investments Commission (ASIC) shows.
In 18 per cent of the 602 key areas reviewed, auditors did not obtain sufficient evidence or exercise sufficient scepticism.
ASIC chairman Greg Medcraft said the results were disappointing but he would not concede that the industry was in crisis.
"It's two strikes or a yellow card," Mr Medcraft said in a teleconference on Tuesday.
"They've actually got to lift their game. This is troubling."
He said the audit industry and firms of all sizes could not live in denial of the findings.
"Just because there are similar trends overseas, that is not a satisfactory excuse."
He is concerned that a deterioration of standards could lead to investor losses and a loss of confidence.
"We don't want to see another major collapse where there has been a significant amount of mis-statement," he said.
While refusing to identify individual firms, ASIC said many companies failed to comply with auditing standards.
There were many instances when auditors accepted management's explanations without challenging the underlying assumption.
And many auditors in the mining industry did not exercise professional scepticism when relying on foreign reports.
The release of the findings follows the collapse of prominent companies Centro, Trio Capital and Banksia where auditing failures were cited.
ASIC said firms needed to examine rotating auditors and audit control systems.
"Next year if we see the situation not improving then we may consider writing to treasury on options for reform," Mr Medcraft said.
"We can't sit by and see a further deterioration."
He said investors and other users of financial statements had to be confident in auditors.
"This is the cornerstone of commerce."
ASIC is also looking at the independence of auditors following concerns they are being paid by companies whose books they are reviewing.
However, while this form of remuneration is not uncommon, there was no obvious alternative model, Mr Medcraft said.
There may have been some more pressure on costs, but there was no satisfactory excuse for a decline in quality.
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