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ASIC abandons its ‘why not litigate’ approach to enforcement – what’s next for auditors?

01 September 2021

#Dispute Resolution & Litigation, #Superannuation, Funds Management & Financial Services

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ASIC abandons its ‘why not litigate’ approach to enforcement – what’s next for auditors?

While it might sound like an obvious requirement of an audit, audit firms must ensure that they understand the business of the company they are auditing and design appropriate tests to identify material misstatements in its account. In addition, individual auditors must take responsibility for the overall conduct of the audit and ensure that staff conducting the audits have appropriate skills.

ASIC’s Corporate Plan

With the release of ASIC’s Corporate Plan 2021-25 and its Statement of Intent last week, much has been made of ASIC having “dumped” its “why not litigate” mantra as ASIC shifts its focus to supporting the government’s agenda of economic recovery.

So what does that mean for auditors and audit firms? 

If you scroll through the plan to page 18 and the section titled Financial reporting and audit, it becomes apparent that the conduct of auditors remains a strategic priority for ASIC.

The plan makes clear that, among other things, ASIC will continue to conduct reviews of audits of listed entities and other public interest entities with focus areas to include asset impairment and revenue. ASIC will also continue its reviews of quality control systems at the six largest audit firms and take regulatory action, including enforcement action where warranted.

First criminal prosecution and sentencing of an auditor

This update comes in the context of the recent report of the first criminal charges and sentencing under section 989CA of the Corporations Act 2001 having occurred in Australia over auditing services provided to Halifax Investment Services Pty Ltd (Halifax).

On 17 August 2021, the former auditors of Halifax were convicted, with the individual auditor being sentenced to pay a $10,000 fine and the audit company being sentenced to pay a $40,000 fine for failing to comply with auditing standards.

In its recent media release regarding this case, ASIC stated that “In taking this action…ASIC is sending a message to auditors to maintain a strong culture focused on audit quality and that any serious failure to comply with auditing standards will be prosecuted.”

The charges were related to audits conducted by the lead auditor and the firm (as the audit company) of Halifax’s profit and loss statements and balance sheets for three consecutive financial years which ended on 30 June 2016, 30 June 2017 and 30 June 2018.

According to the court-sentencing summary, the auditing breaches enabled Halifax to continue to trade while insolvent before falling into administration in late 2018. Over $200 million of client money was stranded in still-frozen accounts. Across Australia and New Zealand, Halifax had about 12,000 clients on its books before the group’s shock collapse in 2018, which revealed a $20 million shortfall and misuse of co-mingled client funds to support the operating business.

The auditing breaches included the audit company failing to understand Halifax’s business and failing to design appropriate tests to identify material misstatements in its account, which allowed material misstatements to go undetected. The auditing breaches by the individual auditor included failing to take responsibility for the overall conduct of the audits and failure to ensure that staff conducting the audits had appropriate skills. It was alleged that Halifax would have been required to stop trading (had the audits been properly conducted) until it raised enough capital to meet the requirements of its AFS Licence.

The audit firm faced fines of up to $45,000 and up to $9,000 for charges before 1 July 2017, and fines of $52,000 and $10,500, respectively, for charges thereafter. In March 2019, strict liability penalties were introduced with individuals facing penalties of $11,100 per offence and companies facing $111,000 in penalties per offence for auditor breaches. A new fault-based offence could result in a maximum of two years in prison.

Conclusion

So while it is being reported that ASIC is moving away from its “why not litigate” stance, time will tell how it will approach auditors and audit firms and the 2019 amendments to the Corporations Act with respect to auditors and audit firms. However, it appears clear that auditors will remain a focus for ASIC surveillance and where appropriate, intervention.

Author: Susan Goodman

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

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