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Audit negligence can be a criminal matter

14 September 2022

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

Published by:

Paul Libreri

Audit negligence can be a criminal matter

The Australian Securities and Investments Commission (ASIC) has initiated criminal proceedings against accounting firm Grant Thornton and its former audit director, Brad Taylor, for its alleged failure in 2018 to complete audits for iSignthis in accordance with the Australian Auditing Standards.

This marks the third instance since 2021 that ASIC has initiated criminal proceedings against an auditor or audit company for failing to comply with auditing standards.

Background

Grant Thornton was iSignthis’ statutory auditor for the 2018 financial year. It issued two unqualified audits of iSignthis’ accounts. ASIC alleges that Grant Thornton’s former audit director, Brad Taylor, was responsible for leading these audits.

In December 2020, ASIC initiated civil penalty proceedings against iSignthis and its managing director and CEO, John Karantzis. The civil penalty proceedings claimed that iSignthis breached its continuous disclosure obligations, made false and misleading representations under the Corporations Act 2001, and that Mr Karantzis breached his directors’ duties.

In support of these claims, ASIC alleges that in the quarter ending 30 June 2018, iSignthis failed to disclose to the ASX that it:

  • recognised around $3,000,000 in one-off, non-recurring revenue relating to integration and set-up services for three customers
  • incurred around $2,850,000 in one-off costs for outsourcing services, which ASIC contends involved the supply of the integration and set-up services for the same three customers.

iSignthis had an option to issue around 337 million in bonus shares. This option was contingent on the company recording an annualised revenue rate of $10,000,000 over a three-year period. To achieve this performance milestone and unlock the options, iSignthis needed to record $5,000,000 or more in revenue for the half-year period ending 30 June 2018.

iSignthis’ total revenue for the half-year period ending 30 June 2018, including the $3,000,000 in one-off, non-recurring sales to three customers, was around $5,500,000. Based on iSignthis reaching the performance milestone, the company issued approximately 337 million bonus shares. A majority of the bonus shares were issued to iSignthis company executives, including managing director and CEO John Karantzis.

ASIC also alleges that iSignthis and Mr Karantzis failed to notify the ASX by 17 April 2020 that Visa had terminated its commercial arrangement with iSignthis, and that iSignthis did not disclose Visa’s reasons for terminating the arrangement.

ASIC is seeking declarations and pecuniary penalties against iSignthis and Mr Karantzis, as well as orders that Mr Karantzis be disqualified from managing corporations.

The civil penalty proceedings against iSignthis and Mr Karantzis are ongoing.

Criminal proceedings against Grant Thornton

ASIC recently commenced criminal proceedings against Grant Thornton and Mr Taylor for five contraventions of sections 307A(1) and 307A(2) of the Corporations Act 2001, respectively.

The contraventions involve Grant Thornton and Mr Taylor’s alleged failure to conduct the 2018 audits of iSignthis’ accounts in accordance with the Australian Auditing Standards.

On 1 September 2022, Grant Thornton and Mr Taylor appeared in the Melbourne Magistrates Court in relation to the alleged contraventions of section 307A of the Corporations Act 2001.

The maximum penalty Grant Thornton and Mr Taylor face for each contravention of section 307A of the Corporations Act 2001 is $52,500 (for body corporates) and $10,500 (for individuals).[1]

The proceedings were adjourned to 1 December 2022.

Conclusion

It is now clear that where ASIC believes that auditors have failed to comply with their obligations under the Australian Auditing Standards and those failures amount to contraventions of sections 307A(1) and 307A(2) of the Corporations Act, the regulator will bring criminal proceedings for such failures.

Given the severe penalties for failing to comply with these standards, auditors should seek professional accounting and legal advice if they have any questions or concerns regarding their obligations.

If you have any questions or would like to get in touch, please contact us below or send in your enquiry here.

Authors: Susan Goodman & Paul Libreri

[1] Following the commencement of the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Act in March 2019, a contravention of section 307A of the Corporations Act 2001 now carries a maximum penalty of $55,500 (for body corporates) and $11,100 (for individuals), or two years imprisonment.

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 newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Paul Libreri

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