ASIC has welcomed the release of the report by Australia’s Financial Reporting Council (FRC) Auditor Disciplinary Processes: Review and the Federal Government’s response to that report.
The FRC report made a number of recommendations for improvement in the processes of ASIC, the Companies Auditors’ Disciplinary Board (CADB), Chartered Accountants Australia and New Zealand (CA ANZ), CPA Australia, and the Institute of Public Accountants (IPA) concerning enforcement or discipline of registered company auditors (RCAs) who do not meet the standards expected of them.
Recommendations in the FRC report relating to ASIC processes concerned:
- Better integrated systems to track enforcement matters across ASIC teams and a more structured approach to auditor surveillance matters.
ASIC introduced a new workflow system on 1 June 2018 for ASIC regulatory and enforcement activities that is common across all ASIC teams, including our surveillance of potential RCA misconduct matters. This system will capture processes, documents and decision points in a common structured way using consistent terminology across ASIC.
- ASIC should evaluate its criteria for audit enforcement actions and explain how the ‘why not litigate?’ approach referred to in ASIC’s recent audit enforcement review would apply to RCA misconduct matters. This includes considering whether more matters identified through file reviews in ASIC’s audit firm inspection program should be referred to the CADB.
ASIC will re-evaluate its criteria for taking auditor enforcement actions, and the types of outcomes that it may seek, including the use of enforceable undertakings and referrals of matters to the CADB as part of our implementation of the new Office of Enforcement.
- ASIC should consider the division of resources between audit inspection and financial reporting surveillance work to ensure that ASIC’s resources are being used effectively to ensure good RCA audit quality.
Audit firm inspections, surveillances on audits of concern and financial reporting surveillances are all conducted within ASIC’s Financial Reporting and Audit team. Resources will continue to be dynamically allocated within the team to achieve the best outcomes for quality financial reporting supported by quality audits.
- ASIC should publish the results of audit inspections in greater detail, including naming firms.
ASIC is already considering whether to publish the percentage of findings for named audit firms in its next audit firm inspection report for the 18 months to 31 December 2019. To that end, ASIC is currently reviewing when it would be appropriate to name entities more broadly across all our surveillance and compliance reports before deciding whether to disclose results for named audit firms.
The FRC report was partly a response to a recommendation by the Parliamentary Joint Committee on Corporations and Financial Services (PJC) for a review of ASIC’s enforcement powers in relation to auditors.
The PJC also issued a report on 13 February 2019 (Oversight of ASIC, the Takeovers Panel and the Corporations Legislation No.1. of the 45th Parliament) recommending “that ASIC devise and conduct, alongside or within its current Audit Inspection Program, a study which will generate results which are comparable over time to reflect changes in audit quality.” This PJC recommendation refers to ASIC statements that our audit firm inspection results are based on reviews of key audit areas in a relatively small number of audit files selected on a risk basis (347 audit areas across 98 files in the 18 months to 30 June 2018) and that caution is needed in extrapolating the results to the entire market.
Consistent with the PJC’s recommendation, ASIC will continue to work with foreign audit oversight regulators and global audit firm networks on measures of audit quality, as well as discussing the matter with a range of domestic stakeholders.
ASIC also supports recommendations in the FRC report that:
- ASIC be given the power to compel remediation of defective audits, alongside the power to publish notices when this occurs.
A power to compel remediation should facilitate more effective and timely outcomes to improve audit quality, and should include remediation measures needed across a firm.
- A less formal approach is adopted to the carriage of CADB matters, including a review of the CADB’s practice and procedures manuals.
ASIC will work with the CADB on a less formal approach, which should lead to more timely outcomes through the CADB process.