Why ASIC’s Proactivity Should Have CFOs on Edge

A look down the list of the Australian Securities and Investment Commission’s web site’s public statements indicates the corporate plod is actively chasing down people it believes are failing to comply with company law in areas that should matter for Chief Executives and Chief Financial Officers.

The reason the regulator’s proactivity should matter is that each enforcement action undertaken by the regulator is not just a sanction applied to a specific fact pattern but also a message to the marketplace that certain principles in law matter.

Take the lodgement of financial statements with the corporate regulator as required under the Corporations Act 2001. This should come to corporate executives and company secretaries rather naturally but there were a bunch of folks that didn’t quite absorb the memo.

There were three companies pointed to in a media release back in March as being put through the wringer and an August release noted that 10 companies had failed to do the right thing in terms of lodgement.

Penalties for each entity vary but the important thing to note is that these issues are being pursued and ASIC is telling the community about them.

The regulator does eventually catch up with people.

Directors failing to manage companies properly are another constant. ASIC has a steady stream of media releases talking about penalties hitting individuals who failed to meet their obligations as a director.

Why should this matter to people sitting in larger entities?

Each time the media releases on director misbehaviour hit the web site and appear in media reports represents another point of awareness for people in large and small entities about the obligations set down in law for compliance.

It should also be remembered the frequent media releases on financial reporting surveillance and audit firm inspections that provide valuable intelligence to company boards, senior executives, and financial and risk management teams about issues regulators are monitoring.

These releases flag matters that need further attention from a governance and risk management standpoint and they provide valuable checklists for companies to ensure that they have considered values of assets, for example, and a many other financial reporting issues that are top of the pops with regulators.

The degree of difficulty increases for companies that have to monitor the web sites of overseas regulators such as the Securities and Exchange Commission because they play in the American sandpit. Each sandpit has its own rules and companies either need their own internal gurus to keep them up to speed or they pay external advisers to keep them briefed.

Chief Financial Officers might find that audit engagement partners highlight the areas ASIC is looking at as a way of heightening awareness of the tyres the regulator is kicking in a given year. Those media releases can be and have been used in the past by auditors to flag issues with clients that are noticeably stubborn on a particular accounting treatment.

Auditors have also been placed on notice that the corporate cop is prepared to use the Corporations Act to take them to court for non-compliance with auditing standards in a media release issued back in August.

Robert James Evett and EC Audit Pty Ltd were convicted and sentenced to pay fines totalling $50,000 in the first ever case of an auditor and a firm getting pinged under the Corporations Act for not complying with auditing standards.

This case involved the three sets of financial statements for the 2016, 2017 and 2018 financial years for Halifax Investment Services, and the regulator said that the Halifax business was not well understood by the audit firm, appropriate tests of samples were not conducted, and Evett himself failed to follow auditing standards.

The regulator said that the misstatements in the financial statements were not detected during the audits and the entity was effectively trading while insolvent. The auditor has also had his audit registration subsequently cancelled following the court case.

Each case noted above – no matter how small – is an elbow in the ribs for the corporate sector, and the examples highlight various elements of the work the regulator is doing, and that it is far easier to learn from somebody else’s mistakes rather than having to make errors of your own.