ASIC reveals findings from financial reporting and auditing surveillance

ASIC has released the findings from its first integrated financial reporting and audit surveillance program which saw a total of $215 million in adjustments made to previously released financial information by ASX-listed companies and other larger entities.

ASIC Report 744 outlined findings related to insufficient disclosure of material business risks in the operating and financial review, impairment of assets and revenue recognition and other financial report disclosures.

A total of 180 financial reports of ASX-listed entities and other large unlisted entities were reviewed during the period from 1 July 2022 to 30 June 2023.

The Corporate Regulator only reviewed a total of 15 audit files for the 2022-23 financial year, a third of what it reviewed in the previous 2021-22 financial year.

The main issues identified in ASIC’s surveillance of financial reports was insufficient disclosure of material business risks in the operating and financial review (OFR), impairment of assets, revenue recognition and other financial report disclosures.

The key areas of concern with ASIC’s audit findings related to impairment of non-financial assets and asset values and revenue and receivables.

“It is concerning that we continue to identify financial reporting findings and audit findings in relation to impairment of assets and revenue recognition,” ASIC said.

Concerns with adequacy of disclosures

The report revealed that there were 33 surveillances where ASIC contacted listed entities to communicate its concerns on the adequacy of the company’s disclosures, particularly in relation to strategies and prospects and material business risks.

Following our surveillances, 19 of these entities made additional or improved disclosures, the report said.

“Our financial reporting surveillances show that many entities still need to significantly improve the information they report in the operating and financial review (OFR) for the benefit of investors and other users. Entities that are of particular risk are those that are newly listed, regularly raise funds, or have more complex business models,” said ASIC.

“Entities that are of particular risk are those that are newly listed, regularly raise funds, or have more complex business models.”

ASIC noted that while the operating and financial review does not need to be audited, auditing standards require auditors to read the OFR to ensure there are no material inconsistencies with the audited financial report and that the OFR contains no material misstatements of fact.

Issues with impairment and asset values

ASIC said there were 20 surveillances where it contacted entities about their impairment testing, mainly of goodwill and other intangible assets. Three entities made impairment adjustments following the regulator’s surveillances.

“Directors (including members of audit committees) should question the need for, and adequacy of, asset impairment and the adequacy of related disclosures,” the report said.

“Information Sheet 203 Impairment of non-financial assets: Materials for directors (INFO 203) discusses director responsibilities in connection with testing of non-financial assets for impairment in the financial report of a company.

Revenue recognition

In 14 of the surveillances undertaken, ASIC contacted entities about their recognition of revenue including disclosure of accounting policies.

“Following these surveillances, three of these entities made adjustments to either their revenue recognition or disclosure of their accounting policy,” the report said.

Financial report disclosures

There were seven surveillances where entities were contacted about their financial report disclosures including going concern, operating segments and non-audit service fee disclosures.

“All these matters were closed without further action following the responses and information provided by the entities to our inquiries,” ASIC said.

Non-IFRS profit information and contingent liability disclosure

Two surveillances saw entities contacted about their presentation of non-IFRS profit information.

“One surveillance resulted in improved disclosure of adjustments made to calculate the non-IFRS profit measure,” said ASIC.

“In the second surveillance, another entity removed its use of a non-IFRS profit measure in the statement of profit and loss. We also had one surveillance where the listed entity involved in a complex and prolonged legal matter increased their contingent liability disclosure which was previously insufficient and did not include all total possible obligations for overseas taxes.”