ASIC to review audit firm independence and ethics
The corporate watchdog has announced a new audit ethics and independence review as it welcomes an expanded headcount provided for under the federal budget.
After securing funding boosts and an increased headcount in Tuesday night’s budget, ASIC has announced an expanded financial reporting and auditing compliance program.
Among the announcements, the regulator announced it would undertake a new review of auditor’s compliance with ethical and independence standards.
ASIC commissioner Kate O’Rourke said the results of a mandatory audit firm review last year were concerning, noting the trouble areas spanned risk, governance, and compliance practices at audit firms.
Firms were required to conduct and report on an evaluation of their implementation of the quality requirements under the ASQM1 framework on audit ethics and independence.
The reviews revealed “significant variability” in how firms were choosing to implement the framework. ASIC advised audit firms should apply quality management requirements across the firm, rather than viewing it as a “tick-box exercise in compliance.”
Other issues identified in the reviews included unsophisticated and unsuitable use of quality management tools; limited domestic guidance regarding how to measure findings and deficiencies; a lack of objectivity in assessments; and rushed implementation of remedial activities to resolve identified deficiencies.
‘ASIC urges firms to be transparent in reporting to executive management and relevant committees around deficiencies and their associated action plans from a governance and oversight perspective,” said O’Rourke.
“This includes communicating the original rating of a deficiency in addition to the point-in-time rating to ensure broader design gaps are being identified and systems operate as effectively as possible.”
Tuesday night’s federal budget provisioned for an expanded ASIC headcount, adding 239 people (an increase of 14 per cent).
It will also receive several funding boosts for specific enforcement areas including $10 million over four years for greenwashing and sustainability-related financial misconduct.
CA ANZ welcomed the expanded headcount, noting that it aligned with their calls for “well-resourced and better targeted regulatory activity.”
“This is an important development as it’s in the best interest of the auditing and accounting professions to have a strong, well-funded regulator but CA ANZ will be looking for more information on exactly where within ASIC, these additional employees will go,” said CA ANZ CEO Ainslie van Onselen.
The corporate watchdog will continue to enforce compliance with its enduring priority areas, including the coming mandatory climate-related financial disclosure requirements.
ASIC urged directors to engage closely with the reforms, noting that entities should be voluntarily reporting in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) ahead of mandatory reporting windows.
“Directors need to be aware of the impending developments in climate reporting. The first tier of companies is proposed to report for financial years commencing from 1 January 2025,” said O’Rourke.
“Directors and entities should start preparing and putting into place the necessary governance arrangements. They should consider what capabilities and data requirements may be needed.”
For the second year in a row, large proprietary companies, which were previously exempt, will again be required to lodge audited financial reports with the ATO.
“Many grandfathered companies exempted from lodging financial reports with ASIC are significant businesses and of interest to many stakeholders. We will now include this cohort in our surveillance program and follow up instances where non-compliance and non-lodgement occurs,” said O’Rourke.
Superannuation trustees will also be required to lodge audited financial reports for the majority of super funds for the first time.
Beyond audit independence and ethics, ASIC will also increase its focus on certain aspects of financial reporting, including uncertainty disclosures in financial reports and climate change risks in operating and financial reviews.
“Uncertainties may lead to a wider range of valid judgements on asset values and estimates. The financial report should disclose uncertainties, changing key assumptions and sensitivities,” it said.
“This will assist investors in understanding the approach taken, understanding potential future impacts and making comparisons between entities. Entities should also explain where uncertainties have changed since the previous full-year and half-year financial reports.”
