ASIC issues warning to auditors over conflicts of interest, audit quality

The corporate regulator plans to investigate audited company reports and those who sign them off as part of its expansion of oversight into the sector.

ASIC commissioner Kate O’Rourke. Picture: Jane Dempster

The corporate regulator is preparing to run the ruler over the audit sector amid concerns the industry is failing to police conflicts of interest and allowing incorrect accounts to go to market.

In a warning to be sent to more than 3000 auditors on Wednesday, the Australian Securities and Investments Commission will caution it is preparing to subject the sector to renewed oversight.

In letters seen by The Australian, ASIC will tell auditors and the heads of firms of their obligations, putting accountants on notice they will face enhanced surveillance, and that they should self report and self identify any issues around conflicts of interest and independence before investigators discover them.

“Whether or not you have done so will be one of the factors that ASIC will consider in determining what further action to take in relation to any noncompliance we identify,” ASIC will tell auditors. “We also remind you of your obligations to report to ASIC contraventions and suspected contraventions by the audited entity that you identify in the course of undertaking an audit.”

ASIC regulates the auditing sector, and the Tax Practitioners Board provides oversight of the broader tax accounting industry.

ASIC commissioner Kate O’Rourke said the regulator was concerned about recurring issues facing the auditing sector, which is crucial to confidence in Australia’s financial markets. She said ASIC was looking back on past reports, as well as forward on looming updates from listed and unlisted companies.

In the past many of Australia’s largest privately held companies have not been required to provide an accounting of their activities, but this has since changed.

Companies will now need to file their accounts to ASIC, opening their books often for the first time. This is alongside superannuation entities that will also be required to lodge financial reports.

ASIC said many large proprietary companies had already lodged accounts, but warned “we are not confident that all grandfathered companies (and other large proprietary companies) are now lodging financial reports”.

Ms O’Rourke said ASIC had statutory provisions for companies that fail to submit their reports.

Failure to lodge was all the more important given many companies were soon to be subject to mandatory climate reporting rules under new emissions obligations.

Ms O’Rourke said ASIC had assembled teams across its enforcement and supervision functions as part of its audit oversight. ASIC is understood to be particularly concerned about the actions of firms in the space that have been identified as allowing auditors to sign off poor behaviour and incorrect accounting.

In a report, ASIC said it was concerned about professional services firms also providing consulting services to firms they audit, and that this could lead to a conflict of interest.

ASIC said in light of preliminary analysis it would now review audit and non-audit service fees charged to clients as well as any declarations around independence and conflicts of interest.

The auditing blitz comes as the regulator prepares to face a parliamentary inquiry on Friday.

ASIC is also bracing for recommendations from an inquiry examining ethics and accountability in the audit and assurance sectors, in light of the scandals surrounding PwC Australia. In its submission to a Joint Parliamentary inquiry, ASIC said it was working with international stakeholders to improve the standards of the auditing sector.