ASIC launches scathing assessment of Australian audit firms

Audit firms failed to ensure financial reports were free from material misstatement in 27pc of the 179 key audit areas that ASIC reviewed.

The corporate regulator has launched a scathing assessment of Australia’s audit firms. Picture: Jack Taylor/Getty Images)

The corporate regulator has launched a scathing assessment of Australia’s audit firms, saying they did not “obtain reasonable assurance that the financial reports were free from material misstatement”.

The Australian Securities and Investments Commission released the results of its audit firm inspections for the 12 months to June 30 2020.

It found audit firms failed to ensure financial reports were free from material misstatement in 27 per cent of the 179 key audit areas that ASIC reviewed across 53 audit files. This compares with 26 per cent in the 12 months to 30 June 2019.

ASIC’s adverse findings follow analysts questioning after Deloitte signed off on not one, but two sets of accounts that health food company Freedom Foods has since restated, resulting in a $590m writedown of its business.

ASIC Commissioner Cathie Armour said the lack of quality did not reflect the economic devastation from COVID-19, with the review assessing financial reports up to December 31 last year.

“Audit firms need to work on improving audit quality and significantly reducing the number of instances where auditors do not obtain reasonable assurance that a financial report is free of material misstatement,” Ms Armour said.

‘The current review relates to audits of financial reports up to 31 December 2019 and largely, does not reflect the impact of COVID-19 conditions where audit quality, and the need to properly inform the market and investors through financial reports, will be even more important.

“There can be more difficult judgments on asset values, liabilities, solvency, going concern and disclosures, as well as challenges from remote working arrangements. Auditors need to respond to these conditions in their audits.”

ASIC reviews of conflicts of interest, firm governance, accountability for quality, culture, talent and root cause analysis focused on audit quality at the largest audit firms; and reporting our findings directly to audit committees.

Ms Armour said the largest number of adverse findings were in the audit of asset values, particularly impairment of non-financial assets and the audit of revenue.

“Firms must strengthen existing initiatives and implement further new initiatives to improve audit quality. This includes enhancing a culture focused on audit quality, the experience and expertise of partners and others, supervision and review of audits, and accountability of partners and others for audit quality’, Ms Armour said.

She said ASIC’s findings do not necessarily mean that the financial reports audited were materially misstated. “Rather, in our view, the auditor may not have a sufficient basis to support their opinion on the financial report”.

Ms Armour said ASIC has undertaken a number of regulatory initiatives in the past year to promote audit quality, although it was too early for these measures to be reflected in findings from the current review.

Improvement measures include more enforcement actions involving auditor misconduct, with twelve matters concerning auditor misconduct currently being considered or progressed by ASIC for possible enforcement outcomes; and transparency of audit inspection results, with ASIC’s individual audit inspection reports for the largest six firms being made public during 2019 and 2020.

Freedom Foods paid Deloitte $5.4m to audit its accounts and provide other services over the past 10 years, including $1.2m for the company’s 2018 and 2019 accounts, which have since been restated and subject to the massive writedown.

When Freedom’s board launched a forensic investigation in June after identifying a series of accounting discrepancies a Deloitte spokesman told The Australian: “We stand by our audit. Beyond that we do not comment on client matters.”