Introduction

ASIC recently issued its latest summary of findings from its ongoing surveillance of financial reporting in Australia and its review of independent auditors (ASIC Report 774, October 2023).

ASIC undertakes these programs annually to encourage improvements in financial reporting and audit quality. Additionally, in severe cases, adverse findings resulted in adjustments to financial reports and regulatory action against company directors and independent auditors.

ASIC’s approach to financial reporting surveillance

Approximately 29,000 financial reports are lodged with ASIC each year, including those for around 1,900 listed public companies. ASIC focuses its selection of financial reports on those issued by larger, listed public companies and unlisted disclosing entities and considers a range of risk factors, such as adverse market conditions, industry specific issues, legal or regulatory concerns and negative media coverage.

Following its review of 180 financial reports, ASIC made a range of enquiries of directors and management, culminating in 25 public companies making subsequent adjustments to their reported financial position, results or disclosures.

Financial reporting areas of concern

The majority of ASIC’s concerns related to the quality of disclosures in the director’s report, including the Review of Operations. In particular, disclosure of business risks was often not of the standard expected. Impairment of assets, revenue recognition and financial statement disclosures were also recurring financial statement problem areas.

ASIC has again expressed concern that some company directors and management are not devoting sufficient resources to performing objective and reliable asset impairment assessments and addressing the complexities of accounting for revenue under International Financial Reporting Standards.

Additionally, ASIC has issued guidance for directors, aimed at improving the quality of the Operating and Financial Review in the annual report. Recommendations include customising disclosures to clearly explain the entity’s specific business model, business risks and future prospects. ASIC highlighted that smaller entities and recently listed companies, in particular, need to focus on clear disclosure that provides key information on business strategies and material or one-off transactions, such as investments or business acquisitions.

Review of work of independent auditors

In the past, ASIC has reviewed a sample of independent auditors’ files annually, selected independently from its financial reporting surveillance program. From 2022, these two surveillance programs have now been combined into a single process.

Unlike in previous years, ASIC focussed on independent auditors’ files that related specifically to the financial statements for which they had already identified surveillance issues. ASIC reiterated its view that there is a correlation between the quality of an entity’s financial reporting and the quality of the independent auditor’s work.

ASIC highlighted that directors should ensure there is clear, open and regular communication between the independent auditor and the company’s management and the board.

When looking at the work of independent auditors, ASIC raised concerns in relation to adequacy of audit evidence obtained when auditing management estimates, including impairment of non-financial assets and asset valuations, consistent with the financial reporting areas of concern.

Testing of revenue recognition and receivables were also found to be common, recurring areas where auditors had not obtained sufficient appropriate audit evidence.

ASIC reiterated that independent auditors need to continue efforts focussed on improving audit quality and consistency, including recruitment and training of skilled staff, rigorous self-assessments of audit quality and root cause analysis into key areas to drive improvements.

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