The Australian Securities & Investments Commission (ASIC) seems set to take a more aggressive approach to “gatekeeper” conduct, including with respect to auditors. In the six months between 1 July 2018 and 31 December 2018, ASIC brought six administrative actions against auditors; see ASIC’s Enforcement Update July to December 2018, released on 9 April 2019. ASIC’s Enforcement Update also notes that “in 2019 ASIC will continue its focus on gatekeeper conduct … [including] company directors and officers, auditors, insolvency practitioners and business advisers.”
ASIC has also welcomed the Financial Reporting Council’s (FRC) report into auditor enforcement, Auditor Disciplinary Processes: Review (March 2019); see ASIC’s media release from 9 April 2019.
Of particular note to auditors are the following recommendations of the FRC and ASIC’s response to them:
|FRC Recommendation||ASIC’s Response|
|ASIC to evaluate its criteria for audit enforcement actions in light of ASIC’s “why not litigate?” approach||ASIC proposes to re-evaluate its criteria for taking auditor enforcement actions|
|ASIC to publish results of auditor inspections in greater detail, including naming firms||ASIC is considering whether to publish a percentage of its findings for named audit firms in its next audit firm inspection report for the 18 months to 31 December 2019|
|ASIC to be given power to compel remediation of defective audits alongside the power to publish notices when this occurs||ASIC supports the recommendation|
|Companies Auditors’ Disciplinary Board (CADB) to adopt a less formal approach, including a review of its practice and procedure manuals||ASIC proposes to work with the CADB on a less formal approach|
In light of ASIC’s stated intention to continue its focus on gatekeeper conduct, and its welcoming of the FRC’s recommendations concerning ASIC’s approach to audit enforcement, auditors can expect greater intervention by ASIC, including a greater propensity towards litigation and the naming of audit firms whose audits are found wanting. This has the potential to lead to an increased number of civil claims being brought against audit firms that are named for having conducted deficient audits.
In the future, it is also possible that ASIC will be given the power to compel remediation of defective audits. The upside is a potentially less formal approach of the CADB, which ASIC says should lead to more timely outcomes.
Audit firms need to ensure that their audit files are in order and be prepared for greater surveillance by the regulator. We have extensive experience with respect to auditor negligence claims and would be happy to assist auditors in responding to ASIC notices and in any subsequent claims.