ASIC’s Oversight of Financial Reporting and Audit 2023–24 (REP 799). Risk Management & Insurance Considerations, Implications and Guidance.
Introduction:
The below piece summarises the recent ASIC findings on financial reporting and audit practices, focusing on the implications for risk management and the critical role of professional indemnity insurance.
ASIC’s position and key findings:
ASIC’s latest report, ASIC’s Oversight of Financial Reporting and Audit 2023–24 (REP 799), highlights an increased emphasis on the integrity of financial reporting and auditing standards within Australian capital markets.
ASIC’s audit surveillance for the financial year ending 30 June 2024 identified several areas for improvement, many of which were associated with action against registered company auditors:
Material Adjustments and Disclosures: Of the 188 financial reports reviewed, 25 cases involved findings resulting in financial adjustments exceeding $1.88 billion.
Audit Quality Concerns: findings were recorded across 12 audit files within nine audit firms, underscoring the need for enhanced audit procedures.
Independence and Conflicts of Interest Compliance:
As a result, ASIC is launching an intensified review of auditor independence, focusing on conflicts of interest.
ASIC is employing new compulsory information-gathering powers, signalling a heightened regulatory stance.
ASIC’s latest initiative also underscores proactive enforcement against registered auditors, with actions including CADB proceedings, infringement notices, and enforceable undertakings to address breaches.
Best Practices for Accounting and Advisory Firms:
In light of ASIC's findings, it is imperative that accounting and advisory firms strengthen their compliance frameworks and adhere to ASIC’s guidance. An overview of recommended best practice includes:
1. Enhanced Disclosure Practices: ensure financial reports transparently address material risks, including impairments and revenue recognition.
2. Rigorous Compliance with Audit Standards: firms should align their auditing procedures with ASIC’s expectations, particularly concerning independence and conflicts of interest.
3. Quality Management Frameworks: continuous improvement of quality management systems will support compliance and help to mitigate the risk of ASIC findings, enforcement, or reputational damage.
By embedding these practices, firms can position themselves to better meet regulatory expectations and demonstrate due diligence, which are crucial factors for both regulatory and insurance purposes.
The Role of Risk Transfer and Professional Indemnity Insurance:
Given ASIC’s rigorous surveillance activities and increasing penalties for non-compliance, effective risk transfer through an appropriately structure insurance program, with a specific focus on Professional Indemnity (PI) insurance, is essential.
A best-in-class policy should be positioned to respond to circumstances and/or claims arising from breaches in duty, including failure to meet audit standards, breaches of independence requirements, or material disclosure issues. \
In an environment of heightened regulatory scrutiny, the relevance of tailored cover now more than ever is relevant in its role to help:
Mitigate the financial impacts of litigation, regulatory actions, or professional negligence claims.
Protect the firm’s reputation and financial stability in the event of adverse findings.
Enable firms to continue operating even amidst regulatory investigations or claims.
Conclusion:
ASIC’s findings and ongoing surveillance demonstrate an evolving regulatory landscape that demands stringent compliance, transparency, and proactive risk management.
We recommend that firms review their risk management practices and procedures and their insurance coverage to ensure the coverage aligns with current regulatory risks and supports their broader risk management strategy.
If you have any questions regarding the latest ASIC findings and their relevance from a risk transfer standpoint, Lockton’s specialty professions practice specialises in supporting resilience and regulatory compliance in this increasingly complex environment.
The contents of this publication are provided for general information only. Lockton arranges the insurance and is not the insurer. While the content contributors have taken reasonable care in compiling the information presented, we do not warrant that the information is correct. It is not intended to be interpreted as advice on which you should rely and may not necessarily be suitable for you. You must obtain professional or specialist advice before taking, or refraining from, any action on the basis of the content in this publication.
