Auditing standards failure leads to criminal conviction of auditors

This article was current at the time of publication.

A Sydney-based auditing firm and its director have pleaded guilty to charges relating to the audit of Halifax Investment Services Pty Ltd (Halifax) for the 2016–18 financial year ends.

EC Audit and its director Robert Evett are the first auditors in Australia to face criminal prosecution for an alleged failure to comply with auditing standards since the standards became law in 2006.  

These charges follow an ongoing investigation into Halifax, with liquidator KPMG and the Australian Securities and Investments Commission (ASIC) claiming now-defunct financial services company Halifax breached client money provisions in the Corporations Act 2001 (Cth). 

As a financial services licensee, Halifax is required to keep client money separate from its own in a trust account, which benefits and protects its clients’ interests.

It should not be used to fund Halifax operations.  

Appropriation of client funds

The liquidator's report of 31 August 2020 reveals, “the deficiency in Client Moneys as at 23 November 2018 is estimated to be approximately $19 million (before taking into account any costs and any recoveries that may be made in the future).”

The report cites reasons for the deficiency as being to fund operational expenses and the “improper operation of trust accounts and improper application of Client Moneys”.

The auditor’s alleged failure to comply with auditing standards in its audit of Halifax has been followed by an ASIC investigation into Halifax which commenced in 2019. 

This investigation into Halifax continues. 

Auditors as gatekeepers

Claire Grayston FCPA, Policy Advisor for Audit and Assurance at CPA Australia, says the successful prosecution is a reminder to auditors of their legal obligations to apply auditing standards and ASIC’s willingness to take action if they fail to do so. 

The regulator adopted a “why not litigate?” approach to enforcement in 2019 after the Hayne Royal Commission.

“Auditors have a critical role as gatekeepers in the financial reporting system,” Grayston says. 

“Their reports provide confidence to market participants, including protection of the monies of those investing through an Australian financial services licensee, such as Halifax. 

“Auditors’ reports should be supported by sufficient appropriate evidence that is thoroughly documented.

 “If auditors see red flags they need to challenge, and when concerns persist, raise the alarm.”