Which companies are on ASIC’s audit radar?

This article was current at the time of publication.

The upcoming Australian Securities and Investments Commission’s (ASIC) annual financial reporting and audit surveillance report will make for particularly interesting reading.

Due for release in October this year, it will outline the corporate watchdog’s key regulatory and compliance outcomes for 2023-24 and highlight where the quality of financial reporting and audits can be improved. Some previously grandfathered large proprietary companies may rate a mention.

Large ‘grandfathered’ proprietary companies under scrutiny

Historically, large grandfathered proprietary companies were exempt from lodging their financial reports with ASIC if they met certain criteria, including being audited annually and meeting the 'exempt proprietary company' definition since 30 June 1994.

Under the Treasury Law Amendment (2022 Measures No. 1) Act 2022, large grandfathered proprietary companies with financial years ending on or after 10 August 2022 are no longer exempt and must lodge their financial reports with ASIC.

This means that if a proprietary company meets at least two of the following three criteria—A$50 million or more in consolidated revenue, A$25 million or more in consolidated gross assets, or has 100 or more employees at the end of a financial year—it is considered a "large" proprietary company. As a result, the company must prepare, audit, and lodge its financial report with ASIC.

Claire LaBouchardiere, Senior Executive Leader, Companies and Small Business at ASIC, says the removal of the previous reporting exemption is one reason large previously grandfathered proprietary companies are on the regulator’s radar.

“In addition to that, these are very large companies,” she says. “They earn sizeable revenue and employ quite a considerable number of staff, so they are of interest to a wide variety of stakeholders.”

On the radar

Large proprietary companies make up a sizeable proportion of the economy and some have already captured the attention of ASIC. LaBouchardiere cites the example of Southern Steel Group Pty Ltd, which was the subject of an ASIC media release in April this year.

“It was a previously grandfathered large proprietary company lodging for the first time [for 30 June 2023], but it failed to include comparatives for the 30 June 2022 financial year, which was one of the requirements under the accounting standards. 

Jeffrey Luckins FCPA, a partner at William Buck in Melbourne, says that while large proprietary companies have always prepared financial reports and had them audited in accordance with the Corporations Act, the requirement to lodge them with ASIC means they may be open to greater public scrutiny.

“I expect that it will create enormous interest from the media, which will want to see exactly what these companies are doing, the extent of their activities, the value of their assets etc,” says Luckins. “There will be surprising disclosures of many businesses which people would not realise are part of an ultimate holding private company group, for example”.

“That might create some interesting conversations around commercial decisions, the extent of their resources and activities, how they're competing in the market space and, indeed, what potential conflicts of interest do these financial reports reveal.”

Luckins adds that the timing requirements of financial reports may also have some impact.

“These financial reports theoretically need to be completed and audited within four months of the end of the financial year, and that may add compliance and reporting pressure to the financial management teams of companies, the preparers of the financial reports and the auditors, as they won’t want to be seen as being non-compliant,” says Luckins.

“I also think that when mandatory climate reporting is introduced, it will create a Pandora's box of cost and timing pressures for large proprietary companies, which have not planned or budgeted for these significant new compliance measures.”

Large companies, huge impact

Tiffany Tan, External Reporting and Assurance Lead, Learning & Innovation at CPA Australia, says that while large proprietary companies are not publicly listed, their financial activities have a huge impact on the broader economy.

“Think about a large building company,” she says. “A family may give a A$100,000 deposit toward building their house, and then the building company collapses … and that family loses that money.

Although ASIC’s surveillance activities are not aimed at assessing the quality of the underlying business, we believe with ASIC now looking at the financial reports of large privately-owned companies, this additional oversight will enhance the quality of financial reporting.

It should also help promote the improvement and maintenance of audit quality. Additionally, we hope it will encourage companies to act more responsibly toward their customers and employees. It also provides transparency for the wider public, as this financial information is now publicly accessible.”

While accountants preparing the financial reports of large proprietary companies must comply with Australian accounting standards, Tan says judgement and objectivity are also vital.

“For example, is there any indication that your company is experiencing cash flow issues that could potentially raise concerns about its ability to continue as a going concern? If so, how serious are these threats, and should they be disclosed in the financial report?” she says. “That kind of judgement call is important. 

“Also, a lot of businesses of this size will have assets, like commercial buildings, where the valuation has changed significantly since COVID,” adds Tan. “The question is, if you bought this property located in the CBD five years ago for A$5 million, is it still worth A$5 million due to the decrease in occupancy rates?

If that’s unlikely in the current market condition, then ASIC will be looking at that and whether the financial report reflects the correct valuation. 

“Accountants need to be prepared to have honest conversations with their clients about making realistic judgements, as business owners tend to think big and be optimistic.”

“And auditors need to remain objective and critically evaluate management’s reasoning and assumptions in these areas that require significant judgement.”

Lifting practices across the board

LaBouchardiere says ASIC’s expanded surveillance program aims to support financial reporting and audit quality. She says its findings will be included in its October report with the intention of improving practices. 

“We publish our report in October each year to show the market the kinds of issues that we've got concerns about and to lift practices across the board.”

“What I can say is that some of the findings for large proprietary companies so far have been consistent with the kinds of issues that we see when we look at listed companies as well,” she says.

ASIC’s 2022-23 financial reporting and audit surveillance report included findings around financial report disclosures, impairment and asset values and revenue recognition.

“We'd encourage issuers and their auditors to take a look at those,” says LaBouchardiere. 

Going forward, ASIC’s surveillance program will also be expanded to cover Registrable Superannuation Entities (super funds) which will be required to report for the first time for financial years ended 30 June 2024.

“Some of ASIC’s enduring focus areas will be relevant to both previously grandfathered large proprietary companies and super funds, particularly around asset values,” she adds. “If you think about the superannuation funds that might hold a number of unlisted assets, getting the valuations right for those is going to be really important.”