The Australian Securities and Investments Commission (ASIC) has called on directors to be more involved in the initial public offering (IPO) due diligence process for companies that are listing.
The recommendation from the regulator came out of a review it conducted of the due diligence done by companies on whether they have properly prepared their prospectus ahead of listing. While it is not a legal requirement to conduct IPO due diligence, it has emerged as standard practice to protect against liability and ensure that investors can make informed decisions.
Directors weren't involved as much in the oversight process as we would have expected – ASIC Commissioner John Price
In the course of the review, which involved ASIC examining the due diligence processes of 12 companies that listed between November 2014 and January this year, the regulator came across several instances where directors had only a superficial involvement in the due diligence process.
"Directors weren't involved as much in the oversight process as we would have expected," ASIC Commissioner John Price told The Boardroom Report. "Their expertise and experience wasn't being utilised as much as it should have been."
The lack of engagement from directors was particularly a problem among small to mid-sized issuers, according to the ASIC report. Additionally for Chinese-based issuers listing in Australia, there was often no evidence that the prospectus had been translated into Chinese for non-English speaking directors, the report states.
At a minimum, ASIC expects directors to participate in the preparation of the prospectus at some stage, while in the best due diligence processes, the regulator notes that directors had:
- critically reviewed the issuer’s internal reporting systems, continuous disclosure policies and procedures, and corporate governance policies;
- engaged appropriate expert advisers;
- had a robust dialogue with management and the expert advisers involved in the due diligence;
- made sure there is an effective system of inquiry and adequate supervision at all stages of the due diligence process and during the preparation of the prospectus, so that it is properly carried out;
- participated in the verification process;
- applied an independent mind to the IPO due diligence process;
- and applied their own skills, knowledge and experience in questioning and assessing the completeness, accuracy and reliability of all statements (including all forward-looking statements) in the prospectus.
In addition to directors not being sufficiently involved in the process, ASIC found that many of the companies took a 'box ticking' approach to due diligence that favoured 'form over substance'. Such an approach led to "a low level of care and effort in the verifications of the statements made in the prospectus," with advisers and directors being called out for failing to follow up on missing records as well as information that was contradictory with the claims of management.
A cheap due diligence process can actually be a false economy in that if you don't do it right there's potentially reputational damage for the company, potential additional cost when you try to resolve regulatory problems and you can really blow your timetable out of the water – John Price
ASIC advises that scrimping on advisers for an IPO due diligence can be more expensive down the track.
"You get what you pay for at the end of the day. And sometimes a cheap due diligence process can actually be a false economy in that if you don't do it right there's potentially reputational damage for the company, potential additional cost when you try to resolve regulatory problems and you can really blow your timetable out of the water," Price said.