Over the last month we have seen ASIC issue the following releases relevant to directors and audit committees regarding the upcoming reporting season:
The link between all the information that ASIC has released is ASIC’s regulatory role as well as their desire to educate preparers, directors and auditors to improve the quality of financial reports.
Communicating with directors and audit committees
This regulatory guide is intended to operationalise the current allowances in the law for direct communication of specific financial reporting and audit quality findings identified from ASIC’s reviews of audit files to directors, audit committees or senior management. In many cases, the auditor may already be communicating such information about ASIC reviews.
The information disclosed to the entity must be about:
- How the audit of entity was conducted by an Australian auditor; or
- The entity’s compliance with the Corporations Law in respect of :
- Preparing financial statements and reports; or
- The continuous disclosure requirements.
ASIC believes that communicating both financial reporting and audit quality findings will assist directors to:
- Take action to address deficiencies in an entity’s financial report;
- Improve systems and processes supporting financial reporting; and
- Engage with the auditor about steps the auditors will take to improve audit quality.
A company will be informed of a planned routine inspection of audit files five business days after the auditor has been informed.
Not all findings from the review of audit files will be communicated to directors. Communication will occur as follows:
- Financial reporting findings – communication to occur where ASIC has identified concerns, from the review of the audit file, that the entity’s financial report is materially misstated.
- Audit quality findings – communication to occur with reference to set criteria, in the following circumstances:
- The auditor has not obtained reasonable assurance that an entity’s financial report is free of material statement;
- The previous years’ findings were relatively severe and the concerns have not been addressed; or
- There are concerns that the auditor does not meet the independence requirements.
Results from the ASIC Review of 31 December 2016 financial reports
ASIC announced the results from its review of the 31 December 2016 financial reports of 90 listed and other public interest entities. In this review ASIC observed that it continues to identify concerns regarding the assessments of the recoverability of the carrying values of assets.
Other areas of concern noted in these financial reports included impairment testing, consolidation accounting, amortisation of intangible assets, revenue recognition, tax accounting and estimates and accounting policy judgements.
Relevance of the audit inspection program report
ASIC also released their audit inspection results for 2015-2016 and an associated information sheet Audit Quality – The Role of Others where they remind directors that they are responsible for the quality of the financial reports. They indicate that audit quality supports financial reporting quality and it is in the interests of the directors and the audit committees to support the audit process in this regard.
ASIC focus areas for 2017
ASIC continues to remind directors to seek explanation and advice supporting accounting treatments and challenge management appropriately. The focus areas for 2017, where directors should be extra-diligent, are as follows:
- Impairment testing and asset values
- Revenue recognition
- Expense deferral
- Tax accounting
- Off-balance sheet arrangements
- Estimates and accounting policy judgements
- Impact of the new revenue, financial instruments, lease and insurance standard.
Also, John Price, ASIC Commissioner, was quoted in the Australian Financial Review on 5 July 2017 ‘Company directors to make uncomfortable tax disclosures’ in relation to tax being a focus area for 2017, as follows:
“Directors should consider the appropriate treatment of uncertain and disputed tax positions in financial reports, including whether there is a need to recognise a liability or disclose a contingent liability."
A new interpretation was issued by the IASB in June 2017 on this matter [IFRIC 23 Uncertainty over Income Tax Treatments], and this will shortly be issued by the AASB. This will provide directors and management with additional guidance on this matter. Although not technically applicable until 2019, we encourage directors and preparers to refer to this guidance as soon as possible given that it provides clarity over the current accounting requirements.
Regulatory Guide 260 Communicating findings from audit files to directors, audit committees or senior management [RG 260]
Results from ASIC review of 31 December 2016 financial reports [MR 17-219]
Audit inspection program report for 2015-2016 [Report 534]
ASIC calling on preparers to focus on the quality of financial report information [MR 17-162].