This article appeared in Charter Magazine February 2008.
Auditors have had much to grapple with in the last few years since the introduction of the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosures) Act 2004.
In particular, auditors have faced a more vigilant corporate regulator. On that score, ASIC’s views about the "quality" of the profession were made clear in its September 2005 and August 2006 reports to the Financial Reporting Council about the results of its audit inspection program.
While ASIC considered that the performance of the Big Four was better than that of the mid-tier firms, it also said that “there is a need to further improve the quality of audit work being done on the financial statements of entities in Australia by both the Big Four and the Mid-Tier Firms.” One of the significant weaknesses detected by ASIC across the board was the inadequacy of audit documentation.
What does this mean for auditors? The answer is simple: while ASIC will perform an “educative role” to assist the profession to meet appropriate standards, it will have no hesitation in exercising its regulatory powers in appropriate circumstances – and this means the referral of an auditor to the Companies Auditors and Liquidators Disciplinary Board (CALDB) for disciplinary action.
The CALDB has the responsibility of dealing with applications made by either ASIC or APRA concerning the performance of auditors (and liquidators) under the ASIC Act. It has the power to suspend or cancel the registration of auditors, to admonish or reprimand auditors or to require specific undertakings.
The CALDB is a peer review body consisting of members with particular expertise in the fields of law, auditing and accounting, insolvency, business and commerce, financial markets and economics.
It is an administrative body and not a court. In Albarran v Members of the Companies Auditors and Liquidators Disciplinary Board and Gould v Magarey & Ors (2007) 234 ALR 618, the High Court of Australia ruled that the CALDB was not a body that exercised the judicial power of the Commonwealth, despite having many features of a court and the power to "punish". The appellants were liquidators but the decision is equally applicable to auditors.
The CALDB is led by a Chair and Deputy Chair both of whom must be a lawyer of at least five years standing.
The most regularly invoked jurisdiction of the CALDB is that found in s1292 (1) (d) Corporations Act 2001 (Act).
The section provides that:
"The Board may, if it is satisfied on an application by ASIC…for a person who is registered as an auditor to be dealt with under this section that…
(a) – (c)…; or
(d) the person has failed, whether in or outside this jurisdiction, to carry out or perform adequately and properly:
(i) the duties of an auditor; or
(ii) any duties or functions required by an Australian law to be carried out or performed by a registered company auditor;
or is otherwise not a fit and proper person to remain registered as an auditor;
by order, cancel, or suspend for specified period, the registration of the person as an auditor."
Section 1292 (1) (d) focuses on whether there has been a failure by the auditor to adequately or properly carry out or perform the duties or functions required to be performed by an auditor. Whether an auditor has performed to the requisite standard is a question of fact and degree that requires the application of a standard to the acts or omissions alleged by ASIC to be relevant to the audit in question: Dean-Willcocks v Companies Auditors and Liquidators Disciplinary Board (2006) 59 ACSR 698.
The High Court in Albarran’s case also accepted, that the words "adequately and properly" import notions of judgment by reference to professional standards rather than pure questions of law and that the words "otherwise not a fit and proper person" expand and add to what precedes them but do not introduce a discrete subject matter.
Section 1292 (1) (d) (i) and (ii) are different in effect even though the allegations ASIC may make against an auditor may straddle both sub-paragraphs of the section.
In Goodman v Australian Securities and Investments Commission (2004) 50 ACSR 1, ASIC contended that Goodman, in conducting a half yearly review of an ASX listed entity, had breached s1292 (1) (d) (i) and (ii). Goodman argued that in conducting the review under section 309 (4) of the Act he was not carrying out or performing the duties of an auditor but was carrying out or performing a duty or function required by the section. Therefore, the duty to review the half yearly financial report was a duty of a limited nature and did not call for compliance with non-statutory standards such as auditing standards. As ASIC’s case against him was a failure to comply with auditing standards, it could not succeed.
The Court rejected this approach even assuming the correctness of Goodman’s characterization of the duties he performed. Reference to professional standards (such as auditing standards which at this time were not legally enforceable) were relevant to the judgment to be made by the CALDB in determining whether the auditor had performed adequately and properly the duty or function in question.
ASIC commences an application to the CALDB by filing a Statement of Facts and Circumstances (SOFAC). The SOFAC should set out all the facts on which ASIC relies, the contentions and arguments drawn from those facts and any issues of law or legal interpretation to be put at the hearing. The SOFAC should also include all documentary evidence supporting the facts and contentions.
Upon receipt of the SOFAC, the Registrar of the CALDB will advise the auditor that the Application has been received and provide a copy of the CALDB’s Manual of Practice and Procedure, Practice Note on Costs, Mediation Guidelines and a pro-forma timetable without dates.
A pre-hearing conference with the parties and advisers will then be convened. At the pre-hearing conference, the parties are expected to reach agreement on the matters to be dealt with before the hearing and the dates by which those matters are to be attended to. As a general rule, the procedural timetable will be tight.. The parties may endeavour to reach an agreed position without a hearing through mediation, either privately or with the assistance of the CALDB.
The auditor responds to the SOFAC by filing a Response. The parties may decide to meet after this to refine the issues in dispute although this is not mandatory. If ASIC decides that it needs to amend the SOFAC in light of the Response, it will be given time to do so.
ASIC and the auditor may elect to call expert opinion evidence in support of their positions. If an expert is called, they must follow the CALDB’s Guidelines for expert evidence.
Once the parties have complied with the timetable, a Notice of Hearing will be sent to the parties. The parties are expected to file a Certificate of Readiness 14 days before the hearing.
The Chair determines the composition of a sitting panel. It will either be a three member or five member panel. The Chair or the Deputy Chair must be the chair of the sitting panel with the other panel members consisting of equal numbers of accounting and business members.
Applications to the CALDB are generally divided into administrative matters (such as failure to lodge an annual statement under s1287A, ceasing to be a resident of Australia and so on) and conduct matters (such as failure to comply with a condition of registration or a s1292 (1) matter).
CALDB hearings are mostly held in private. A hearing before the CALDB is to be conducted with minimal informality and technicality and as expeditiously as possible. The CALDB is not bound by the rules of evidence and must observe the rules of natural justice. It has the power to summon witnesses and take evidence.
Parties before the CALDB are permitted legal representation.
The CALDB is empowered to reject an Application.
However, if the CALDB makes an adverse finding against an auditor, either at the conclusion of the hearing or more usually after reserving its decision, the CALDB will provide the parties with further time, usually successive periods of seven days, to make submissions on orders, penalty and costs.
Decisions of the CALDB may be appealed to the Administrative Appeals Tribunal or the Federal Court, depending on the appeal procedure selected.
Findings of the CALDB are published in the Commonwealth Gazette but the reasons for its decisions are not published.
Auditors are very much in the firing line these days. If a company collapses or shareholders lose money, the performance of the auditor will be looked at closely. Inevitably, ASIC will not be far behind. Constant reviews of audit procedures and processes and warnings and taking note of ASIC pronouncements and regulatory action must be the order of the day. If not, a visit to the CALDB may be in store!
For further information, please contact Stephen Newman on (03) 9608 2219 or s.newman@cornwalls.com.au
