ASIC's new report sparks compliance check

Lockton has released insights following the Australian Securities and Investments Commission’s (ASIC) latest report, “Oversight of Financial Reporting and Audit 2023-24” (REP 799).

The report pointed to significant compliance challenges for Australia’s financial services sector, underscoring the importance of risk management and professional indemnity (PI) insurance as ASIC steps up its regulatory focus.

ASIC findings in financial reporting and audit practices

ASIC’s audit oversight, covering the fiscal year ending June 2024, reviewed 188 financial reports and found material issues in 25 of these cases, leading to AU$1.88 billion in adjustments. The findings indicate gaps in reporting standards, which ASIC sees as critical to maintaining market integrity.

The regulator also raised concerns about audit quality, citing issues across 12 files from nine firms. These gaps suggest that audit practices in certain firms may not meet the required standards.

In response, ASIC – which also seeks feedback on new sustainability reporting standards – is increasing its focus on auditor independence, especially concerning conflicts of interest, and is implementing enhanced enforcement measures.

The report outlined ASIC’s use of powers, including proceedings through the Companies Auditors Disciplinary Board (CADB), infringement notices, and enforceable undertakings to uphold compliance standards.

Best practices for accounting and advisory firms

Lockton advises firms involved in financial reporting and auditing to strengthen their compliance practices in response to ASIC’s findings. Key recommendations include:

• improving disclosure standards: ensure financial reports transparently address significant risks, including asset impairments and revenue recognition practices, to meet ASIC’s expectations;
• complying with audit standards: firms should strengthen their audit protocols to align with ASIC’s guidelines on independence and conflict management; and
• focusing on quality control and continuous improvement: maintaining a quality management framework that evolves with regulatory changes can reduce enforcement risks and demonstrate a proactive approach to compliance.

Lockton said implementing these practices can help firms meet ASIC’s standards and may also support their standing when applying for or renewing PI insurance policies.

The role of PI insurance in managing regulatory risk

Given ASIC’s increased scrutiny, Lockton suggests that firms reassess the role of PI insurance as part of their overall risk management strategy.

According to the firm, a well-structured PI policy can help firms by:

• reducing financial impact: PI insurance can offset expenses associated with legal claims, regulatory actions, or professional negligence issues linked to audit and reporting requirements;
• protecting reputation: financial coverage from PI insurance can aid firms in managing reputational risks and financial stability during regulatory reviews or investigations; and
• supporting operational continuity: with PI insurance, firms can maintain their business operations and financial stability even during challenging regulatory or legal situations.

Preparing for a shifting regulatory landscape

ASIC’s recent findings reflect a heightened regulatory environment that requires transparency, accountability, and a focus on proactive risk management.

Lockton advises that firms in the financial services sector review their risk management strategies and PI insurance policies to ensure they are prepared for evolving regulatory expectations.