Navigating the complexities of financial reporting and audit requirements is a challenging but essential task. The Australian Securities and Investments Commission (ASIC) conducts surveillance on Australian entities’ full-year financial reports under its financial reporting surveillance program. The program includes listed entities, public interest entities, ‘grandfathered’ large proprietary limited companies, and from 30 June 2024 superannuation funds.
With ASIC setting its focus areas for the financial year ending 30 June 2024, it’s important for entities covered by the program to understand and prepare for these expectations to ensure their financial statements are both accurate and compliant.
ASIC Commissioner Kate O’Rourke said, ‘We expect preparers, directors and auditors to pay particular attention to these focus areas in a collective effort to improve financial reporting and audit quality.’
This guide delves into ASIC’s focus areas, emphasising the importance of high-quality financial reporting, the directors’ pivotal role, and specific challenges entities may face.
ASIC’s focus areas can be found on its financial reporting and audit focus areas page. It details the following enduring and new focus areas that ASIC will focus on when it conducts its reviews:
Enduring focus areas for financial report reviews
Challenges in Asset Valuation and Impairment Testing
Asset valuation and impairment testing remain perennial challenges, accentuated by the current economic volatility. Directors, preparers, and auditors must focus on the appropriateness of the assumptions underlying the recoverable amount of non-financial assets, including goodwill and intangible assets. With ASIC’s increased scrutiny, businesses need to ensure their valuation methods are robust, supported by reasonable and supportable assumptions, and cross-checked for reliability. Understanding the intricate details of market capitalisation and its role as an impairment indicator or in valuation cross-checks is also critical.
Understanding Provisions and Their Adequacy
Provisions represent another area requiring meticulous attention. The need for and adequacy of provisions—be it for onerous contracts, leased property make good, mine site restoration, or financial guarantees—must be carefully considered and justified. This includes a forward-looking approach to identifying potential liabilities and ensuring that provisions are not only adequate but also accurately reflected in the financial statements.
Identifying and Documenting Subsequent Events
Subsequent events, those occurring after the reporting period but before the financial report is finalised, can significantly impact a business’s financial position and performance. ASIC emphasises the importance of reviewing these events to determine their effect on the financial statements and ensuring they are adequately disclosed. This underscores the need for businesses to have processes in place to identify, evaluate, and document such events promptly and accurately.
Enhancing Transparency with Comprehensive Disclosures
Disclosure practices are under the microscope, with ASIC calling for enhanced transparency in financial reporting. This includes a deeper dive into the uncertainties surrounding asset values and estimates, ensuring that financial reports provide clear, specific disclosures that reflect the entity’s unique circumstances. Furthermore, the Operating and Financial Review (OFR) should tell the entity’s story, providing insights into the drivers of financial results, risks, management strategies, and future prospects. This narrative should be supported by factual, clear, and comprehensive information that enables investors to understand significant factors affecting the entity and its value.
New Focus Areas for ASIC in 2024: A Closer Look
Introducing Mandatory Audit Reviews for Enhanced Compliance
A noteworthy addition to ASIC’s program is the introduction of mandatory reviews of auditors’ compliance with ethical and independence standards. This initiative is designed to reinforce the quality of financial reporting and auditing by ensuring that auditors adhere to the highest standards of professional conduct. The focus on compliance with the Auditing Standard ASQM 1 underscores ASIC’s dedication to fostering a culture of quality management within audit firms.
Climate Reporting: Preparing for Mandatory Requirements
ASIC’s expanded program also touches on the critical area of climate reporting. With the Australian Government moving towards mandatory climate reporting requirements, ASIC is championing voluntary climate reporting in the interim. This proactive encouragement aims to ensure that directors and assurance providers are well-prepared for the forthcoming regulatory changes, highlighting the significance of transparency in disclosing material climate-related risks.
The Importance of Ethical Standards in Financial Auditing
Ethical standards play a pivotal role in the credibility of financial audits. ASIC’s focus on reviewing auditors’ compliance with ethical and independence standards is a testament to the regulator’s commitment to upholding the highest ethical standards in financial reporting and auditing. By emphasising the need for auditors to adhere to these standards, ASIC is reinforcing the foundation of trust that underpins investor confidence in Australia’s financial markets.
Consolidated Entity Disclosure: What It Means for Your Business
The requirement for a consolidated entity disclosure statement in financial reports is another key aspect of ASIC’s expanded program. This new mandate requires public companies to provide detailed information about all consolidated entities at the end of the financial year, including their names, ownership interests, place of incorporation, and tax residency. For Australian businesses, this translates to a greater level of transparency and accountability in financial reporting.
The Role of Proactive Financial Reporting and Audit Surveillance
ASIC’s commitment to enhancing the quality of financial reporting and auditing is evident from its proactive approach to surveillance. By closely monitoring the financial reports of a wide array of entities, ASIC aims to identify and rectify any discrepancies or instances of non-compliance before they can adversely affect investors or the market at large. This proactive stance not only aids in maintaining the integrity of Australia’s financial markets but also supports businesses in upholding high standards of financial reporting and auditing.
By understanding these focus areas and preparing accordingly, entities can enhance the quality of their financial reporting, contributing to market integrity and investor confidence. It requires a concerted effort from directors, preparers, auditors, and all stakeholders involved in the financial reporting process to meet these expectations and navigate the complexities of today’s economic landscape successfully.
Automic Finance is a Practice Entity Member with CAANZ. For detailed insights and tailored solutions, contact us at jules.grove@automicgroup.com.au.
