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Australian corporate regulator adjusts its strategic priorities to deal with the pandemic

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The Australian Securities and Investments Commission (ASIC) recently released its Corporate Plan for 2020-24, recalibrating its regulatory priorities in the wake of the COVID-19 pandemic. ASIC’s Chair, James Shipton, emphasised that the quality of financial reports is “more important than ever” to inform investors and preserve market confidence. Moreover, a recent Enforcement Report confirms ASIC’s dedication to its new ‘why not litigate?’ approach, which has emboldened its enforcement team to take on increased litigation risk to deter poor corporate behaviour and misconduct.

Readjusting priorities during the pandemic

ASIC’s Corporate Plan 2020-24 recognises that a significant portion of its work in the near term will be addressing the impact of the COVID-19 pandemic. ASIC has outlined five strategic priorities relating to COVID-19. These include: (1) protecting consumers from exploitation and predatory behaviour; (2) identifying and disrupting the most egregious corporate misconduct; (3) maintaining financial system resilience and stability; (4) supporting Australian business responses to the damaging effects of the COVID-19 pandemic; and (5) building ASIC’s organisational capacity.

Focus on financial reporting

ASIC has been stressing the importance of fair and accurate financial reporting in light of the pandemic and its adverse impact on many businesses, expanding its pre-pandemic ruminations on this issue (covered in a previous blog post in February 2020).

In particular, ASIC has outlined several areas of focus for directors, preparers and auditors regarding asset values, including property values and expected credit losses on loans and receivables. ASIC recommends that businesses consider factors which may adversely affect the values of commercial and residential properties. These factors include Covid-induced changes in office work practices affecting future space requirements of tenants, changes in consumer preferences for online shopping, and shifts in the financial situation of existing tenants. Moreover, in terms of determining expected credit losses, companies should disclose estimation uncertainties and key assumptions, especially given that past models may not be representative of current expectations.

ASIC’s recent review of 31 December 2019 financial reports singled out asset values and related disclosures as a crucial area of focus, particularly given the estimation uncertainty associated with many non-financial asset valuations in the COVID-19 economic climate.  ASIC reiterated that companies must not make “unrealistic and unsupportable assumptions” about future cash flows and the recoverability of the carrying values of assets. The assets of concern include goodwill, exploration and evaluation expenditure, and property, plant and equipment.

The key tips from ASIC’s review are summarised in the following diagram:

Other important priorities

In its Corporate Plan 2020-2024, ASIC also emphasised that it will continue to focus on other important priorities that “must progress alongside [its] pandemic-related activities”.  These longer-term focus areas include deterring poor corporate behaviour and misconduct through ASIC’s ‘why not litigate?’ discipline and driving cultural change using all of its regulatory tools, to their full force. The strategy focuses on increased and accelerated court-based outcomes overseen by the ASIC Office of Enforcement.

ASIC’s recent enforcement record

ASIC’s Enforcement Update for the period from July to December 2019 has underscored its commitment to increasing enforcement activity.  During that period, ASIC’s investigations resulted in 279 criminal charges being laid, which is a rise of 300% from the previous six months and is the largest six-month increase in ASIC’s history. Concurrently, there was a jump in the number of individuals charged in criminal proceedings and custodial sentences imposed (including eight individuals imprisoned).

Further, there was a distinct shift away from non-court-based enforcement options. There were no enforceable undertakings recorded in the second half of 2019. These undertakings between individuals or companies and the regulator, which do not require an admission of liability, were once prevalent in ASIC’s enforcement activity. However, after severe criticism by the Hayne Royal Commission and the adoption of the ‘why not litigate?’ approach, it is not surprising that ASIC has all but ceased its use of enforceable undertakings. Similarly, “banning orders”, which prevent individuals from providing financial or credit services, also fell from 103 in first half to 48 in the second half of 2019.

ASIC’s new direction

Other notable trends to come out of the ASIC Enforcement Update include a drop in the number of investigations commenced by the regulator, from 77 in the first half to 60 in the second half of 2019. Further, and related to the financial reporting focus described earlier, auditor misconduct has been a high priority for ASIC, with a 250% increase in actions against auditors in the six-month period.

Edward is grateful to Georgina Calvert, paralegal, for her assistance in preparing this post.