ASIC reviewed the financial reports of 200 proprietary companies required to lodge financial reports for years ended 30 June 2012 and 31 December 2012. The review focused on large proprietary companies. The main findings were as follows:
1. Special purpose financial reports
Some 75% of the companies had prepared special purpose financial reports on the basis that the company was not a reporting entity. Many of these companies had significant numbers of employees, suppliers and customers.
Companies are not permitted to prepare special purpose financial reports that do not comply with all of disclosure requirements of accounting standards where it is reasonable to expect that the company has actual or potential users dependent on general purpose financial reports who are unable to demand all of the information that they require.
Preparers of financial reports should have regard to SAC 1 Definition of the Reporting Entity in identifying potential users of financial reports.
Auditors are required to form an opinion as to whether a financial report complies with accounting standards. This includes forming their own conclusion as to whether a company has been appropriately classified as a non-reporting entity, including whether it is reasonable to expect that the company has users dependent on general purpose financial reports and who are unable to demand all of the information that they required. Auditors should apply professional scepticism in coming to a view on this issue.
2. Recognition and measurement
As outlined in ASIC Regulatory Guide 85 Reporting requirements for non-reporting entities (RG 85), financial reports of proprietary companies are required by the Corporations Act and accounting standards to follow the recognition and measurement requirements of accounting standards, whether or not they are reporting entities.
We raised questions on the accounting treatments of a number of companies and, in most cases, were satisfied with the information and explanations provided. We did not identify any companies that had deliberately chosen not to comply with the recognition and measurement requirements of the accounting standards.
However, a small number of companies reviewed had not adequately impaired goodwill and/or other non-current assets.
3. Other matters
Other matters identified in our reviews included:
- lack of going concern disclosure, particularly where the entity is loss-making, has negative operating cash flows and/or is reliant on another party for continuing support;
- lack of accounting policies specific to the entity, including revenue recognition, joint venture arrangements, and the valuation basis for non-current assets such as property, plant and equipment; and
- purporting to rely on ASIC’s Class Order 98/1417 for relief from the audit requirements of the Corporations Act, even though they did not meet the financial or other conditions for use of that relief.
Lodgement of financial reports
Section 319 of the Corporations Act generally requires large proprietary companies and those small proprietary companies that are controlled by foreign companies to lodge financial reports annually with ASIC.
ASIC has a regular compliance program to identify and contact proprietary companies that appear to have failed to lodge financial reports as required by the Act. Where appropriate, we issue companies with a notice to comply. ASIC also has a program of either seeking a civil order from a court or referring a brief of evidence to the Commonwealth Director of Prosecutions for prosecution if there is a breach of the law.
Auditors should be mindful of their obligation to report suspected contraventions of the Corporations Act to ASIC in certain circumstances. Further guidance for auditors in relation to reporting the non-lodgement of financial reports to ASIC appears in ASIC Regulatory Guide 34 Auditor’s obligations: reporting to ASIC (RG 34).