The corporate sector includes auditors and liquidators, who are subject to separate fees and levies. The corporate subsectors include corporations (listed corporations, unlisted public companies, large proprietary companies and small proprietary companies), auditors of disclosing entities, registered company auditors, and registered liquidators.

In 2019–20, our work in this sector focused on the healthy operation of capital markets by promoting best practice corporate culture and conduct and ensuring that investors are treated fairly in corporate transactions. This included targeting corporate governance practices and the integrity of financial reporting. We also focused on responding to the impact on businesses and consumers of the COVID-19 pandemic.

Capital raising initiatives in the COVID-19 pandemic environment

On 31 March 2020, ASIC announced it would help listed companies raise capital quickly by giving temporary relief to enable certain ‘low doc’ offers (including rights offers, placements and share purchase plans) to be made to investors, even if they did not meet all the usual requirements. We did this to assist companies that needed to raise funds urgently because of the impact of the COVID-19 pandemic.

Without this relief, some listed companies would have been prevented from using ‘low doc’ offers because they were suspended from trading for longer than the Corporations Act permitted, while they assessed the impact of the COVID-19 pandemic on their business and prepared for a capital raising.

ASX also granted a temporary waiver to allow companies to raise an increased amount of capital without shareholder approval. After consultation with a wide range of capital market participants and shareholder associations, we secured changes to these rules to provide enhanced disclosure for placement allocations and share purchase plans. These changes reflected our expectation that directors make fair and transparent fundraising decisions in the best interests of the company.

Mining and exploration initial public offerings

In December 2019, we reviewed the initial public offering (IPO) process for small-cap and micro-cap mining and exploration listings. Our observations from that review were published in Report 641 An inside look at mining and exploration initial public offers.

We found that advisers often have significant influence in these listings and in relation to the governance of the company itself. There was often poor management of conflicts of interest resulting from multiple roles played by some advisers. In some cases, we also identified preferential treatment of investors who had a pre-existing relationship with the adviser.

Our report included guidance and best practice recommendations for lead managers and directors to address the concerns we identified. These recommendations were complemented by a range of ASX Listing Rule changes.

We continue to monitor conduct in relation to IPOs of securities in mining and exploration companies and we intervene when necessary.

Improving audit quality

Auditors play a vital role in underpinning investor trust and confidence in the quality of financial reports, which provide important information for investors and others who make decisions based on those reports.

ASIC is taking a broader, more intensive supervisory and enforcement approach to our work program on audit, which includes:

• reviewing how conflicts of interest are managed in the six largest audit firms, as well as firm culture, governance and accountability mechanisms in relation to audit quality, and firm talent for quality audits
• analysing the processes that underpin audit quality and the effectiveness of director oversight of financial reporting – in particular, the use of root cause analysis in audit firms, as identifying the root causes of an adverse finding enables corrective action to be taken
• increasing transparency by publishing the level of adverse findings for large audit firms, as well as broader measures and indicators of audit quality
• implementing our ‘Why not litigate?’ approach in relation to auditor conduct matters.

This year, we continued our review of the financial statements of listed and other public interest entities and the audit files of a number of these entities.

Our inspection findings showed that more needs to be done to improve audit quality: see Report 648 Audit inspection report for 2018–19 and our supplementary report containing a broader group of audit quality measures and indicators: Report 649 Audit quality measures, indicators and other information: 2018–19. These were jointly released on 12 December 2019.

In October 2019, we made a submission to the Parliamentary Joint Committee Inquiry on the regulation of auditing in Australia and appeared at four hearings. The Inquiry is due to report by 2 December 2020.

COVID-19 pandemic initiatives – financial reporting and audit

Financial reporting and audit processes of many companies were affected by the COVID-19 pandemic. ASIC helped companies, directors and auditors meet their reporting and audit obligations by:

• maintaining regular contact with audit firms, accounting bodies, the Australian Institute of Company Directors, standard setters and other regulators internationally to monitor developments
• outlining reporting and audit focus areas, including asset values, liabilities, solvency and going concern, as well as disclosures on uncertainties, key assumptions, underlying drivers of results, strategies, risks and future prospects
• providing an additional month for listed and unlisted entities to lodge audited financial reports for balance dates to 7 July 2020
• adopting a ‘no action’ position where annual general meetings of public companies for year ends up to 7 July 2020 are held seven months, rather than five months, after year end
• providing information on our website to address common questions about the reporting and audit obligations of companies, directors and auditors, given the impact of the pandemic
• refocusing our financial reporting surveillances and audit inspections to promote informing markets about the impact of the pandemic on entities through audited financial reports
• some changes to our regulatory activities to ease the burden on companies, directors and auditors who may be under pressure due to remote work and other impacts of the pandemic.

Changing liquidator behaviour

In 2019–20, ASIC focused on improving the behaviour of registered liquidators in relation to independence, remuneration and investigation of illegal phoenix activity.

Independence: Registered liquidators must provide to creditors, and lodge with ASIC, a Declaration of Relevant Relationships and Declaration of Indemnities (DIRRI), a key document considered by stakeholders to assess liquidator independence.

We identified 39 registered liquidators who were not lodging their DIRRIs. Some had previously been contacted by ASIC regarding non-lodgement, but most were first-time non-lodgers. We requested that all outstanding DIRRIs be lodged and issued five formal directions to the liquidators with whom we had previously corresponded. Liquidators reviewed their internal procedures to prevent this in future.

Remuneration: We worked with registered liquidators in relation to how changes to the law introduced in 2017 applied to seeking approval of remuneration passed on papers – that is, without convening a meeting of creditors. A misunderstanding about how the law applied meant that some resolutions were invalid. ASIC worked with the liquidators affected to rectify the invalid resolutions, ensuring that they obtained valid resolutions and reviewed their processes and procedures to ensure future compliance with the Corporations Act.

Investigation of illegal phoenix activity: Following the changes to the law in 2017, where ASIC suspects possible illegal phoenix activity, it can appoint a reviewing liquidator to inquire, investigate and report findings to us objectively and independently. The appointment of a reviewing liquidator does not mean that the liquidator subject to review has done anything wrong.

To date, we have appointed 10 reviewing liquidators to 22 external administrations. We have observed positive changes in the behaviour of the liquidators under review, including:

• improved file management processes
• focused investigations, including performing historical company searches
• seeking ASIC assistance via the External Administration Assistance program and/or the Assetless Administration Fund
• improved timeliness of reporting and finalisation of external administrations
• better record keeping, particularly of decisions made in the course of their work.

Assetless Administration Fund reforms – transition to Grant Connect

The Assetless Administration Fund (AA Fund) is a Commonwealth grant scheme administered by ASIC. Funds allocated for 2019–20 were $7.083 million. Where a registered liquidator suspects illegal phoenix activity and other serious misconduct, but there are no assets to fund investigations and reporting, the AA Fund supports registered liquidators to investigate and report misconduct to ASIC. In some cases, it also funds legal action to recover assets.

ASIC conducted a series of workshops with registered liquidators to raise awareness of the type of funding they can apply for, including for asset recoveries, and the eligibility criteria for that funding. We obtained valuable feedback to help improve how we administer the AA Fund.

Changes implemented include preparing for the transition of grants to the Grant Connect website and platform, as well as new grant guidelines that simplify the definition of ‘assetless’, outline the potential staged approach and the types of tasks that may be funded under the Asset Recovery stream, and clarify the assessment criteria for funding under that stream.

This year, ASIC also migrated applications for the AA Fund onto ASIC’s new Regulatory Portal, which pre-fills some data, improves collection of information to assist with the assessment of applications, and improves tracking of the status of applications and transactions.

Amanda Young – cancellation of registration as a liquidator

On 2 September 2019, following an ASIC investigation into alleged misappropriation of funds, we issued Amanda Young with a notice to show cause why she should remain registered as a liquidator.

Ms Young had agreed to voluntarily suspend her registration on 18 December 2018 pending our investigation into allegations she had misappropriated funds totalling approximately $238,000 from four liquidations.

Ms Young failed to respond to our notice and we referred her to a disciplinary Committee convened on 1 November 2019. On 3 June 2020, the Committee concluded that Ms Young had misappropriated the funds, had improperly used her position, had falsified books, and was not a fit and proper person to be registered as a liquidator.

The Committee concluded that Ms Young’s registration as a liquidator should be cancelled. The Committee’s decision noted that Ms Young ‘took deliberate steps to conceal her actions, including falsifying official documents and misleading and deceiving her colleagues’. The Committee recognised that a suspension would be inappropriate and contrary to the public interest, due to the repeated misconduct, Ms Young’s failure to express contrition or remorse, and the importance of protecting the public and deterring others from similar conduct.

Registered liquidators hold other people’s money when carrying out their duties. Maintaining trust is critical for the integrity of the financial system and confidence in the corporate insolvency regime.

Helping protect small business

Where necessary, we take action against companies, directors and other officeholders who fail in their duties. By doing so, ASIC works to create a level playing field. This year, ASIC recorded 322 small business-related outcomes.

Table 3.7.1 Small business enforcement outcomes by misconduct and remedy type

As at 1 July 2020, ASIC had 168 small business-related criminal cases underway against persons or companies.

ASIC also works to combat illegal phoenix activity. This year, of the 61 administrative actions in Table 3.7.1, 10 involved disqualification of directors where there were clear indicia of illegal phoenix activity.

As part of our focus on this type of misconduct, we also undertook surveillances of 41 high-risk phoenix subjects, assisted liquidators to obtain books and records, and ensured that directors comply with their obligations through our External Administration Assistance program.

Further details of prosecutions are set out in Chapter 2.