ASIC homing in on valuations in auditor independence crackdown

The corporate regulator has outlined some of its focus areas regarding auditor independence following the release of its report on auditor independence last year.

Appearing before the Joint Committee on Corporations and Financial Services on Friday, ASIC said valuation practices in financial reporting and audit practices were critically important given the rise of private markets in recent years.

ASIC commissioner Kate O’Rourke said ASIC was paying close attention to both behaviours and actions by auditors in relation to independence, including their approach to valuations.

O'Rourke said ASIC was particularly interested in valuations in the private credit space.

"An area that we're focused on is private credit. When we do see auditors going into funds, whether they be super funds or other managed investment schemes, the question of appropriately testing the valuation of assets that sit within those funds is incredibly important," she said.

"It's sometimes very difficult as sometimes there's not easily accessible information but auditors [need] to take that step of trying to independently value it, rather than relying on the valuations of either the fund managers themselves or someone else who is a related party to that situation."

A report released by ASIC in November on private credit surveillance for retail and wholesale funds identified poor valuation practices among some private credit funds which could potentially impact entry and exit prices, performance and fees.

"Most funds we reviewed did not have effective separation between the investment committee approving loans and the representatives responsible for monitoring loan assets’ performance and value after allocation into a fund, or for overseeing independent third-party valuation of loans," the ASIC report read.

Speaking at the same Committee hearing, ASIC Commissioner Simone Constant emphasised the importance of valuations in financial reporting and audit and assurance practices in an "era of rising private markets".

"We always say private markets done well, are good for the economy, but to have confidence in private markets, these practices are critical," she said.

An ASIC review of auditor independence last year found that many audit firms, of all sizes, were unable to effectively demonstrate compliance with independence and conflict-of-interest obligations.

The findings, outlined in Report 817 Building trust: Auditor compliance with independence and conflict of interest obligations (REP 817), revealed a number of likely breaches of prescriptive independence requirements.

The review found that 15 auditors were likely in breach of rotation requirements, relationship prohibitions, or of providing a prohibited non-audit service.

Nine auditors had also failed to demonstrate how they complied with mandatory rotation requirements that prevent auditors from auditing a listed client for more than five consecutive years.

The report also stated that five auditors appeared to hold prohibited relationships with clients, including one auditor who was also an officeholder of their client.

ASIC said it would conduct additional inquiries into potential breaches identified during the review.

O’Rourke said that auditor independence was fundamental to audit quality and integrity.

"A strong focus on independence not only builds trust, it also fosters more rigorous challenge in the audit process thereby enhancing the preparation of high-quality financial information," she said.