AUTHORS

Ralph Martin
Ralph Martin
National Technical Director
Perth
Ross Shillingford
Ross Shillingford
Manager
Melbourne

ASIC ramps up enforcement activity on companies which fail to lodge financial statements.

Included within the Australian Securities and Investments Commission’s (ASIC) 2023 Corporate Plan list of regulatory and enforcement projects was a notable focus on surveillance and enforcement procedures against companies (and AFS licensees) who do not comply with their obligations to lodge financial reports with the regulator.ASIC surveillance increase

ASIC Enforcement

As noted above ASIC’s 2023 Corporate Plan outlines a new focus on surveillance and enforcement procedures against companies (and those responsible) who do not comply with their obligations to lodge financial reports.

Between 1 July 2022 and 30 June 2023, ASIC has prosecuted 51 companies and issued over $800,000 in penalties for failing to lodge financial reports, hold annual general meetings (AGMs) and to maintain the required number of directors and resident directors. Companies were prosecuted in both Local and Magistrates’ Courts by ASIC. Fines ranged between $2,000 and $123,000 were issued in conjunction with convictions to the companies, with the regulator also naming and shaming entities in an orchestrated press release.

ASIC has continued to focus enforcement activity in this area, recently obtaining a judgement against a mining company for failure to lodge financial reports for the last five years. The Company was fined $100,000.

The fines and convictions in the above instance were limited to the companies as entities and not to the officers. The 2023 action however may be interpreted as a warning shot from ASIC, and should not be seen as the final extent of its potential reach current considering political pressure on the regulator to “show its teeth”. As outlined the Corporations Act clearly highlights director’s responsibilities for financial reporting, with prosecution of individuals who have contravened their Corporations Act responsibilities withheld only at the regulator’s discretion.

ASIC have revealed that new systems are in development to increase capabilities to identify non-compliance. This includes cross referencing databases such as ATO filings to identify companies that may be large proprietary companies and therefore required to lodge financial reports.

The Corporations Act Requirements to lodge financial statements

The default requirements of the Corporations Act 2001 are that large proprietary companies must:

  • annually prepare a financial report (which includes the financial statements, the notes to the financialare you at risk of AISC enforcement statements, and the directors’ declaration) [s292(1)]
  • annually prepare a directors’ report [s298]
  • appoint an auditor and have the financial report audited [s301(1)]
  • lodge the financial report with ASIC within 4 months after year-end [s319(1),(3)(b)]
  • distribute the financial report to members within 4 months after year-end [s314, 315(4)]

A proprietary company is classified as large if it satisfies any two of the following three criteria, which must be calculated on a consolidated basis and in accordance with Australian Accounting Standards.

  • The consolidated revenue for the financial year of the company and the entities it controls (if any) is $50 million or more;
  • The consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) are $25 million;
  • The company and the entities it controls (if any) have 100 or more employees (full-time equivalent) at the end of the financial year.

A small proprietary company is generally not required to prepare financial reports, unless directed to by ASIC, or directed to by shareholders; and is generally not required to prepare and lodge audited financial reports annually unless the company is controlled by a foreign company.

There are various exemptions available from preparation of financial statements and/or audit requirements for some proprietary companies. These are summarised in our guide to Reporting Obligations for Australian Proprietary Companies.

All public companies, companies limited by guarantee (unless small), registered managed investment schemes and other disclosing entities as prescribed by ASIC are also required to comply with the default reporting requirements under the Act.

Director’s responsibilities

Directors have a duty of care and diligence under both general law and the Corporations Act which are not limited by their particular background knowledge and experience. Whist ASIC have previously publicly stated that “directors do not need to be accounting experts” the regulator clarifies that directors must have an appropriate level of financial knowledge, including appropriate knowledge of financial reporting and obligations as per the Corporations Act.ASIC risk

Under Section 344 and Section 188 (2) of the Corporations Act, a director is in violation of the Act should they fail to take all reasonable steps to comply with, or secure compliance with, the company’s obligation to prepare and file financial reports. Company secretaries whom are not directors can also be held liable from such obligations under Section 188 (1).

If you are concerned that you may have current or past financial reporting obligations which have not been met, we would recommend seeking immediate professional advice. The growth in the scope and sophistication of ASIC’s surveillance activities in this area mean that inaction is an increasingly risky approach.

FOR MORE INFORMATION

For more information about financial reporting obligations, please see our article on Reporting Obligations for Australian Proprietary Companies, otherwise please don’t hesitate to contact Ralph Martin, or your local RSM contact today!

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