Cooking the books? Defendant auditors plead guilty to Australia's first criminal audit negligence charges
The auditors of failed broker Halifax Investment Services Pty Ltd have entered guilty pleas to criminal charges of failing to conduct audits in accordance with auditing standards.
The guilty pleas come a month after the Australian Securities and Investment Commission (ASIC) announced that it had brought charges against the defendants in respect of their audits of Halifax's profit and loss statements and balance sheets for the 2016, 2017 and 2018 financial years, alleging that:
- the company, EC Audit Pty Ltd, failed to conduct the audits according to auditing standards in breach of s989CA(1) of the Corporations Act 2001 (Cth) (Corporations Act); and
- the company's director and lead auditor on the Halifax audits, Robert Evett, failed to ensure that the audits were conducted according to auditing standards in breach of s989CA(2) of the Corporations Act.
Section 989CA of the Corporations Act makes it an offence of strict liability for an individual auditor or an audit firm to fail to conduct an audit of an Australian Financial Services Licensee in accordance with auditing standards. Auditors can also be held criminally liable under s307A of the Corporations Act for failing to conduct an audit of other disclosing entities in accordance with auditing standards.
Sentencing is expected to take place in August this year. The maximum penalties for the offences occurring on or after 1 July 2017 are a fine of AUD10,500 fine for each charge against the director and AUD52,500 fine for each charge against the company. In respect of the offences occurring before 1 July 2017, the maximum penalties are AUD9,000 and AUD45,000 fine for the charges against the director and company respectively.
The prosecution of the auditors follows ASIC's continuing investigation into Halifax which began in 2019, shortly before the company entered liquidation. Halifax was one of Australia's largest independent share brokers when it was found to have a significant shortfall in client funds. Liquidators later revealed that, among other problems, the broker had co-mingled the investments of users of its online trading platform, pooling over AUD200 million of client money to fund day-to-day operations and making it impossible to determine what individual clients were owed. Complex liquidation hearings in May 2021 have led to investors regaining a fraction of their investments.
ASIC has increasingly focused on auditors in recent years, but this first successful test case for criminal prosecution for audit negligence serves as a clear caution for Australian auditors and may signal an even more robust stance in policing adherence to auditing standards going forwards, or a willingness by ASIC to prosecute more nuanced instances of misconduct or failings by auditors.
Auditors and their advisors should be particularly mindful of the potential availability of the privilege against self-incrimination – including in civil cases concerning audit negligence, which are generally premised on an alleged failure to comply with applicable audit standards – given the risk that ASIC may separately prosecute defendant auditors for the same or related conduct.