Audited Financials are qualified financial statements (Balance Sheet and Profit & Loss) by an independent qualified auditor that confirms whether the statements accurately reflect a company's financial performance.

Audited Financials are optional for all businesses. They are only compulsory if the following thresholds are met:

- Large company

o Consolidated revenue of $50 million or more

o Gross assets at the end of the financial year of $25 million or more

o Company and its entities have 100 or more employees

- Registered scheme

- Disclosing entity, i.e., Listed companies

Whilst it is not a requirement, companies will often obtain audited financials if they want to receive a loan/grant concerning acquisition or sale. But at the end of the day, audited financials are for the benefit of ASIC and not for the company with an auditor to be independent.

What are the risks for Auditors?

But what are audited financials worth, and what happens if the audited financials are, in fact, inaccurate?

Lately, we have seen a few matters where the company has provided audited financials, but the evidence appears fraudulent. As a result, the audited financials are worthless and do not reflect the company's position. We have also seen that sophisticated investors have provided funds on the premise that the audited financials were accurate.

Whilst our initial view was that the auditors were negligent and should be liable for the loss by the sophisticated investor, it may not always be the case.

Firstly, the sophisticated investor would need to prove the loss incurred due to the reliance on the financials. However, if no assets were available before the monies were provided upon which they were believed to be secured, the loss isn't quite as clear cut. Secondly, even if the loss is established, the auditor would only be liable for a proportionate liability, with current case law having the wrongdoer (director) be held responsible for the majority.

But that's not always the case, as seen in Cam & Bear Pty Ltd V McGoldrick [2018] NSWCA 110, whereby the accountant auditor of an SMSF was sued successfully. In summary, the accountant failed to make enquiries about the financial condition of specific investments. Had these investigations been undertaken, the accountant would have identified a significant deficiency in assets, which in turn would have created doubt about the recoverability of the investments for the client. The auditor was then found liable for the loss of the client.

What should Auditors look out for?

So, what should an auditor look out for to minimise their risk? Whilst we are not auditors, and we know that they all have their processes which they follow, we would suggest that they also consider taking the following steps:

  • Don't believe everything a director tells you - conduct your due diligence. With the current digital age, is very easy to create a website and/or email addresses and it is extremely cheap.
  • If it sounds too good to be true, it probably is. Check that the assets are real and as they should be. For example, if the director alleges that there are monies held with an institution that is overseas and not commonly known, do some basic research on the company rather than just relying on the email that a director has provided as the contact.
  • Don't sign off on an audit where you don't believe that the company is solvent.
  • Remember statutory obligations to report company issues to ASIC. If due consideration is taken and procedures are followed based on current case law, auditors are reasonably safeguarded. But be mindful to keep accurate file note records and all evidence or emails from the relevant stakeholders if they need to be relied on at a later date.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.