DKZN and and Australian Securities & Investments Commission

[2009] AATA 313

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2009] AATA 313

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2008/6233

GENERAL ADMINISTRATIVE DIVISION		)
Re		DKZN

Applicant

And

Companies Auditors & Liquidators Disciplinary Board

First Respondent

And

Australian Securities & Investments Commission

Second Respondent

DECISION

Tribunal Mr G L McDonald, Deputy President

Date5 May 2009

PlaceMelbourne

Decision The Tribunal decides that the application for a stay be refused.

................................................

Deputy President

CATCHWORDS – ADMINISTRATIVE LAW – whether decision under review should be stayed to allow the applicant to complete three audits for non profit organisations – application for stay refused

Administrative Appeals Tribunal Act 1975 s 41

Corporations Act 2001 s 324CA

REASONS FOR DECISION

5 May 2009 Mr G L McDonald, Deputy President

1. The applicant is applying, under s 41(2) of the Administrative Appeals Tribunal Act 1975 to have the terms of a banning order stayed to permit him to complete three uncompleted audits which were underway at the time the applicant’s registration as an auditor was cancelled by order of the first respondent on 22 December 2009.  The second respondent opposes the application.

2.      The Tribunal has before it submissions filed by both parties, an affidavit sworn on 3 April 2009 by the applicant and one sworn on 29 April 2009 by Mr John Stack, an officer of the second respondent, as well as some newspaper articles identifying concerns expressed by the liquidator in respect of one of the companies, audited by the applicant, which was the subject of the proceeding before the first respondent.  One of the concerns expressed in the newspaper articles was as to the sufficiency of the audit carried out by the applicant.

3.      All three audits the subject of the stay application are for non profit organisations – two being companies limited by guarantee (“A” Club and “F” Limited) and the remainder being an incorporated association (“C” Association).  Not any of the organisations were involved in the proceedings which led to the cancellation of the applicant’s registration as an auditor.  Those proceedings involved two corporations only and were the only apparent regulatory breaches over a company audit career commencing in 1983.  In each of the three cases that are the subject of this application the audit was being conducted for the first time by the applicant.  The applicant has not been involved in the provision of accounting or other professional services to any of the three nominated organisations.

4.      The applicant declined to provide oral evidence in support of his application for the stay.  However, in his affidavit sworn on 3 April 2009, the applicant submits in respect of:

(a)  “A” Club:

(i)the club financial year finishes on 30 April;

(ii)prior to his deregistration, approximately 50% of the audit work had been completed;

(iii)duplication of work would be required if another auditor needed to be appointed resulting in the club having to pay additional audit fees; and

(iv)given the time it takes to hear and determine this case then there may be insufficient time to appoint a new auditor, if the applicant is unsuccessful in his substantive application before the Tribunal;

(b)  “C” Association:

(i)the club’s financial year ends 30 June;

(ii)approximately 40-50% of the audit work had already been completed prior to the applicant’s deregistration;

(iii)there would be duplication of work required if another auditor needed to be appointed resulting in the club having to pay additional audit fees; and

(iv)given the time it takes to hear and determine this case then there may be insufficient time to appoint a new auditor, if the applicant is unsuccessful in his substantive application;

(c)  “F” Limited:

(i)while there is an extended time in which the audit must be completed, the reasons given for continuing are the same for as those set out for “C” Association save that the applicant estimates 60% of the audit work had been completed prior to him being deregistered.

5.      Additionally the applicant undertook not to engage in any professional work for any of the three organisations other than the audits and, through his Counsel, undertook to have the audits completed prior to the commencement of the hearing of his substantive application.  Through his Counsel the applicant rejected giving an undertaking to have his audit work for the three organisations peer reviewed, because of the additional cost he would incur if such an appointment was required.

6.      In addition to the extra expenses incurred by the three organisations the applicant, through his Counsel, submitted that his financial situation was precarious and that the additional fees generated in completing the audits would assist with the payment of professional fees associated with his appeal in the substantive case.  It was also submitted that the failure to grant the stay would have a significant negative impact on the applicant’s hitherto unblemished reputation.

7.      On behalf of the applicant it was submitted that he was unrepresented in the proceedings before the first respondent and that had inhibited his ability to put his case in as full a way as would have occurred if he was represented.  Additionally it was submitted some alleged procedural deficiencies in the earlier proceedings may have acted to the applicant’s disadvantage (for example, it was claimed that that he was denied the right to cross examine one of the key witnesses.  It was also submitted that the applicant had not had the opportunity to properly test the expertise of a witness called by the first respondent as an expert).  These concerns may be righted in the de novo hearing before the Tribunal.  However, in view of the fact that the applicant conceded, in the hearing conducted by the first respondent, that some of his actions in conducting the audits were non compliant, the Tribunal does not regard this submission as having great weight.

8.      The second respondent opposes the application on several grounds including the seriousness of the findings of the first respondent including the applicant had:

(a)  undertaken accounting work which he then audited giving rise to a conflict of interest situation which he took no steps or any proposals to address;

(b)  had invested in, and made loans to, one of the companies which he was auditing and, again, he took no steps to reduce or eliminate the potential conflict of interest;

(c) failed to notify the second respondent of the potential for conflict of interest as he is required to do by s 324CA(1A) of the Corporations Act 2001 (the Act);

(d)  failed to comply with various auditing standards including failure to document audit working papers, failure to take steps to collect sufficient appropriate audit evidence (including as to the number of investment properties held and the valuation of the properties held) such that he was in a position to be assured that there were no material misstatements in the company’s financial reports, failed to obtain and evaluate audit evidence to be assured that the financial statements provided a true and fair view, and obtained no independent or comparative valuations for properties;

(e)  signed an audit report two days before the director;

(f)   failed to identify discrepancies arising from different inventories recording the same items;

(g)  failed to qualify his audit opinion in circumstances where it ought to have been qualified (for example relating to failures of accounting standards and errors); and

(h)  failed to distinguish his account for undertaking the audit from accounts rendered for other professional services.

9.      The second respondent pointed to the applicant’s apparent lack of recognition of conflicts of interest, noting that the applicant’s son was a board member of “A” Club.  It also pointed to the failure of the applicant to mention any efforts he may have taken, since his deregistration, to re-educate himself with respect to some of the issues in respect of which findings had been made against him.  The second respondent also raises concerns relating to an alleged failure to ensure that the applicant’s appointment as an auditor for at least one of the three organisations had been properly documented and notified.  The latter point may not involve any culpability on the part of the applicant as the appointment and notification procedures are those of the appointing organisation, except it could be expected that prior to embarking on an audit, an experienced auditor would usually be expected to ensure that he held a proper authority and that it was registered with the Australian Securities and Investments Commission.

10.     While there are various ways of expressing them, the principles which the Tribunal must apply when considering an application of this type are well known and are set out in paragraph five of the applicant’s submission as follows:

(a)  the applicant’s prospects of success in the substantive application before the Tribunal; and

(b)  the consequences – both for the applicant and for those whose interests may be affected – if the stay is/is not granted.

11.     In considering the application the Tribunal should also take into account any undertakings which may be offered by the applicant.  Rather than looking to any punitive action against the applicant the Tribunal must look to the protection of the public when considering such an application.

12.     It is not the Tribunal’s position, in undertaking this stay hearing, to embark on a course which will impinge on its functions in considering the substantive application.  It is sufficient for the Tribunal to find that the conduct as found by the first respondent in its decision reveal numerous and serious breaches of not only accepted audit practise but also of well known legislative requirements.  The Tribunal is concerned that after 20 years as an auditor the applicant’s conduct has only relatively recently become the subject of disciplinary proceedings.  It would not ordinarily be expected that someone with the claimed experience of the applicant would embark in a course of conduct involving so many, and so fundamental, breaches of standard audit procedures.  In the view of the Tribunal these considerations outweigh a submission made on behalf of the applicant that there was no association between the allegations raised in the proceedings before the first respondent with any other audit work undertaken by the applicant.

13.     The Tribunal is unable to see what significant difference lies in the fact that the three organisations in respect of which the stay is sought are not for profit organisations, while the two corporations which were the subject of scrutiny in the proceedings before the first respondent were designed to make a profit.  Two of the former are companies and the principles to be applied are the same as for the companies in the former proceedings and are governed by the requirements of the Act.  The fact that so many auditing standards, many of them fundamental to the undertaking of any audit, have allegedly been breached points to an unacceptable and serious level of non compliance from which the public need to be protected.  The public includes the three organisations the subject of this stay application.  With this in mind the Tribunal is satisfied that any financial disadvantage to those organisations, in having to appoint alternative auditors, outweighs the potential burden arising from the risks involved in the applicant completing what may transpire to be a substandard audit.

14.      The financial and reputational damage to the applicant may well be considerable from the failure to grant a stay.  However, the Tribunal notes that he is still able to undertake accounting and related non audit functions.  While he has sold his accounting practice since his deregistration, there is no apparent reason why he could not undertake similar work in other capacities (for example as an employee).  However, the Tribunal is satisfied that whatever the financial and reputational damage which may accrue to the applicant in not granting the stay is outweighed by the need to protect the public by ensuring those who undertake company audits are able to undertake them in accordance with basic professional standards.

15.     The Tribunal, on balance, is not able to accept that those standards would necessarily be applied by the applicant in respect of the three organisations the subject of this stay application and, accordingly, has determined that the stay ought be refused.

I certify that the 15 preceding paragraphs are a true copy of the reasons for the decision herein of

Signed:         .....................................................................................
  Grace Horzitski                   Associate

Date of Hearing  30 April 2009
Date of Decision  5 May 2009

Counsel for the Applicant  Ms K Judd SC and assisted by

Mr J Brereton

Solicitor for the Applicant  Mason Sier Turnbull
Counsel for the Second Respondent     Mr N Hopkins

Solicitor for the Second Respondent     Australian Securities & Investments Commission