Murphy and Australian Securities and Investments Commission
[2013] AATA 810
•15 November 2013
[2013] AATA 810
Division GENERAL ADMINISTRATIVE DIVISION File Number
2013/0972
Re
Terry Murphy
APPLICANT
And
Australian Securities & Investments Commission
RESPONDENT
DECISION
Tribunal Ms G Ettinger, Senior Member Date 15 November 2013 Place Sydney The Tribunal affirms the decision under review.
.................[sgd].......................................................
Ms G Ettinger, Senior Member
CATCHWORDS
CORPORATIONS – registration of auditors – registration refused – whether Applicant satisfied all components of auditing competency standard – whether Applicant had prescribed practical experience – whether different considerations apply where an applicant practices in a country area – decision affirmed
LEGISLATION
Corporations Act 2001 ss 1279, 1280, 1280A
Corporations Regulations 2001 reg 9.2.01
CASES
Albarran v Members of the Companies Auditors and Liquidators Disciplinary Board (2006) 151 FCR 466
Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60
Re Birdseye and Australian Securities and Investments Commission [2006] AATA 752
Re Lofthouse and Australian Securities and Investments Commission (2004) 82 ALD 481
Re Murphy and Australian Securities and Investments Commission [2004] AATA 1371Shi v Migration Agents Registration Authority (2008) 235 CLR 286
SECONDARY MATERIALS
Regulatory Guide 180 Auditor registration, issued September 2012
Auditing Competency Standard for Registered Company Auditors
REASONS FOR DECISION
Ms G Ettinger, Senior Member
15 November 2013
SUMMARY
Mr Terence (Terry) Murphy, aged 56, is a Certified Practising Accountant (CPA), and there is no question that he is a fit and proper person for purposes of the Corporations Act 2001 (the Act). He applied to be a registered auditor in 2002, and again in 2012. His application was refused by the Australian Securities & Investments Commission (ASIC) on both occasions. Mr Murphy applied for review of ASIC’s decision to refuse his first application, to the AAT, which affirmed the decision not to register him (Re Murphy and Australian Securities and Investments Commission [2004] AATA 1371).
In the present matter, ASIC in its decision of 7 November 2012, refused Mr Murphy registration as an auditor. In his application for review to this Tribunal, Mr Murphy represented himself, and tendered documents in regard to his application which are before me. ASIC was represented by Ms A Mitchelmore of counsel. Both Mr Murphy and Mr D Conallin, a Registered Company Auditor and his assessor, gave oral evidence before the Tribunal.
Mr Murphy said that he applied to be registered as an auditor because there is a shortage of auditors in country areas, and he thought carrying out the Red Rock Bowling and Recreation Club Ltd (Red Rock) audit for five years under Mr Conallin’s supervision would ensure his eligibility.
Mr Murphy requested that the Tribunal summons the ASIC decision makers who had been involved in refusing him registration as an auditor. As their evidence would not assist the Tribunal in the decision I have to make, I refused to issue those summons. I explained to the parties that the task of this Tribunal is to hear the matter de novo, and not to find fault with the ASIC decision, but rather to assess Mr Murphy’s application to be registered as an auditor with all the material which was before the ASIC decision maker, and any additional relevant evidence (Shi v Migration Agents Registration Authority (2008) 235 CLR 286).
I must make the correct or preferable decision in matters before this Tribunal. Unfortunately the evidence before me does not satisfy me that Mr Murphy meets all the requirements of section 1280(2) of the Act in order to be registered as an auditor. Accordingly his application must fail. My reasons follow.
THE ISSUES TO BE DECIDED
ASIC, and this Tribunal accept that Mr Murphy’s CPA qualifications satisfy the requirements of section 1280(2)(a) of the Act.
ASIC and this Tribunal accept that Mr Murphy is a fit and proper person to be registered as an auditor, and that he meets the residency and other requirements pursuant to section 1280 of the Act.
However, the Tribunal has had to decide whether it is satisfied that Mr Murphy has satisfied all the components of an auditing competency standard (the Standard) approved by ASIC under section 1280A as required by section 1280(2)(b)(i).
In the alternative, if Mr Murphy can demonstrate that he has had such practical experience as prescribed in regulation 9.2.01 of the Corporations Regulations 2001 he can be registered as an auditor.
The Tribunal must also decide whether Mr Murphy has provided sufficient evidence to satisfy it that he is capable of performing the duties of an auditor, as required by section 1280(2)(c) of the Act.
RELEVANT LEGISLATIVE ENACTMENTS
Part 9.2 of the Act deals with the registration of auditors and liquidators. The Part sets out a statutory regime designed to limit those who are entitled to be, and hold themselves out as being auditors and liquidators, to people who have the requisite professional skill and competence, and who are otherwise fit and proper persons to occupy such positions: Albarran v Members of the Companies Auditors and Liquidators Disciplinary Board (2006) 151 FCR 466 at [26].
Pursuant to section 1279(1) of the Act, a natural person may apply to ASIC for registration as an auditor. Section 1280 applies to ASIC’s determination of the application. Section 1280(2) provides as follows:
(2)Subject to this section, where an application for registration as an auditor is made under section 1279, ASIC must grant the application and register the applicant as an auditor if:
(a) the applicant satisfies subsection (2A) or (2B); and
(b) ASIC is satisfied that the applicant has either:
(i)satisfied all the components of an auditing competency standard approved by ASIC under section 1280A; or
(ii) had such practical experience in auditing as is prescribed; and
(c)ASIC is satisfied that the applicant is capable of performing the duties of an auditor and is otherwise a fit and proper person to be registered as an auditor;
but otherwise ASIC must refuse the application.
Section 1280(8) precludes ASIC from refusing to register a person as an auditor unless it has given the person an opportunity to appear at a hearing before ASIC and to make submissions and give evidence to ASIC in relation to the matter. In connection with the present application dated 9 June 2012 which Mr Murphy made to be registered as an auditor, he provided further information to ASIC on several occasions following his application, as requested, but chose not to attend at a hearing before ASIC.
Regulatory Guide 180
Guidelines have been developed in various areas of the law, and must be taken into account by decision makers such as ASIC and this Tribunal, where those guidelines do not conflict with the relevant legislation. (Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60, Re Lofthouse and Australian Securities and Investments Commission (2004) 82 ALD 481).
In Drake v Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60 at 69-70, Bowen CJ and Deane J stated relevantly:
In a matter such as the present where it was permissible for the decision-maker to take relevant government policy into account in making his decision, but where the Tribunal is not under a statutory duty to regard itself as being bound by that policy, the Tribunal is entitled to treat such government policy as a relevant factor in the determination of an application for review of that decision. It would be contrary to common sense to preclude the Tribunal, in its review of a decision, from paying any regard to what was a relevant and proper factor in the making of the decision itself. If the original decision-maker has properly paid regard to some general government policy in reaching his decision, the existence of that policy will plainly be a relevant factor for the Tribunal to take into account in reviewing the decision. On the other hand, the Tribunal is not, in the absence of specific statutory provision, entitled to abdicate its function of determining whether the decision made was, on the material before the Tribunal, the correct or preferable one in favour of a function of merely determining whether the decision made conformed with whatever the relevant general government policy might be.
Guidelines assist, but do not replace legislation in the Tribunal’s task to make the correct or preferable decision in the determination of each matter before it.
Regulatory Guide 180 (RG 180) is titled “Auditor registration”. The purpose of RG 180 is to provide details of the information required to be submitted by an applicant in order to meet the requirements for registration as a registered company auditor, and how ASIC, and accordingly, this Tribunal will assess that information.
The requirements on registration as an auditor are summarised in Section B of RG 180, titled “Registering as a registered company auditor [RGA]”, and are explained in more detail in Tables 12-17 of Appendix 1. The “Key Points” are as follows:
To be registered as an RCA, you must satisfy us that you meet the requirements in s 1280 – that is you:
·have completed educational requirements prescribed by the Corporations Regulations OR qualifications and experience that are, in our opinion, equivalent to those requirements (see RG 180.18-RG 180.19);
·meet an approved competency standard OR have practical experience as prescribed by the Corporations Regulations (see RG 180.20);
·are capable of performing the duties of an auditor AND are otherwise a fit and proper person (see RG 180.24-RG 180.31); and
·meet the other eligibility requirements relating to disqualifications and residency in Australia (see RG 180.32).
The skills requirement under section 1280(2)(b) of the Act is summarised in Table 6 in RG 180.20. In order to satisfy all of the components of an approved competency standard, an applicant is required to submit a completed log book, including an assessor’s statement and/or a statement by one or more referees, together with a certified copy of their certificate of membership of the CPAA, ICAA, IPA or other professional body. If practical experience is relied upon, the applicant must lodge with ASIC, a statement setting out details of their practical experience, a statement setting out details of their supervisory experience, and a supervisor declaration form from each RCA who supervised the applicant’s work.
The character and capability requirement under section 1280(2)(c) of the Act is summarised in Table 7 of RG 180.24. An applicant is required to submit a capability report explaining the scope and complexity of their auditing experience, and a capability declaration from their supervisor or referee for the audits described in the capability report.
RG 180.25 states that ASIC “consider[s] that a person is ‘capable’ of performing their professional responsibilities as an RCA if they can perform their duties in a manner that is not negligent.” RG 180.26 provides that ASIC:
… will only consider a person capable of performing their professional duties in a manner that is not negligent if they can demonstrate that they have performed audit work exposing them to a sufficient range of audits and auditing issues relative to the type of audit engagements. We will make this assessment on a case by case basis.
The Auditing Competency Standard
On 24 November 2004, ASIC approved the Standard. It is the only auditing competency standard approved by ASIC under section 1280A of the Act (see Appendix 1 Table 14 of RG 180).
The notion of competency refers to the knowledge and skills drawn on in performing tasks in particular work contexts (Standard [1.1]). There are a total of 20 task/context combinations that an applicant is required to demonstrate to the satisfaction of an assessor, comprising the four generic tasks of planning, evidence gathering, evidence evaluation and decision making performed in each of five different contexts in the course of an audit. The five contexts are: client acceptance/retention, audit planning, control testing, substantive testing and opinion formulation (Standard [4.1] and Appendix II: Tasks and sub-tasks).
The Respondent’s Statement of Facts and Contentions outlined that for an applicant to demonstrate that they have satisfied all of the components of the Standard:
(a)the applicant must have been employed by an accounting firm for at least 5 years or been admitted as a member of the CPAA/ICAA for at least 2 years (RG 180 Appendix 1 Table 14);
(b)the applicant must record in a log book on a continuous basis all audit engagements over, usually, a 3 to 5 year period in which he or she has demonstrated competency in the components of the Standard (Standard [3.3], [3.4] and [6.1]);
(c)the applicant’s assessor, being the registered company auditor who is responsible for reviewing or supervising the applicant’s audit work, must assess and verify the applicant’s performance against each of the components of the Standard (Standard [5.1]);
(d)alternatively to the requirement in (c), where an applicant is unable to demonstrate some tasks to an assessor the applicant may submit with their application a Statement by a Referee attesting that, in respect of each of the tasks not demonstrated to an assessor, the applicant has acquired and retained the competencies required to perform those tasks and the basis for making such a statement (Standard [6.2]).
An applicant is expected to be able to competently perform certain tasks in various contexts in all situations that are likely to be encountered by the applicant in the foreseeable future (Standard [3.2]). If the actual number of audits on which an applicant has been engaged is limited or if all audits are straightforward in nature, the applicant may find it difficult to demonstrate sufficient competency (Standard [3.5]; RG 180, Appendix 1 Table 14).
The Standard provides that an assessor may assess the applicant’s competency in performing the various task/context combinations by one or more methods including observing, reviewing and questioning (Standard [5.4]). One method should not be used as the sole method of assessment; two or more methods should be used. Where the assessor considers the performance of a task should be documented the assessor should always review the written evidence (Standard [5.5]).
The Standard provides that the referee must be a RCA who has known the applicant for at least two years. The Statement by Referee is required to state, in respect of each of the tasks not demonstrated to an assessor (which should be identified in the referee’s statement), that the applicant has acquired and retained the competencies required to perform those tasks and the basis for making each of the statements (Appendix V of the Standard at [5.1], [5.2]).
THE APPLICANT’S SUBMISSIONS
The substance of Mr Murphy’s submissions was that his application should be granted because he satisfies all of the components of the auditing competency standard pursuant to section 1280(2)(b)(i) of the Act, and, in the alternative, that he has had the relevant practical experience in auditing. He claimed that he has conducted auditing work for 3,000 hours over the past five years, and similarly for the five years prior. He submitted that the Red Rock audit was the most complex in his region, and told me that he spent 1,000 of the 5,000 hours he has spent on audit, on that job. It was not clear to me whether the 5,000 hours mentioned by Mr Murphy was intended to cover the past ten years. However his submission in regard to the past five years was that he had conducted auditing work for 3,000 hours.
Mr Murphy also referred to the fact that he had been granted leave to carry out the audit of Australian Eco-Retreats Pty Ltd (Australian Eco-Retreats) even though a registered company auditor was required. He said that he did not charge for the job as the company had been in difficulties. Mr Murphy submitted that goodwill had been a big issue in Australian Eco-Retreats. He told me that following many discussions with Mr Conallin he had had to reassess the goodwill, and halve it from $500,000 to $250,000. I noted that Mr Murphy was not supervised by Mr Conallin in relation to the Australian Eco-Retreats audit.
Mr Murphy submitted in reply to the Respondent finding that his audit work was not substantial, that he worked in the country, and that that was clearly a different environment to working with BHP, a big city company. In support of that he said: I have to deal in my world. He submitted that the bar ASIC set was too high to accommodate small rural firms.
Mr Murphy submitted that in considering his practical experience regard should be had to the audit of other reporting entities such as superannuation funds, and entities holding trust funds such as real estate agencies and travel agencies. He noted that the audit standards were essentially the same for all the organisations mentioned above. Mr Murphy also indicated that Mr Conallin had supervised him when he carried out the real estate trust account audits.
Mr Murphy was critical of ASIC’s approach in either accepting or rejecting an application, submitting that their tick-a-box method was not appropriate. In his written submission (Exhibit A1) at [12], Mr Murphy stated: If anything [RG] 180 is proof that the quality of the decision-making used by ASIC was prescriptive rather than balanced, authoritative and objective.
Mr Murphy also emphasised that Mr Conallin supported the view that he is both qualified pursuant to section 1280(2)(b)(i), and experience qualified (section 1280(2)(b)(ii)). Mr Murphy did not accept there was a conflict in that Mr Conallin had signed off on the internal controls and the audit engagement, stating that the Respondent was taking the BHP approach to a small audit. Mr Murphy submitted that Mr Conallin had reviewed all the reports and every task.
Mr Murphy also intended to rely on the 2005 audit carried out for Great Lakes Radio Station supervised by Mr Preo. However I have noted that it is outside the period to be considered in this matter.
THE RESPONDENT’S SUBMISSIONS
I have already noted above that Mr Murphy’s application to be registered as an auditor was made on the basis of satisfying all the competency standards, but that at the hearing he argued in the alternative that he also met the tests to be registered as experience qualified as he was entitled to do. However, based on Mr Murphy’s application, the Respondent’s Statement of Facts and Contentions was focused on the alleged failure of the Applicant to provide enough evidence to establish that he satisfied all components of the Standard. Nevertheless, Ms Mitchelmore acknowledged that there are alternative ways to qualify for registration as an auditor, being, on practical experience as prescribed by the regulations, that is, by completing 3,000 hours of audit in five years. She emphasised that there was but one standard, for large or small audits, the country or the city.
As to competency; Ms Mitchelmore submitted, referring to RG 180, that ASIC held that Mr Murphy did not meet the approved competency standard, and failed to demonstrate that he was capable of performing the duties of an auditor. She submitted that Mr Conallin’s evidence was that all the audits Mr Murphy conducted over the past four years which he had supervised, being mainly Red Rock, were similar. Ms Mitchelmore also submitted that the log books, the records, did not demonstrate Mr Murphy’s competence in regard to the three main contexts, being client acceptance/retention, audit planning and control testing.
Ms Mitchelmore also submitted that the documentation tendered as Exhibit A4 (Red Rock poker machine records) had no annotations to indicate where the document and the transactions recorded were considered to be material. She emphasised that the documentation must be in good order so that a senior auditor coming in without prior knowledge would be able to pick it up and understand it all. She submitted that this was not the case with Mr Murphy’s records. Ms Mitchelmore submitted that the log book of audit work submitted by Mr Murphy was inadequate. In summary she submitted that the Tribunal should affirm the decision of ASIC not to register Mr Murphy as an auditor.
Ms Mitchelmore did not make any submissions in relation to the relevance of Mr Murphy’s experience auditing entities other than companies.
MR MURPHY’S APPLICATION TO BE A REGISTERED AUDITOR
I have noted from T5, which is Mr Murphy’s application to be registered as an auditor by ASIC, dated 9 June 2012, that he applied to be considered under the auditing competency standard. In his written submissions, Mr Murphy stated that he did not apply on the basis of his practical experience in view of his previous unsuccessful application, but wanted the Tribunal to take that into account. The fact that Mr Murphy did not formally apply on the basis of his practical experience, does not preclude him being registered as an auditor pursuant to section 1280(2)(b)(ii) of the Act if the Tribunal is satisfied that he has had such practical experience in auditing as is prescribed, and the Tribunal is satisfied that he is capable of performing the duties of an auditor.
I have already noted that Mr Murphy satisfies the other qualifications required, that is, in regard to formal academic qualifications, residency, and that there is no question that he is a fit and proper person to hold such office.
Mr Murphy attached lists of his clients to his application and Exhibit A1. The list attached to Exhibit A1 provided additional information including: total hours, auditor, supervisor and audit years. He said that he had audited over 90 self-managed superannuation funds, and that nowadays those requirements were equal to those for a listed company. He also told me that he had recently, in 2013, been authorised by ASIC to carry out audits of self-managed superannuation funds.
As part of the audit, an auditor is required to keep a log book. Mr Murphy acknowledged that there was nothing in the log book about Australian Eco-Retreats, and there were only two emails which related to the audit. He said that it was complex and it had been supervised by Mr D Cheetham, a registered auditor. However, I was unable to discern what competencies Mr Murphy had demonstrated he satisfied in this audit, or how the audit had contributed to his claim to be experience qualified.
He told me that he also audited four real estate trust fund audits, and two incorporated bodies. He stated that over the past three years he had also prepared the audit papers for a travel compensation audit, and numerous other audits for charities.
Mr Murphy acknowledged that Red Rock was his substantial work to establish his task competency. I can also take Mr Murphy’s experience of auditing self-managed superannuation funds, real estate trust funds and similar bodies into account provided the work overall demonstrates the breadth and scope of the experience required for an auditor.
MR DAVID CONALLIN, REGISTERED COMPANY AUDITOR
Mr Murphy nominated Mr David Conallin as his supervisor and assessor, and provided reports from Mr Conallin which I discuss below. As noted above, Mr Conallin also gave oral evidence at the hearing.
Mr Conallin provided to the Respondent a Statement on Basis of assessment by referee dated 30 November 2011. Notwithstanding he did not supervise all of the audits mentioned, Mr Conallin stated:
The applicant has in my opinion, demonstrated sufficient tasks and skills to a competent level required to be a Register [sic] Company Auditor as previously indicated.
The complexity of the audits done by the applicant are sufficient to be made a registered auditor. I am aware Mr Murphy has been involved done a wide range of audits from Travel Compensation, Real Estate Trust Accounts, Superannuation Funds, Not for Profit Company’s [sic] of a small and large size. The complex nature of these engagements is enough to complete the necessary tasks required to meet the competency standard.
Mr Conallin stated that he signed off the Red Rock audit on the basis of discussions with Mr Murphy.
Mr Conallin certified that the Capability Report in respect to Mr Murphy was true and correct.
WHETHER THE APPLICANT SATISFIED ALL THE COMPONENTS OF AN AUDITING COMPETENCY STANDARD
According to RG 180, Table 14:
You may rely on Corporations Act or other audits to demonstrate competency under the competency standard where the task/context permits.
This includes audits of non-reporting entities (e.g. self-managed super funds, solicitor’s trust accounts, real estate agency trust accounts and incorporated associations.
However, we consider that it will be very difficult for you to demonstrate competency in all tasks/contexts if you have not undertaken any Corporations Act audits or only a small number of audits generally, or you have not identified any reasonably complex audit issues in your capability report.
As Red Rock was the major audit on which Mr Murphy relied in relation to his application for registration as an auditor on the basis that he satisfied the Standard, I have dealt with it next.
THE RED ROCK AUDIT
I noted that accompanying his application to ASIC, Mr Murphy provided documents signed off by Mr Conallin in regard to his competencies. Each one related to audits of Red Rock, which was Mr Murphy’s only major client. It is a not for profit club, and has no trust account. I am mindful that it is not impossible to succeed in being registered as an auditor having dealt with just one major client. However I am mindful that the audit of a single client may not provide the scope of challenges and tasks necessary to fulfil the requirements of sections 1280(2)(b)(i) and/or (ii).
Mr Murphy told me that he had audited Red Rock six times this year. When asked by Ms Mitchelmore whether the audit of Red Rock involved the same issues each time, Mr Murphy replied that there had been changes in the club over the years. He said that the board was replaced some 2 – 3 years ago, the roof of the club had blown off in a tornado which was an unusual event to be taken into account in the financial statements and audit, there were insurance issues in the replacement of the roof, problems with paying for repairs, legal opinions, and other abnormal events. However, Mr Murphy agreed that the poker machines and bar sales presented the same issues each year, that being the business of the club. Mr Conallin corroborated Mr Murphy’s evidence that the issues in regard to the audit of Red Rock were substantially the same year to year.
Mr Murphy’s application was accompanied by two statements from Mr Conallin dated 18 October 2012. In one, a Statement on Basis of assessment, Mr Conallin attested to Mr Murphy having audited Red Rock under his supervision for four years, and progressed from being involved in simple tasks in 2008/9 to being audit manager in 2009/10 and 2010/11. In the other letter, a Statement of audit engagement complexity, Mr Conallin stated that Red Rock had to undergo audit because its turnover was $1,300,000 (that is, in excess of the prescribed $1,000,000). He stated that it had assets of $1,600,000 and a staff of seven. Mr Conallin emphasised that it was a complex audit because it had a high turnover, and was a mainly cash business, making internal controls critical, particularly as it is a not for profit organisation. He replied to questions asked in cross-examination in regard to the Red Rock audit, that it had complexities, but agreed that the same issues arose year to year. Mr Conallin explained that there was extra work included, giving the example of a lack of invoices to support expenditure, and that although this was a common occurrence, it could be complex.
I next explored the competencies relevant to the registration of Mr Murphy as an auditor. They relate to Red Rock as this was his major audit.
The Respondent’s submissions were that in relation to each of the competencies, there was very little dialogue recorded, and ASIC held the view that Mr Murphy had not demonstrated the necessary competencies or experience in order to be registered as an auditor.
Client Acceptance/Retention
I noted that in regard to ongoing client competencies, Mr Conallin signed on 7 May 2012 for work carried out for Red Rock in July 2010 and July 2011. The competencies in regard to client acceptance/retention include various sub-tasks such as guiding and supervising the audit team in development of a discussion document on the nature of the audit and other work, evidence gathering relevant to the client acceptance/retention decision, evidence evaluation and other tasks as specified in the Standard.
Mr Murphy stated that client acceptance/retention was performed each year, and recorded in detail when they first obtained the client, but that if any negative information about the client subsequently came to light, it would be reviewed and recorded. He stated: The client has the same management, systems and financial performance for 10 years.
Audit Planning
In regard to audit planning; the signoff was similar. The audit work was carried out in July 2010, and July 2011, with sign-off by Mr Conallin on 7 May 2012. Tasks included identifying criteria necessary for the decision as to the appropriate audit plan.
I noted however that in 2010/2011 Mr Murphy rather than Mr Conallin had signed off on the Planning Memorandum.
Mr Murphy submitted that although there was no documented evidence of a planning discussion on fraud, that was checked.
Ms Mitchelmore noted that the Planning Memorandum was not signed by Mr Conallin as it should have been. Further, the client was also identified as an incorporated association rather than a company limited by guarantee which demonstrated inaccurate work by Mr Murphy.
Mr Murphy’s explanation was that it was difficult at times in the country, as contrasted to the city, to contact people and assemble them to sign documents.
Control Testing
As to control testing, the dates for sign-off were as above for the other competencies. Control testing included identifying the nature, timing and extent of audit procedures necessary, and other tasks. The same sign-off by Mr Conallin applied.
Mr Conallin agreed that the testing of internal controls should be documented. He agreed it was important to know what systems were in place, for example, for property, authorisations, and banking practices.
Mr Conallin agreed that internal controls were a risk, and cash was tested on the first day of the financial year. Mr Murphy told me that even though the documentation was not extensive, he spent a week on internal controls. He said that he also verified the wages back to the relevant awards.
Ms Mitchelmore asked Mr Conallin about the log books Mr Murphy submitted. He replied that they were written by Mr Murphy, and that, he, Mr Conallin, had agreed with what was documented, agreeing also however, that there was not much on the audit file to document internal controls.
Substantive testing
Then there was substantive testing. Work appears to have been signed off by Mr Conallin for 2009, 2010 and 2011 for various tasks.
Opinion formulation
Opinion formulation was the final field. The overall picture was to identify the nature, timing and extent of audit procedures necessary to be able to form an opinion on the financial report.
When asked about SWOT (which had mistakenly referred to as SWOP in the documents), Mr Conallin explained that this was an assessment of the commercial aspects of the business in order to make sure the company was solvent.
Mr Murphy noted the criticism of ASIC that the written representation letters were not signed, or signed late, and the audit report lodged undated. He explained that there was a difficulty in getting all the directors together to sign documents. ASIC’s view with which I agreed, was that that was unacceptable.
CONCLUSIONS IN RELATION TO THE COMPETENCIES
I have noted above that Red Rock was Mr Murphy’s only major client, and that Mr Conallin supervised the audits over four years where Mr Murphy progressed from being involved in simple tasks in 2008/9, to being audit manager in 2009/10 and 2010/11. I am satisfied also from the evidence of Mr Conallin that, whilst offering some challenges, the audit was substantially the same year after year. Mr Murphy himself, although enumerating some of the challenges including the replacement of the board some 2- 3 years previously, and the replacement of the roof blown off in a tornado, agreed that the business of the club was bar sales and poker machines, and that the work of the audit in that regard remained the same each year.
I noted that although Mr Conallin had signed off on the various audit competencies for Mr Murphy, there was little written comment. Mr Murphy said that he and Mr Conallin discussed the various competencies. He said that they discussed internal controls, what company reports should go to the auditor, discussed counting the cash, and so on. Mr Murphy said that the audit files do not document internal controls as checks were done throughout the year which were not part of the audit file. I am mindful that Mr Murphy tendered a large document which dealt with poker machine takings (Exhibit A4), but that no analysis accompanied the document.
I noted that the log book had to be a contemporaneous record over 3 – 5 years recording when Mr Murphy first attained competency in, and subsequently performed a task competently.
I have considered the evidence surrounding the audits Mr Murphy has conducted, considered the log books, the sign-off on competencies, and his application. I have taken into account Mr Murphy’s and Mr Conallin’s evidence. The one major audit on which Mr Murphy seeks to demonstrate he satisfied all the competencies, does not satisfy me that he has the breadth and depth of experience which is required for registration. The documentation in regard to the audit of Red Rock over the years is very sparse.
Accordingly I am unable to be satisfied that Mr Murphy should be registered as an auditor because he has not satisfied all the components of an auditing competency standard pursuant to section 1280(2)(b)(i). I then moved to consider whether he satisfies the alternative requirement, that he had the practical experience contemplated in section 1280(2)(b)(ii) of the Act,
WHETHER THE APPLICANT HAD PRACTICAL EXPERIENCE IN AUDITING AS PRESCRIBED
In the alternative, because I am not satisfied that Mr Murphy has satisfied all the components of the Standard, I must consider whether he has the requisite experience to be registered, (section 1280(2)(b)(ii) of the Act and reg 9.2.01).
The prescribed practical experience requires the Applicant to have at least 3,000 hours work in auditing companies during the five years immediately before the date of his application, including at least 750 hours supervising audits of companies.
Mr Murphy said that he had 3,000 hours of audit experience, and that he had supporting time sheets to demonstrate that.
Mr Murphy submitted in his written critique of the Respondent’s Statement of Facts and Contentions, (Exhibit A1), that it would be nigh impossible for a small rural auditor to generate the requisite number of hours in relation to audit of a public company. He submitted however, that audit of other reporting entities such as superannuation funds, entities holding trust funds such as real estate agents and travel agents should count. He submitted that the audit standards for these other entities are essentially the same, and that his work with those should therefore be counted. Mr Murphy emphasised that the situation had changed since he applied to be registered in 2004, and that self-managed superannuation funds were now subject to the same audit standards as other companies. He also referred to the case of Re Birdseye and Australian Securities and Investments Commission [2006] AATA 752, submitting that Senior Member Dunne allowed a more open definition in that case.
Mr Murphy who appended a list of approximately 90 self-managed superannuation funds which he says he has audited, told me that he spent four hours per audit per year, and that he had been handling from 10 to 100 of those funds for some 10 years.
Mr Murphy also told me that he audits three to four real estate funds in New South Wales per year, and one to two in Queensland.
Mr Murphy also said that he audits surf clubs, the library, an art society, the Red Cross, a school P&C, Gumnut Cottage, all of which he considered not insignificant.
Mr Murphy also spoke of “Be All I Am Pty Ltd” which he said was a significant not for profit company.
Mr Murphy told me that as of May or June 2013, ASIC has approved him to audit self-managed superannuation funds. That does not change my view because the required experience relates to the audit of companies.
From the evidence before me, I could not discern the actual number of hours Mr Murphy spent on relevant audits, and I could not be satisfied that he had spent 3,000 hours auditing companies during the five years immediately before the date of his application, including at least 750 hours supervising audits of companies. Accordingly I was not satisfied from Mr Murphy’s evidence that he had the practical experience as contemplated in section 1280(2)(b)(ii) of the Act.
IS MR MURPHY CAPABLE OF PERFORMING THE DUTIES OF AN AUDITOR
If Mr Murphy had been found to have satisfied all the components of an auditing competency standard approved by ASIC under section 1280(2)(b)(i) of the Act, or had such practical experience in auditing as is prescribed in section 1280(2)(b)(ii) of the Act, he would be able to be registered if I was satisfied that he was capable of performing his professional responsibilities as a registered company auditor. To be considered capable, I would have to be satisfied that he was able to perform his duties in a manner that is not negligent.
ASIC, and accordingly the Tribunal, will only consider a person capable of performing their professional duties in a manner that is not negligent if they can demonstrate that they have performed audit work exposing them to a sufficient range of audits and auditing issues relative to the type of audit engagements. This is assessed on a case by case basis. (RG 180.26)
Mr Murphy’s capability report, and the capability declaration by Mr Conallin were amongst the documents before me. The purpose of the capability report was to allow ASIC, and hence the Tribunal to make a proper assessment of M Murphy’s capability. Mr Murphy was responding to the request that he explain the scope and complexity of his audit experience by giving three examples. His examples were:
·In relation to a complex real estate business where the trust account figures did not balance: he said that this audit did not appear in his log book, but that it was a significant issue involving the loss of a person’s business, house and job.
·At Red Rock (which had no trust account), a problem arose because creditors were not paid for abnormal work. He explained that it was to do with damage to the roof, and explained that he had created a contingent liability in the accounts to account for the repairs.
·The third item was to do with Red Rock, where there was a scarcity of invoices supporting expenditure. Mr Murphy said that this was a common occurrence, and agreed it was not complex. He said that he recommended tighter controls to management.
I have noted the Respondent’s submissions in regard to the capability report, and note that in relation to the first item, there was no information relating to the competencies. The following two items dealt with the audit of Red Rock, and on the basis of the above, I cannot be satisfied that the work referred to was sufficiently complex or indicated that Mr Murphy had been exposed to a sufficient range of audits and auditing issues. Accordingly, I am not satisfied that he is capable of performing the duties of a registered auditor.
FURTHER CONSIDERATIONS – CONFLICT OF INTEREST
Ms Mitchelmore drew to my attention, and inquired of Mr Murphy as to two potential areas of conflict about which ASIC had concerns. One related to Red Rock having a number of sponsors including Business & Taxation Solutions (Mr Murphy’s firm) being a major sponsor in the financial years 2010 and 2011. Mr Murphy told me that the sponsorship was historical, and that no goods or money changed hands over the sponsorship. I noted that there was no explanation of the potential risk in the audit file.
Ms Mitchelmore was also concerned about the paymaster at Red Rock paying his own wages. Mr Murphy stated that in a small organisation that would be acceptable, and that the audit of Red Rock should not be treated as one such as BHP might conduct. Mr Conallin’s view that a paymaster paying himself in a small organisation such as Red Rock was not of concern.
I was mindful however, that the same principles apply in audit for large and small companies, and for large and small towns irrespective of their location.I agreed that whilst it seemed obvious the paymaster should not pay his own wages, provided sufficient controls were in place, such as sign-off by other senior staff, that situation may be tolerated in a small organisation.
REFEREES
Mr Murphy provided letters of reference:
·Mr R Clissold of Australian Eco-Retreats in a letter dated 5 September 2013 praised the audit work carried out by Mr Murphy. He stated that the nature of the accounts was complex as the company had been through administration, and complexities dealing with the Travel Compensation Fund. The complexity of the audit was also commented upon by Mr D Cheetham, auditor.
·Baker & Borthwick Attorneys wrote on 4 September 2013 stating their views with regard to difficulties in obtaining the services of auditors in country areas, and emphasising that in relation to depths of audits, turnover, industry, staffing and profit motive were not necessarily the criteria for complexity.
CONCLUSIONS
Having considered all the evidence I am not satisfied that Mr Murphy meets the requirements in section 1280(2) of the Act to be registered as an auditor because I am not satisfied that he has met all the components of an auditing competency standard, or has had such practical experience in auditing as is prescribed. Nor am I satisfied that he is capable of performing the duties of a registered auditor within the terms of the legislation.
DECISION
The Tribunal affirms the decision under review.
I certify that the preceding 95 (ninety five) paragraphs are a true copy of the reasons for the decision herein of Ms G Ettinger, Senior Member ..................[sgd]......................................................
Associate
Dated 15 November 2013
Date of hearing 21 October 2013 Applicant In person Counsel for the Respondent Ms A Mitchelmore
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