Re Gooley and Companies Auditors and Liquidators Disciplinary Board and Australian Securities and Investments Commission
[2000] AATA 1144
•22 December 2000
CATCHWORDS – CORPORATIONS – the applicant's registration as an auditor was suspended for two years – whether one of the courses of action prescribed in section 1292 of the Corporations Law should be taken – whether reprimand suitable – decision set aside.
Administrative Appeals Tribunal Act 1975 – ss. 35, 37, 44
Australian Corporations & Securities Legislation 1993 – ss. 244, 324, 331A, 331B, 829, 1280, 1290, 1292
Aldrich v Boulton (2000) 109 ACrimR 568
Australian Securities Commission v Kippe and Another (1996) 137 ALR 423; (1996) 20 ACSR 679; (1996) 67 FCR 499; (1996) 14 ACLC 1226
Bradshaw v Medical Board (WA) (1990) 3 WAR 322
Builders Licensing Board v Sperway Constructions (Sydney) Pty Ltd (1976) 135 CLR 616; (1976) 14 ALR 174; (1976) 51 ALJR 260
Hardcastle v Commissioner of Police (1984) 53 ALR 593
New South Wales Bar Association v Evatt (1968) 117 CLR 177; (1968) 42 ALJR 13
New South Wales Bar Association v Hamman [1999] NSWCA 404
Pillai v Messiter [No. 2] (1989) 16 NSWLR 197
Re Australian Securities Commission and Companies Auditors and Liquidators Disciplinary Board (1994) 19 AAR 377; (1994) 12 ACLC 340; (1994) 13 ACSR 373
Re Hodgekiss (1959) 62 SR (NSW) 340; (1959) 79 WN (NSW) 163
Re Wolstencroft and Companies Auditors and Liquidators Disciplinary Board (1998) 54 ALD 773
DECISION AND REASONS FOR DECISION [2000] AATA 1144
ADMINISTRATIVE APPEALS TRIBUNAL )
) Q1999/1383
GENERAL ADMINISTRATIVE DIVISION )
Re QX00/C
Applicant
AndCOMPANIES AUDITORS AND LIQUIDATORS DISCIPLINARY BOARD
Respondent
AndAUSTRALIAN SECURITIES & INVESTMENTS COMMISSION
(Party Joined)
DECISION
Tribunal: Miss S A Forgie (Deputy President)
Mr K L Beddoe (Senior Member)
Mr J D Horrigan (Member)
Date: 22 December, 2000
Place: Brisbane
Decision: The Tribunal:
For the reasons we have given, we:
1.set aside the decision of the respondent dated 21 December, 1999 in so far it decided that the applicant's registration as a registered auditor be suspended for two years but that the order not come into effect until 19 January, 2000;
2.substitute for that part of the decision under review a decision that the applicant be reprimanded in relation to the audit of the Company in so far as it related to payments made by that company on 30 June, 3 July and 17 July, 1992;
3.otherwise affirm the decision under review; and
4. with effect from the expiration of the appeal period set out in s. 44 of the Administrative Appeals Tribunal Act 1975, revoke the confidentiality order made under s. 35.
S A FORGIE
Deputy President
REASONS FOR DECISION
On 21 December, 1999, the applicant applied for review of a decision of the Companies Auditors and Liquidators Disciplinary Board ("the Board") dated 21 December, 1999. The Board ordered that the applicant's registration as a registered auditor be suspended for two years but that the order not come into effect until 19 January, 2000. It also ordered that he pay 80% of the costs of the Australian Securities and Investments Commission ("ASIC") with the amount of those costs being agreed between him and ASIC or, in the event of their failing to agree within 60 days, being the amount taxed. By an order dated 23 December, 1999, the operation of the Board's orders was stayed until the application for review has been determined or until further order. ASIC was joined as a party by order of the Tribunal dated 22 December, 1999.
At the hearing, the applicant was represented by Mr McMurdo QC, the Board by Mr Daubney and ASIC by Miss Ford of counsel. The documents lodged pursuant to s. 37 of the Administrative Appeals Tribunal Act 1975 ("AAT Act") ("T documents") were admitted in evidence together with an affidavit of the applicant sworn on 9 June, 2000 and an affidavit of Mr Paul Richard Moni sworn on 6 June, 2000. No oral evidence was given. 13 June, 2000, an order was made that, until further order, publication of the names of the applicant and certain entities and of evidence given by or in relation to them during the hearing is prohibited pursuant to s. 35 of the AAT Act.
THE ISSUE
The issue is whether the applicant failed to carry out or perform adequately and properly the duties of an auditor as they are defined in s. 1292(1)(d) of the Corporations Law ("the Law"). If he did fail to do so, the issue is whether the applicant's registration should be cancelled or suspended for a specific period, or whether the applicant should be admonished or reprimanded, or whether the applicant should be required to undertake to refrain from engaging in specified conduct either with or without specified conditions.
BACKGROUND
There was no dispute among the parties as to the facts forming the background to the applicant's coming to the attention of the Board and, ultimately, the applicant accepted the Board's findings in relation to his conduct. In view of that and on the basis of the evidence, we have made a number of findings of fact that we will set out in the following paragraphs.
The applicant
The applicant is a chartered accountant who is a Fellow of the Institute of Chartered Accountants and a Fellow of the Australian Society of Certified Practising Accountants. For many years, he has worked with a firm of accountants ("the Firm"); first as an employee and later as a partner. For the whole of his professional career, he has been involved in the audit practice of the Firm. Since 1983, he has been a registered auditor. He has practised his profession both in Australia and overseas. At the time of the Board's consideration, he was either then, or had previously been, the Firm's partner responsible for the audit of several major public companies. Apart from his day to day responsibilities in relation to audit, the applicant also had wider responsibilities for maintaining accounting and audit standards in the Firm and in the profession generally.
Events surrounding the public float of the Company and its commencing operation
Some years ago, a company ("the Company") was incorporated. Upon its incorporation, a partner of the Firm (other than the applicant) had responsibility for the audit of the Company's accounts. The Company decided that it would be publicly floated and decided to issue a prospectus in relation to the shares in the company. Therefore, it had to comply with the Law as it was then in force and that is set out in s. 244.
Where a public company, which is a limited company and has a share capital or is a no liability company, issues a primary prospectus in relation to shares in the company and has not previously issued such a prospectus, it must hold a general meeting of the members of the company (s. 244(1)). The meeting, known as a "statutory meeting" must be held not less than 1 month nor more than 3 months after the company allots shares pursuant to the prospectus.
At least 7 days before the day on which the meeting is held, the directors must send a report to each of the members of the company (s. 244(2)). The report is known as a "statutory report". It must be certified by no fewer than 2 directors of the company and, among other matters, must state, as at the date of the report:
"(a) the total number of shares allotted, distinguishing:
(i)shares allotted as fully paid up in cash;
(ii)shares allotted as partly paid up in cash;
(iii)shares allotted as fully paid up otherwise than in cash; and
(iv)shares allotted as partly paid up otherwise than in cash;
and stating:
(v)in the case of shares partly paid up – the extent to which they are so paid up; and
(vi)in the case of shares allotted as fully or partly paid up otherwise than in cash – the consideration for which they have been allotted;
(b)the total amount of cash received by the company on respect of all the shares allotted and so distinguished;
(c)an abstract of the receipts of the company and of the payments made out of those receipts up to a day within 7 days of the date of the report showing under distinctive headings;
(i)the receipts from shares and debentures and other sources;
(ii)the payments made out of those receipts;
(iii)particulars concerning the balance (if any) remaining in hand; and
(iv)an account or estimate of the preliminary expenses;"
(s. 244(3))
Section 244(4) provides that:
"The statutory report shall, so far as it relates to the shares allotted and the cash received in respect of such shares and to the receipts and payments on capital account, be examined and reported upon by the auditors (if any)."
A copy of the statutory report and of any auditor's report must be lodged at least 7 days before the statutory meeting.
In 1991, the applicant was the partner of the Firm responsible for work on a prospectus for the public float of the Company. That prospectus referred to the Company's acquiring the business of another company and, in effect, to its continuing that company's business operations (T documents, page 200). In April, 1992, a second prospectus was issued in relation to the public float of the Company. Prior to the issue of that prospectus, the applicant had attended meetings of the Due Diligence Committee for some months. He had investigated and acquainted himself with the affairs of the Company and with its projected financial affairs. On 9 and 13 April, 1992, he attended meetings of the Due Diligence Committee at which there was discussion as to the sufficiency of cash to enable the Company to commence operations. The applicant was the Firm's partner responsible for signing the independent accountant's report in the prospectus as well as in the supplementary prospectus issued in early June, 1992. That supplementary prospectus contained revised financial forecasts and stated that it was planned to commence operations on 31 August, 1992. It stated that the proposed operational date reflected the deferral of the expected date of completion of a contract and the finalisation date of the delivery of certain equipment.
The company had been in negotiations with an overseas company ("Company A") regarding the lease of equipment necessary to conduct its operations. It was agreed between the Company and Company A that Company A would lease three pieces of equipment from a third company ("Company C") and then sub-lease those pieces to the Company. In consideration of Company A's securing the equipment, the Company would pay Company A an amount equal to the then value of the difference between the rental stream it had intended to pay Company A and the rental stream Company A proposed to pay Company C (i.e. the Present Value Amount or "the PVA"). The amount would be payable on or before 23 June, 1992. A letter dated 13 June, 1992 set out the agreement between the Company and Company A. In fact, the Company entered leases directly with Company C and did so on 16 June, 1992. Copies of the leases were given to the Firm.
Company A wrote to the Company on 22 June, 1992 and advised that the PVA due from the Company was US$3,703,649.77. The letter was to be treated as an invoice for that amount. The Company's bank statement for the period ending 30 June, 1992 showed a payment of A$4,998,178.75 but there was no explanation of the debit or any indication of the destination of the funds. A copy of the letter was given to the Firm.
Sometime after 26 June, 1992 but before 17 July, 1992, the applicant became the Company auditor. Prior to the allotment of shares to the public the Due Diligence Committee held a meeting on 9 July, 1992. The committee received a report that the Company was arranging the acquisition of certain spare parts and that the costs would be within the forecast expenditure limits set out in the prospectus. It decided that, through one of its officers ("Officer X"), the Company should update the data on the preliminary expenses to 30 June, 1992. Officer X was to report to the Firm so that it could complete its audit as well as report to the committee.
One of the Firm's staff who was working with the applicant on the due diligence met with Officer X on two occasions; 9 and 13 July, 1992. The staff member wrote a minute, which he later showed the applicant and which stated that the purpose of his meeting with Officer X had been to reconcile the cash position of the Company following the due diligence meeting on 9 July, 1992. He noted that Officer X had advised that meeting that there was likely to be an overspend of $12m on security deposits to lessors. He went on to set out the major items of difference between the actual, or then forecast, expenditure and the budget estimate contained in the prospectus. In relation to spare parts, the staff member referred to the actual costs of spare parts funded through another Company A per Officer X. Two amounts were shown and they were A$4,998,179 and A$4,462,500. The two payments matched two payments earlier made by the Company to Company A. They were the payment of $4,998,178.75 on 30 June, 1992 and that of $4,462,500.00 made on 3 July, 1992.
The Company publicly floated on 17 July, 1992. The prospectus fund-raising of $50m was completed in early August, 1992, part of the equipment leased by Company A from Company C and sub-leased to the Company was delivered between 20 and 30 August and, at the end of that month, the Company began trading.
An Audit Planning Memorandum to the files was dated 9 July, 1992 and signed by the applicant as well as by the manager of the audit. It was not until September, 1992 that the applicant carried out the majority of his work in relation to the audit. That involved his reviewing the audit work carried out by his staff and his attending audit committee meetings.
On or about 15 September, 1992, the Company gave the Firm a copy of a letter from Company A to the Company dated 8 September, 1992. Company A confirmed that it was prepared to consider favourably the Company's proposal that it consider refunding the pre-payment received from the Company on 30 June, 1992. It would do so on the basis that the Company would pay $20,000.00 each month for each piece of equipment Company A had sub-leased to it.
On 15 September, 1992, the applicant refused to sign off the auditor's report on the accounts. He refused on the basis that he was not satisfied that the Company had provided sufficient information to the auditors about various transactions. Among those transactions were the two payments made by the Company to Company A on 30 June, 1992 and 3 July, 1992. Upon being provided with further information, the applicant was satisfied regarding the two payments.
In the course of his review of the audit work, the applicant also reviewed a schedule prepared by his audit staff referring to a post balance date transaction which was recorded as a payment made by the Company to a third company ("Company B"). That payment in the sum of $1,013,500.00, was made on 17 July, 1992. The applicant had been aware that such a payment had been made by the Company to Company B from his participation in the due diligence committee meetings during the public float. He was satisfied that he had sufficient understanding of the transaction and concluded that the transaction did not require an adjustment to the financial statements or the specific disclosure in the notes to the accounts for the period ending 30 June, 1992.
On 21 September, 1992, the board and the applicant signed the statutory report. The statutory meeting of the Company was held on 9 October, 1992. The Company's statutory report showed that the receipts from shares to 14 September, 1992 amounted to $50m and payments amounted to $5,026,030.00. This left $44,973,970.00 for transfer to the operating account. The annual accounts were signed on 21 September, 1992 by the Company's board and by the applicant as auditor. The Firm stated that the statements in the statutory report were in accordance with the records of the Company and to the best of its knowledge, information and belief were correct. The applicant's statement in the annual accounts also included the following:
"Our audit has been conducted in accordance with Australian auditing standards to provide reasonable assurance as to whether the financial statements are free of material misstatement. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial statements and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion as to whether, in all material respects, the financial statements are presented fairly in accordance with Australian accounting concepts and standards and statutory requirements so as to present a view of the company which is consistent with our understanding of its financial position and the results of its operations.
The audit opinion expressed in this report has been formed on the above basis.
…
In our opinion … the financial statements … are properly drawn up:
(a)so as to give a true and fair view of:
(i)the company's state of affairs as at 30 June 1992 and of its loss for the year ended on that date; and
(ii)the other matters required by Divisions 4 and 4B of Part 3.6 of the Corporations Law to be dealt with in the financial statements;
(b)in accordance with the provisions of the Corporations Law; and
(c)in accordance with statements of accounting concepts and applicable accounting standards." (T documents, page 51)
A few months later, trading in the shares of the Company was suspended by the Australian Stock Exchange ("ASX"). Some six weeks later, a liquidator was appointed to the Company.
In respect of the payments made to Company A and Company B, Officer X was convicted of theft. The payments made on 30 June, 1992 and 17 July, 1992 had been misappropriated by Officer X for his own interests. The third payment, made on 3 July, 1992 made to Company A had in fact been paid to Company A but that company had then used the payment to purchase shares in the Company.
Registration of an auditor - legislative framework
An individual person must not consent to be appointed as an auditor of a company unless he or she is a registered company auditor (s. 324). Part 9.2 of the Law is concerned with the registration of auditors and liquidators. Registration of auditors is within the province of ASIC. Except in limited circumstances, ASIC must register a person if he or she possesses the qualifications or experience specified in s. 1280(2)(a), the prescribed practical experience in auditing and is both capable of performing the duties of an auditor and is otherwise a fit and proper person to be registered as an auditor (s. 1280).
Cancellation of registration of an auditor – legislative framework
Registration as an auditor may be cancelled by request of the registered auditor (s. 1290) but may also occur in the circumstances specified in s. 1292. That section also provides for the suspension of an auditor's registration and for other measures. Under s. 1292, ASIC may apply to the Board in certain circumstances including where:
"the person has failed, whether within or outside Australia, to carry out or perform adequately and properly:
(i)the duties of an auditor; or
(ii)any duties or functions required by an Australian law to be carried out or performed by a registered company auditor;
or is otherwise not a fit and proper person to remain registered as an auditor." (s. 1292(1)(d))
Section 1292(9) provides for the steps which the Board may take where ASIC has made an application to the Board to deal with a person who is registered as an auditor. It provides that:
"Where … the Board is satisfied that the person has failed to carry out or perform adequately and properly any of the duties or functions mentioned in paragraph (1)(d) … or is otherwise not a fit and proper person to remain registered as an auditor, liquidator or liquidator of that body, as the case may be, the Board may deal with the person in one or more of the following ways:
(a)by admonishing or reprimanding the person;
(b)by requiring the person to give an undertaking to engage in, or to refrain from engaging in, specified conduct;
(c)by requiring the person to give an undertaking to refrain from engaging in specified conduct except on specified conditions;
and, if a person fails to give an undertaking when required to do so under paragraph (b) or (c), or contravenes an undertaking given pursuant to a requirement under that paragraph, the Board may, by order, cancel, or suspend for a specified period, the registration of the person as an auditor, as a liquidator or as a liquidator of a specified body corporate, as the case may be."
A brief outline of the duties of an auditor
On 1 August, 1992, ss. 331A and 331B of the Law came into operation and regulated certain aspects of the responsibilities of auditors at the time the applicant conducted the audit. Section 331A provides that:
"(1) A company's auditor must report to the company's members on:
(a)the financial statements that must be laid before the company's annual general meeting; and
(b)the company's accounting records and other records relating to those financial statements."
(2)The auditor must give the report to the company's directors soon enough for them to comply with subsection 315(2)."
Section 331B provides that:
"(1) The report must state whether or not, in the auditor's opinion, the financial statements are properly drawn up:
(a)so as to give a true and fair view of the matters with which Divisions 4, 4A and 4B of Part 3.6 require them to deal …; and
(b)in accordance with this Law; and
(c)in accordance with applicable accounting standards.
(2) If, in the auditor's opinion, the financial statements are not drawn up in accordance with a particular applicable accounting standard, the report must give particulars of the quantified financial effect on the financial statements of failing to draw them up in accordance with that accounting standard.
(3) If the auditor is not satisfied about a matter referred to in subsection (1) or (2), the report must state why not."
The expression "applicable accounting standard" used in s. 331B(1)(c) means:
"… in relation to, or in relation to accounts or group accounts forming part of, a company's financial statements for a financial year, means an accounting standard that, when the financial statements are made out:
(a)applies to that financial year; and
(b)is relevant to the financial statements;".
An "accounting standard":
"… except in section 288, means:
(a)an instrument in force under section 32 of the Corporations Act 1989, as the instrument has effect for the purposes of Parts 3.6 and 3.7 of the Corporations Law of this jurisdiction; or
(b)a provision of such an instrument as it so has effect." (s. 9)
ASRB 1002 was an applicable accounting standard and it was headed "Events Occurring After Balance Date".
Beyond the statutory duties with which an auditor must comply in carrying out his or her duties, he or she must, as a member of the professional body to which he or she belongs, also follow the Statement of Auditing Standards ("AUS 1"). AUS 1 is now prepared by the Auditing Standards Board of the Australian Accounting Research Foundation and issued by the Australian Society of Certified Practising Accountants and the Institute of Chartered Accountants in Australia. At the relevant time in 1992, it was approved and issued by the National Councils of Accounting Bodies. It sets out the basic principles which govern the auditor's professional responsibilities and with which an auditor must comply in carrying out an audit.
Guidance on the practical application of the principles found in AUS 1 is given in the Statements of Auditing Practice ("AUP") prepared by the same board. Statements of Auditing Practice do not extend or limit the application of the auditing standards and may be varied to meet the requirements of a particular audit engagement.
ASIC's application to the Board regarding the applicant's registration as an auditor
ASIC made an application to the Board in relation to the applicant. It contended that he had failed, in accordance with s. 1292 of the Law, to carry out or perform adequately or properly the duties of an auditor or the duties or functions required by an Australian law to be carried out or performed by a registered company auditor. ASIC contended that:
"(a) the audit work completed in respect of the 30 June, 3 July and 17 July payments recorded in the books of … [the Company] was deficient and as a result [the applicant] failed to detect that the payments were not correctly reflected in the annual accounts, and that the annual accounts were therefore not properly drawn up so as to give a true and fair view of the company's state of affairs as at 30 June, 1992, and were not in accordance with applicable accounting standards;
(b)the audit report dated 21 September 1992 in respect of the annual accounts was incorrect in that the impact on the … [Company's] operations of the three payments mentioned above was not adequately dealt with in the auditor's report;
(c)the auditor's report dated 21 September, 1992 in respect of the statutory report was incorrect in that the details included in the statutory report were not in accordance with the records of the company." (T documents, page 19)
The paragraphs of AUS1 on which ASIC relied in contending that the applicant had failed to comply with a number of professional audit and accounting standards were:
Paragraph 19 of AUS1
"When auditors delegate work to assistants, they shall carefully direct, supervise and review the work delegated."
Paragraph 21 of AUS1
"Auditors shall document matters which are important in providing evidence that the audit was carried out in accordance with the Auditing Standards and Practice Statements."
Paragraph 22 of AUS1
"Auditors shall plan their work to enable them to conduct an effective audit in an efficient and timely manner. Plans should be based on knowledge of the client's business and shall be further developed and revised as necessary during the course of the audit."
Paragraph 23 of AUS1
"Auditors shall obtain sufficient appropriate audit evidence through the performance of compliance and substantive procedures to enable them to draw reasonable conclusions therefrom on which to base their opinion on the financial information."
Paragraph 25 of AUS1
"Auditors shall review and assess the conclusions drawn from the audit evidence obtained as the basis for expressing their opinion on the financial information. This review and assessment involves forming an overall conclusion as to whether:
(c)the view presented by the financial information as a whole is consistent with the auditor's knowledge of the business of the entity; and
(d)there is adequate disclosure of all material matters necessary to give a true and fair view." (T documents extracted from pp. 52-54)
ASIC relied on four AUPs: AUP 3 (The Auditor's Report on Financial Statements), AUP 8 (Audit Implications of Events Occurring After Balance Date), AUP 14 (Audit Evidence) and AUP 16 (Fraud and Error).
The payments and the applicant's actions in relation to those payments
The Board considered the material in relation to each of the three payments to which we have referred and set out its conclusions in relation to each. As its findings are not challenged by either the applicant or ASIC, we have accepted those findings.
30 June, 1992 payment
The Board found, and we also accept, that:
"… by the time of the 14 September memo [regarding outstanding Audit Queries by Audit Manager] and the first Audit Committee meeting [on 18 September, 1992] the only question with which … [the applicant] was concerned, in connection with the 30 June payment, was not whether the payment had been made to … [Company A] but the nature of the payment and how it should be characterised in the annual accounts." (T documents, page 35, paragraph 4.2.5)
"The 22 June letter called for payment of an amount in $US namely $US3,703,649.77. Not only that, but the letter also specifically requested the wire transfer to be effectuated in $US. The only evidence that …[the Firm] had of the amount which …[the Company] may have paid out in response to this invoice was the 30 June bank statement which showed a debit in $A.
To enable … [the Company] to fulfil its obligation under the 22 June letter, … [the Company] had to purchaser the requisite amount of $US. The 30 June letter did not establish the link between the $US invoice and the $A debit because it only referred to the $US amount.
As to the numerical connection between these two, there is only a handwritten note on the 22 June letter which consists of a $A amount (which corresponds to the unidentified debit shown in the 30 June bank statement) and '@.7425' which is the exchange rate that was used by … [the Company] in the annual accounts. That note does not seem … to be clear evidence of an actual conversion calculation having been made by … [the Firm]. There is no conversion calculation anywhere else in the audit working papers.
As a numerical result, $US3,703,649.77 converted into $A at 0.7425 produces the result of $A4,988,080 which is over $A10,000 less than the $A figure written on the 22 June letter and shown as a debit in 30 June bank statement." (T documents, page 35, paragraph 4.3.1)
We also find that the Firm had employed a straight line discount average calculation in calculating the amount owed by the Company to Company A. It had calculated a figure of $A 3,753,006 whereas the figure shown by Company A in its invoice forming part of its letter of 22 June, 1992 was $3,703,650.00. The discrepancy was $49,356.00 or a difference of 1.3%. (T documents, page 33, paragraph 4.2.3) Allowing for an assumption to be made as to the date on which the lease payments were to commence, it would have been possible to calculate the amount precisely. (T documents, page 36, paragraph 4.3.3)
There were various descriptions of the payment of 30 June, 1992. For example, the Company's cashbook identified the transaction as a payment to Company A in respect of the leasing of aircraft; the General Risk Analysis ("GRA") described it as part of the commitment of $9,460,678.00 shown as "Deposit on Spares and Engines" (the Board found that the amount of $4,462,500.00 paid to Company A on 30 June, 1992 precisely matched the remainder of that commitment); the letter of 22 June, 1992 described it as a consideration for certain services rendered by Company A (see paragraph 12 above); the agenda for the first Audit Committee meeting described it as the present value of future lease payments; and, in the annual accounts, 20% of the amount is shown under "Current Assets" within "Deposits" to secure … leases, operating premises and training". The remaining 80% is shown under "Non-Current Assets" within "Deposits to secure … leases".
The Board found that the evidence "… established that the 30 June payment was not, in fact, a payment to … [Company A] and its characterisation in the annual accounts as a 'deposit to secure … [certain property]' was incorrect. The payment was not a deposit and subject to the extent, if any, to which it could be recovered from … [Officer X] or entities associated with him, was not an asset. Furthermore, the liability arising out of the 13 June letter [letter dated 13 June, 1992 in Firm's files from Company A to Company] had not been recognised in the annual accounts." (T documents, page 51, paragraph 7.2)
The GRA referred to deposits of $A1,438,308.00 already paid for Company A and Company C and to a commitment to pay a further $A1,080,000.00. This was followed by a note that the Firm "… will ensure a correct treatment is adopted, and appropriate disclosures are made by reviewing agreement." There was also a note that the Company's other commitments may include security deposits on equipment of $800,000.00. This was followed by a note that the Firm "… will need to review contracts/agreements for the above to determine exact commitments" (T documents, page 37, paragraph 4.3.4). There was no evidence that the Firm undertook any work of the type foreshadowed in the GRA to reconcile the fact that the payment of 30 June, 1992, when viewed as a deposit, was significantly larger than anything else described as a deposit in that document.
Although the GRA stated that the Firm would confirm balances held with the company externally, it did not seek any external confirmation other than to have regard to the letter of 8 September, 1992 from Company A to the Company. The Firm neither saw nor asked for any documentation from the bank, which was the only party common both to the Company's purchase of the necessary United States' currency and to its transmission of that currency to Company A.
The Board went to find, and we accept, that:
"(a) The evidence reviewed by … [the applicant] (and his staff) was not sufficient and appropriate to enable him to draw a reasonable conclusion as to the 30 June payment;
(b)The procedures which … [the applicant] performed or directed to be performed were not sufficient to obtain reasonable assurance about the correctness of the way in which the 30 June payment was dealt with in the books of … [the Company] and in the annual accounts;
(c)… [The applicant's] knowledge of … [the Company] combined with his knowledge of other transactions (including in particular the 3 July payment) was such that he should not have accepted the evidence which he did on which to base his conclusion concerning the 30 June payment; and
(d)The state of the evidence on which … [the applicant] based his conclusion concerning the 30 June payment was such that it should have caused him to make further enquiries (including those of the type outlined in the GRA) which we believe would have revealed the true nature of the 30 June payment." (T documents, page 40, paragraph 4.5)
3 July, 1992 payment
Company A wrote a letter to the Company dated 14 May, 1992. A copy of that letter was given to the Firm. In it, the Company agreed to place a security deposit of $US195,000.00 for each piece of equipment, $US195,000.00 for training with Company C and, at the time of signing the lease, an additional security deposit of $US195,000.00 for each piece of equipment. The security deposits were to be returned to the Company when it had fulfilled all of its obligations under the lease agreement and related documents to be entered into. The letter continued that, at the sole discretion of Company A, it could require an additional security deposit. The amount of the additional amount was within the sole discretion of Company A but could not exceed $5m.
On 1 July, 1992, Company A notified the Company that it required additional security of $US3,300,010.00. The letter read:
"… This money will be held by … [Company A] until such time as … [Company A] negotiates final agreement with … [Company C] in relation to the Agreement entered into with them on February 20, 1992, in relation to the … [equipment] which are the subject of separate leases which … [the Company has] entered into with … [Company C]. Once … [Company A's] obligations in relation to … [this equipment] with … [Company C] have been extinguished, which we expect to be early October, we would then as previously advised return to you the said deposit plus interest." (T documents, page 41, paragraph 5.1.2)
The Company gave the Firm a copy of the letter of 1 July, 1992 and also of its own written to Company A on 2 July, 1992. The later letter referred to the Company's sending by telegraphic transfer the sum of $US3,300,010.00.
The payment amounted to $A4,462,500.00 and was identified as part of significant payments after 30 June, 1992. It was included in the Firm's memorandum of 14 September, 1992 regarding outstanding Audit Queries by the Audit Manager. It was included with one other payment under the heading relating to equipment security deposits. The memorandum noted that documentation was required to link the payments with the lease agreements. The memorandum was forwarded to Officer X on 15 September, 1992.
The Firm's working paper regarding Company A's security deposits was dated 15 September, 1992. It noted the contents of the correspondence and suggested that there need be no disclosure in the accounts due to the temporary nature of the amount. The matter was discussed at the second Audit Committee meeting. Those discussions confirmed in the applicant's mind that no additional disclosure was required in the accounts of 30 June, 1992 as the there was no liability or commitment existing at that date. It was only a contingent liability referred to in the letter of 14 May, 1992.
As we have said, the GRA referred to deposits of $A1,438,308.00 already paid for Company A and Company C and to a commitment to pay a further $A1,080,000.00. This was followed by a note that the Firm "… will ensure a correct treatment is adopted, and appropriate disclosures are made by reviewing agreement." There was also a note that the Company's other commitments may include security deposits on equipment of $800,000.00. This was followed by a note that the Firm "… will need to review contracts/agreements for the above to determine exact commitments" (T documents, page 43, paragraph 5.3.1). There was no reference to a payment of $US3,300,010.00.
The Firm's examination of the 3 July, 1992 payment was directed to obtaining an understanding of its nature in order to identify whether or not it was a post balance date event to be dealt with in the annual accounts. It was very significantly in excess of any amounts referred to in the GRA as security deposits on equipment.
The Firm did not identify the lease agreement under which the payment was to be made. It could not be a lease agreement regarding the equipment because the Company had entered a lease agreement directly with Company C on 16 June, 1992 rather than, as originally planned, through Company A. The Firm had examined the lease agreements between the Company and Company C and the deposits paid together with the terms and conditions on which they were paid. Instead of making further enquiries, the Firm relied solely on the letter of 14 May, 1992 and did not examine a number of discrepancies which are found in the letter and which were identified by the Board (T documents, page 44, paragraph 5.3.2). It did not explore the issue whether the agreement between the Company and Company A had in fact been terminated and Company A was not entitled to demand a further security deposit.
As the Board found, it was "… established that the 3 July payment was claimed by and made to … [Company A], but it was not an amount to which … [Company A] was entitled. The amount and fact of the payment was, in the circumstances of … [the Company], material. Accordingly, the payment was a relevant post balance date event requiring disclosure in the notes to the annual accounts." (T documents, page 51, paragraph 7.2)
The Board went on to find, and we also accept, that:
"(a) The evidence reviewed by … [the applicant] (and his staff) was not sufficient and appropriate to enable him to draw a reasonable conclusion as to the 3 July payment;
(b)A review by … [the Applicant] adequate for the purpose, when combined with his knowledge of the documentation supporting the 30 June payment would have revealed that the demand by … [Company A] in the 1 July letter was a demand … [Company A] was not entitled to make;
(c)… [The applicant's] knowledge of … [the Company] and of its business and financial position combined with his knowledge of other transactions (including in particular the 30 June payment) was such that he should not have accepted the evidence which he did on which to base his conclusion concerning the 3 July payment; and
(d)… [The applicant] did not carry out or direct the carrying out of sufficient and appropriate examinations or have appropriate regard to all relevant matters to be in a position to make a proper assessment of this post balance date transaction." (T documents, page 46, paragraph 5.5)
17 July, 1992 payment
From sometime in the first half of 1992, there were negotiations between the Company and Company B. Those negotiations were in respect of an agreement under which Company B was to provide certain maintenance services to the Company. Under the heading "Other Commitments", the GRA recorded an amount of $208,000.00 against Company B with "($1m - $792,000 from Vic Govt)" next to that figure. The GRA stated that the Firm would need to review the contracts or agreements to determine the exact commitment.
On 6 July, 1992, the Victorian Government confirmed that a grant of $792,000.00 was available on certain terms and conditions. It sent an agreement to the Company for signature. The Company accepted the offer on 10 July, 1992 but applied for a waiver of the requirement that it had to train certain staff in Australia.
On 17 July, 1992, the Company drew a cheque in the sum of $1,013,500.00 and the cheque was debited to the bank account. The Company's cashbook recorded the transaction as a payment to Company B but the cheque was drawn in favour of the Company.
The agreement between the Company and Company B was dated 28 August, 1992. It provided that if the agreement were cancelled in certain circumstances within the first 5 years, the Company would become liable to pay Company B $1m or some lesser sum if it were cancelled in a year other than the first. The Company would also be liable to provide Company B with an acceptable security for payment of that amount. An acceptable security was a third party bank guarantee or a charge over a non-negotiable Certificate of Deposit. The only other provisions in the contract relating to payment were those payments to be made by the Company to Company A for services rendered.
There was no evidence that the Firm reviewed any agreement creating a commitment to Company B for $1m or for any other amount. There is also no evidence of the Firm's making any enquiries to explain or understand the discrepancy between the sum of $1m referred to in the GRA and in the Firm's working paper dated 20 July, 1992 regarding the Victorian Government grant as a commitment and the sum of $1,013,500.00 shown in the Company's records as having been paid to Company B.
The Board found that the evidence:
"… established that if the 17 July payment had been properly examined it would have been revealed as a payment not to … [Company B] but to the … [Company's] Float Trust Account. In the circumstances, the payment was also a relevant post balance date event requiring disclosure in the notes to the annual accounts." (T documents, page 51, paragraph 7.2)
The Board went on to find that:
"(a) The evidence reviewed by … [the Applicant] (and his staff) was not sufficient and appropriate to enable him to draw a reasonable conclusion as to the 17 July payment; and
(b)… [The applicant] did not carry out or direct the carrying out of sufficient and appropriate examinations or have appropriate regard to all relevant matters to be in a position to make a proper assessment of this post balance date transaction." (T documents, page 50, paragraph 6.4)
Annual accounts
In relation to the preparation of the annual accounts, the Board concluded that:
"… because the annual accounts:
presented the 30 June payment as a deposit and failed to disclose its true character;
failed to recognise the liability arising out of the 13 June letter; and
failed properly to disclose the 3 July payment and the 17 July payment;
the annual accounts were not properly drawn up so as to give a true and fair view of the company's state of affairs at 30 June 1992 and of its loss for the year ended on that date." (T documents, page 51, paragraph 7.2)
The Board also concluded "… that the annual accounts did not comply with the provisions of AAS 8 by reason of the non-disclosure of the 3 July and 17 July payments. It follows that the annual accounts did not comply with ASRB 1002 and that the opinion expressed in … [the applicant's] report to the effect that 'the financial statements were properly drawn up in accordance with applicable accounting standards' was not correct." (T documents, page 52, paragraph 7.3)
With regard to AUS1, the Board considered each of the paragraphs we have set out above and, in its document entitled "Findings", said in relation to each of them:
Paragraph 19 of AUS1
"On the evidence before the Board there is little indication that … [the applicant] actually directed the work undertaken by his staff in respect of the 30 June, 3 July and 17 July payments.
The GRA documented an audit approach, but, in critical areas, those directions were not adhered to. There was no evidence of … [the applicant's] supervision of audit staff (other than some discussions with …) and limited evidence of his review. Most of the working papers were initialled by … [the applicant], but, in his oral testimony … [the applicant] told the Board that his initials on working papers did not indicate that he had read in detail the working papers or key documents appended to the working papers.
In our view the agreements and correspondence between … [the Company] and … [Company A] and between … [the Company] and … [Company B] were not properly considered in the course of the audit notwithstanding that the GRA identified the review of such agreements to be important to the conduct of an effective audit of … [the Company].
It is our view that this indicates that the work of … [the applicant's] assistants was not directed, supervised and reviewed adequately.
There may have been further documents evidencing a review of the working papers by … [the applicant], by one of his partners and by … which were not retained. As a result, the material before the Board may not fully reflect the review process. However, it was … [the applicant's] evidence that all matters arising on the review would have been dealt with and recorded in the working papers (or in the annual accounts). It is our view that the working papers did not record appropriate consideration of a number of matters and as a result we find the review process in respect of each of the three payments to have failed to meet the standard set out in paragraph 19 of AUS 1." (T documents, page 52, paragraph 7.4.1)
Paragraph 21 of AUS1
"We believe that the audit working papers contained insufficient information about the understanding of the … [Company A] arrangements so far as that understanding dictated the course of action followed by … [the applicant] and his staff in connection with both the 30 June payment and the 3 July payment.
In our view the audit working papers:
included sufficient documentation linking the $US amount in the 22 June letter [letter in Firm's files from Company A to the Company dated 22 June, 1992] with the $A debit appearing in the … [Company] bank statement, (the 30 June payment); and
should have contained a documented analysis of the various … [Company A] agreements and an understanding of the relationship that existed between … [Company A] and … [the Company].
The documentation relating to the 17 July payment did not record the consideration given to whatever was relied upon for the purpose of concluding that the 17 July payment was a payment to … [Company B] in accordance with a commitment by … [the Company] to … [Company B].
Finally, it is our opinion that the provisions of paragraph 21 were breached by the failure to adequately document the direction, supervision and review by … [the applicant] of the work undertaken by his staff." (T documents, pages 52-53, paragraph 7.4.2)
Paragraph 22 of AUS1
"The planned approach for the audit of … [the Company] was set out in the GRA which was the primary planning document for the audit. It set out … [the Firm's] broad outline for the audit approach and relevant issues to be taken into account in planning the audit. The plan appears to have been based on … [the applicant's] knowledge of the business of … [the Company] … and was likely to have enabled … [the applicant] and his staff to conduct an effective audit.
However, it is evident that … [the applicant] and his staff did not adhere to that plan. It appears that matters arising in the course of the audit that were inconsistent with the knowledge displayed in the GRA were not evaluated against that knowledge and the audit approach was not revised to ensure that the work conducted by … [the Firm] would still result in the conduct of an effective audit.
… [the applicant] stated that there were detailed audit programs which provided guidelines for the audit team in carrying out various aspects of the audit and that as the work progressed … [the Firm] revised the work that needed to be carried out in accordance with further information they became aware of. However, we were given no other evidence of any detailed audit programs devised in particular for any of the three payments nor of any revision of any such detailed audit programs." (T documents, page 53, paragraph 7.4.3)
Paragraph 23 of AUS1
"In our opinion … [the applicant] failed to obtain sufficient appropriate audit evidence in connection with all three of the payments under consideration.
In particular, in considering the 30 June payment … [the applicant] had no satisfactory external evidence to the effect that the purported payment to … [Company A] had been made. There was no evidence obtained from … [the Bank] in respect of the transaction and the 8 September letter was insufficient evidence of the asserted payment having taken place.
In respect of the 3 July payment, the documents examined by … [the Firm] provided insufficient evidence of the arrangements between … [Company A] and … [the Company] and failed to provide an adequate explanation as to why the 3 July payment should have been made and why it was not a transaction relevant to the matters to be considered pursuant to AAS 8.
In respect of the 17 July payment … [the applicant] failed to obtain sufficient appropriate evidence to establish whether the payment was relevant to the annual accounts." (T documents, page 53, paragraph 7.4.4)
Paragraph 25 of AUS1
"In the opinion of the Board the annual accounts did not present a view consistent with the view that should have been held by … [the applicant] as a consequence of his understanding of the business and state of affairs of … [the Company].
In particular, the annual accounts conform only with the various representations made to … [the Firm] and conclusions drawn from them. The annual accounts do not conform with the view that should have been held by … [the applicant] as a consequence of his involvement with the affairs of … [the Company] throughout the capital raising. … [The applicant's] involvement and the level of information he already had were reflected in the 14 July letter and the GRA." (T documents page 54, paragraph 7.4.5)
With regard to the AUP, the Board considered AUP 3, AUP 8 and AUP 14 and considered that the matters raised under them had already been dealt with sufficiently. It also considered AUP 16, which sets out the course to be followed when fraud or an error has been uncovered. The applicant and his staff in the Firm were not aware of any fraud or error and so did not have regard to AUP 16. In those circumstances, he cannot be said to have failed to comply with AUP 16.
CONSIDERATION
Based on the findings which we have made, we are satisfied that the applicant failed to carry out or perform adequately and properly the duties of an auditor as we have summarised them. He has failed to follow the standards established by the professional bodies of which he is a member and which he is, as a member, required to follow. As a result of his failing to follow those standards, the applicant has failed to detect that the Company's annual accounts were not properly drawn up so as to give a true and fair view of its state of affairs as at 30 June, 1992. He has also failed to detect that they were not in accordance with applicable accounting standards. It follows that we are satisfied that, in the circumstances of this case and in the light of those breaches, he has failed to carry out or perform adequately and properly the duties of an auditor within in the meaning of s. 1292(1)(d) of the Law.
As Mr McMurdo submitted, we accept that the applicant's breaches were not deliberate breaches of his duties. They were not, however, trifling. When viewed in the context of the activities in which the Company was then engaged and the nature of the business that it proposed to conduct, they must be regarded as very serious. The Company was engaged in major acquisitions that required significant expenditure. Variation in the amount of that expenditure would have a significant impact upon the Company's cash flow and so upon its ability to maintain its operations. The Company was embarking upon its operations in a highly competitive environment where the risks of failure were great. If it were to embark upon those operations but later fail, there would be many people who would suffer directly as a result. Those people included not only those who supported it by purchasing shares in the public float but also its staff and customers. At the same time, there was a lot of public support for it.
The issue in this case is whether the applicant's failure means that his registration should be cancelled or suspended for a specific period or that he should be admonished or reprimanded or required to undertake to refrain from engaging in specified conduct either with or without specified conditions. Those are the courses of action prescribed by s. 1292(9).
In considering this question, we must first consider the Tribunal's role. Mr Daubney urged on us to bear in mind that the Board is established as the specialist disciplinary tribunal. That is clear, we agree, from the requirement that the Board consist of a chairperson, a member selected by the Minister from a panel of 5 nominated by the National Council of the Institute of Chartered Accountants in Australia and a member selected by the Minister from a panel of 5 nominated by the National Council of the Australian Society of Certified Practising Accountants.
Relying on authorities such as Re Hodgekiss (1959) 62 SR (NSW) 340; (1959) 79 WN (NSW) 163 (Owen, Maguire and Hardie JJ), Bradshaw v Medical Board (WA) (1990) 3 WAR 322 (Kennedy, Rowland and Ipp JJ) and Aldrich v Boulton (2000) 109 ACrimR 568 (Chesterman J), Mr Daubney went on to submit that, even though the hearing is in the nature of a re-hearing, the Tribunal should give great weight to, and be slow to differ from, the Board's decision. He relied particularly upon the following passage from Re Hodgekiss where Owen J said:
"… I think it desirable to state shortly my view as to the way in which the Court should approach an appeal of this nature. The Statutory Committee is a tribunal of practising solicitors of standing appointed by the Chief Justice under the terms of the Legal Practitioners Act for the purpose of hearing charges of professional misconduct referred to it by the Court or a judge or by the council of the Incorporated Law Institute. For the purposes of punishing members of the profession who fail to maintain proper standards of honour and honesty and of protecting members of the public, the Committee is given wide powers, including the power to strike the names of offenders from the roll. Such a tribunal is eminently fitted to decide whether the conduct of a solicitor in any given set of circumstances amounts to professional misconduct and to determine what is the proper penalty to be imposed in any particular case. While an appeal from its decision to the Court is in the nature of a rehearing, the Court should give great weight to and be slow to differ from the Committee's opinion that particular acts or omissions by a solicitor do or do not amount to professional misconduct, and the Court should attach the same weight to a decision of the Committee as to the appropriate order to be made in a particular case. (See In re A Solicitor (No. 2) (1924) 93 L.J.K.B. 761; Re a Solicitor [1956] 3 All E.R. 516)." (page 343)
Although Owen J was slow to differ from the Statutory Committee's findings and decision, he went on to consider how to determine the facts on which a finding of professional conduct has been based. His Honour said that the findings should be regarded in the same way as if they had been found by a judge sitting without a jury. It must be borne in mind, his Honour said, that the judge has the opportunity of seeing and hearing the witnesses. That opportunity was denied to the Court. He went on:
"But it is for the Court to make up its own mind what facts are proved by the evidence and what inferences should be drawn from those facts, and it would not, in my opinion, be proper for it merely to satisfy itself that there is evidence which could justify the findings against which the appeal is brought. It must make up its own mind what the facts are. To do otherwise would be to disregard the legislative direction that the appeal shall be in the nature of a rehearing. …" (page 343)
In the later case of Builders Licensing Board v Sperway Constructions (Sydney) Pty Ltd (1976) 135 CLR 616; (1976) 14 ALR 174; (1976) 51 ALJR 260 (Barwick C.J., Stephen, Mason, Jacobs and Murphy JJ), Mason J canvassed various ways in which a court might conduct a "rehearing". His Honour said that a rehearing might entail a hearing de novo (or an exercise of original jurisdiction) where the court on hearing an appeal is not limited to the material before an administrative body. That might occur where, for example, there is no provision for a hearing at first instance, the administrative body is not bound by the rules of evidence, the issues are not justiciable and it is not bound to give reasons for its decision (page 334). There are, however, administrative bodies required to determine justiciable issues formulated in advance, to conduct a hearing, where the parties may be represented, where evidence is subject to cross-examination, a transcript kept, the rules of evidence applied and reasons given for its determination.
In Bradshaw v Medical Board (WA), Rowland J considered that the Medical Board (WA) had characteristics of administrative bodies in the latter category identified by Mason J. Rowland J considered the role of the Court in such a case:
"… What the judge must do is to decide whether those facts constituted conduct which amounted to professional misconduct. In doing so, he would have to assess what weight to give to the decision of the Board and, with respect to those who suggest otherwise, he would start off wanting to give great weight to the views of members of the Board, composed as they are of members of the profession who have been appointed to the Board for the simple reason that they are members of the profession, unless the facts or views are such that he is unable to accept either the facts as found or the views as expressed. To do otherwise is to avoid the whole purpose of having a specialist tribunal appointed for the purpose. That is not to suggest that he could not, and should not, overturn their decision if, after having considered the whole of the evidence, he believed that the decision was wrong." (page 335)
Although unnecessary for him to decide the issue, Rowland J expressed the view that Commissioner White, sitting as a Judge of the Supreme Court, was correct when he conducted a rehearing:
"… He gave due attention to the makeup of the Board and properly, in my view, gave it the respect and consideration which one would normally give to such a specialist tribunal; but nevertheless stated that he was unable to say that it was in error, having considered all the evidence." (page 336)
It is apparent from this brief summary of a cross-section of the authorities that the weight to be given to the findings and decision of the administrative body whose decision is under consideration, depends on such matters as the nature of that body's consideration and the legislative provisions regulating its review. These were touched on in Re Wolstencroft and Companies Auditors and Liquidators Disciplinary Board (1998) 54 ALD 773, (Deputy President Forgie and Mr Way, Member):
"54. The essence of Mr Bull's submissions was that Mr Wolstencroft had committed various breaches of his duty as an auditor, that ASIC only referred the most serious breaches to the board and dealt itself with less serious breaches, the board provides the highest level of peer review available to an auditor, the board had decided that suspension was appropriate and, therefore, the tribunal should affirm its decision. It is apparent from our findings of fact, that we regard Mr Wolstencroft's breaches of his duty as serious. We also accept that the board provides the highest level of peer review and we hold it in great regard. …
55. That brings us to the Act. If we were to accept the decision of the board simply because of our regard for it and because it is the highest level of peer review of an auditor's conduct, we would be failing to fulfil our responsibility under the Act. The Act has given the tribunal power to review the board's decision. If we were not to carry out that function we would be improperly refusing to exercise our jurisdiction: see for example Repatriation Commission v Morris (1997) 26 AAR 284; 79 FCR 455; 50 ALD 156 per Beaumont J and Re Coldham; Ex parte Brideson (1989) 166 CLR 338; 84 ALR 165 per Wilson, Dean and Gaudron JJ at 172. If we were to accept that on finding that Mr Wolstencroft has committed serious breaches of duty leads immediately to the conclusion that he should be suspended, we would also be failing to exercise our discretion according to the Act. We will return to that shortly. In the meantime, we will simply observe that the ASIC's policy to take only the most serious cases to the board and its view that the most serious cases should attract a consequence of suspension (or cancellation) cannot override our duty to act according to the Act as passed by parliament." (page 785)
In view of Mr Daubney's submission, we would go further. The Act does not vary the provisions of the AAT Act. Therefore, in reviewing the Board's decision, we must make the decision afresh and are not limited to a consideration of whether the Board's decision was open on the evidence. We are not limited to the evidence led before the Board. As part of that review process, we must make findings of fact based on the evidence and we must reach our decision in light of those findings and the relevant law. If we were to give weight to the decision of the Board simply because of our regard for the Board and because it is the highest level of peer review of an auditor's conduct, we would be taking into account something other than the evidence and we would be in danger of adopting the Board's decision rather than making our own. The Board's decision can only be evidence of the fact that it made a decision based on certain findings of fact. It founds the Tribunal's jurisdiction but it cannot itself be evidence of the matters upon which it has reached a decision and it cannot influence the decision on review that the Parliament has entrusted to this Tribunal.
That brings us to the decision that we should make in this case. Section 1292(9) sets out three additional courses that are available to us in this case: admonishing or reprimanding him; requiring him to give an undertaking to engage in, or to refrain from engaging in, specified course of conduct; and requiring him to give such an undertaking except on specified circumstances. In considering which course we should adopt, we must bear in mind that we are not imposing a penalty. As the Full Court of the Federal Court said in Australian Securities Commission v Kippe and Another (1996) 137 ALR 423; (1996) 20 ACSR 679; (1996) 67 FCR 499; (1996) 14 ACLC 1226 (Von Doussa, Cooper and Tamberlin JJ) in relation to a banning order made under s. 829 of the Act against a dealers representative:
"The immediate and direct legal effect intended by a banning order is not to impose a penalty or punishment on the person concerned, but to be preventive in that it removes a perceived threat to the public interest and to public confidence in the securities and futures industry by removing that person from participation therein." (page 431)
The principles enunciated by the Federal Court apply equally to a consideration of the provisions of s. 1292(9) as they do to s. 829. This was the approach adopted in Re Wolstencroft where it was said:
"It follows from the view taken by the full court of the Federal Court in the Kippe case that our choice of one of those courses must be guided by what is in the public interest in two senses. First, there is a public interest in ensuring that the individual follows the appropriate course of action in the future. Second, there is the public interest in ensuring that the public can be secure, or as secure as is reasonably possible, in the knowledge that those who are entrusted with the auditing of accounts can be properly entrusted with that task. It is particularly important that auditors ensure that the financial information of whom they audit is presented fairly within an identified financial reporting framework. That is so because their reports are relied upon by those who are both related to and unrelated to the subject of the audit. Those people must have confidence that they can rely on the audited accounts." (page 786)
This is consistent with the more recent judgement of the New South Wales Court of Appeal in New South Wales Bar Association v Hamman [1999] NSWCA 404, 29 October, 1999 (Mason P, Priestely JA and Davies AJA). The court considered disciplinary proceedings against a legal practitioner and said:
"… Disciplinary proceedings against a legal practitioner are concerned with the protection of the public (Wentworth v New South Wales Bar Association (1992) 176 CLR 239 at 250-251). The object is not to punish the practitioner but to protect the public and to maintain proper standards in the legal profession. …" (paragraph 21)
Authorities such as New South Wales Bar Association v Evatt (1968) 117 CLR 177; (1968) 42 ALJR 13 (Barwick C.J., Kitto, Taylor, Menzies and Owen JJ) and Hardcastle v Commissioner of Police (1984) 53 ALR 593 (Bowen C.J., Gallop and Lockhart JJ) acknowledge that, in achieving the objects of public protection and the maintenance of proper professional standards, an order made in disciplinary proceedings may involve great deprivation for the person who is the subject of that order. Despite that, the object of the order is not to punish or to extract retribution.
How do we achieve that object? Section 1292(9) simply sets out courses of action that may be adopted. It is not expressed in mandatory terms and it is open to us to take no action at all even when we are satisfied, as we are, that the applicant has failed to carry out or perform adequately or properly the duties of an auditor or the duties or functions required by an Australian law to be carried out or performed by a registered company auditor. Understandably, s. 1292(9) does not set out any criteria as to when one course should be adopted and not another. It cannot for the infinite variety of ways in which a person may err and so fail in his or her duties is as boundless as the range of human activity itself. Simply to err does not of itself justify a person's being suspended. Suspension, or cancellation, is only a course that should be adopted if it is necessary for the public protection. Circumstances in which it would be necessary were identified by Kirby P in Pillai v Messiter [No.2] (1989) 16 NSWLR 197:
"… The public needs to be protected from delinquents and wrong-doers within the professions. It also needs to be protected from seriously incompetent professional people who are ignorant of basic rules or indifferent as to rudimentary professional requirements. Such people should be removed from the register or from the relevant roll of practitioners, at least until they can demonstrate that their disqualifying imperfections have been removed. …" (page 201)
Bearing these principles in mind, we will turn to the facts of this case. The applicant was aware of the business operated by the Company and was aware that it was a high risk venture in a very competitive industry. He was aware of the investment by those members of the public who subscribed to shares in the public float, by the Company's staff and ultimately by its customers. He was aware of the need for the Company to raise sufficient share capital if it was to start operating its business at all and he was aware of the need for it to have sufficient operating capital at the outset. It is in this context that his actions and omissions, as we have found them to be, must be weighed. When they are weighed, they are found to be seriously wanting.
But are they wanting so as to justify the applicant's being suspended? That is the course of action chosen by the Board. As Mr Daubney submitted, the applicant did not accept at the outset that his audit had not been of an appropriate standard. He contested ASIC's contentions before the Board and it was only at the hearing before us that he accepted the Board's findings. This, even when taken with the seriousness of his breaches of duty, does not necessarily justify his being suspended in order to protect the public. Testing ASIC's contentions was a course open to him and he should not be condemned for having chosen to take that course. His case was not frivolously put and was supported by the evidence of another auditor. Having received the Board's findings and its reasons for those findings based on the evidence he and others put to it, he has now accepted them.
The applicant's breaches of duty all arise from one or other of the three payments made on 30 June, 3 July and 17 July, 1992. There is no evidence of any wrongdoing on his part other than arising from, or surrounding, those three payments. In relation to those payments, we agree with the Board that:
"This was not a case of mistake or error. This was a case (albeit an isolated case) in which the work necessary to carry out the audit was not undertaken in an adequate and proper way or, in some respects, at all. This is a case in which the prescribed standards were simply not met." (Board's Order, page 2)
For all that, it was, as the Board said, an isolated case. It does not, without more, indicate an ignorance of basic rules or an indifference as to rudimentary professional requirements. The indication is of carelessness and of lack of attention to detail in a particular case but not generally. That carelessness and lack of attention had dire consequences but the consequences do not change the fundamental nature of the action leading to them. To adopt the words of Kirby P in Pillai v Messner [No.2], it was "a terribly unfortunate mistake" (page 201), or series of mistakes, in one audit.
Mr Daubney submitted that the applicant has not been truthful in relation to one of his more recent activities. At the hearing before the Board, Mr McMurdo had submitted that:
"… [The applicant] has informed us, and we wish to say to the Board, that that is not an isolated example of the impact that these proceedings had already had upon him professionally. That is to say, that we're instructed that in the last three to four years … [the applicant] has declined any further appointment as the auditor of a public company pending the outcome of these proceedings."
An affidavit sworn by Mr Paul Moni, who is a chartered accountant and employed by ASIC as its National Accounting Adviser, states that he had located an independent audit report for a certain listed corporate entity that we will call "Company D". That company was registered on 30 June, 1999. The independent audit report was dated 6 September, 1999 and was in respect of the year ended 30 June, 1999. Mr Moni had spoken to Company D's company secretary who advised him that the Firm had been engaged to provide the report and the applicant was the partner who had signed the report.
The applicant did not deny that he had signed the independent audit report. In an affidavit, he explained that, prior to the incorporation of Company D, 80% of a business that we will call "D" was owned by a company that we will call "Company E". The applicant said that he had been Company E's auditor in relation to the D business since at least 1991. Company E is the largest shareholder in Company D and Company D has operated the D business since 30 March, 1999. He regarded his work with Company D as stemming from his work as the auditor of Company E and of the accounts of the D business. We accept the applicant's explanation and do not regard him as attempting to mislead either the Board or us. In the circumstances, therefore, we do not consider that his instructions to Mr McMurdo to advise the Board that he has declined any further appointment as the auditor of a public company pending the outcome of the proceedings is not indicative of any attempt to mislead it or of any disregard for the accuracy of his assertions.
On the basis of the evidence, we are satisfied that the applicant has enjoyed a very sound professional reputation over a considerable period of time. Apart from those leading to the present proceedings, he has never been the subject of a complaint to the Board or to either of the professional bodies of which he is a member. Over and above his professional duties in respect of individual clients, he has also made a contribution to the profession by his active involvement in the maintenance of appropriate auditing standards. He is held in high regard by his peers.
In view of these findings and the isolated nature of his breaches, we do not consider that suspension will in any way enhance the prospects of his following appropriate auditing practice and procedure in the future. There is no reason to think that he will err in the future. That leads us to consider the public interest in ensuring that the public can be secure, or as secure as is reasonably possible, in the knowledge that those who are entrusted with the auditing of accounts can be properly entrusted with that task. It is a particularly important task, for many people, both within and without the body whose accounts are audited, rely on the information in that audit. They rely on it to make decisions that may have a significant impact upon their financial situation and so ultimately upon their well-being generally.
This takes us to consider whether suspension of the applicant's registration can add to the public's confidence that auditors can properly be entrusted with their task. It would certainly assure the public that, if a person makes a careless mistake, the matter will not be treated lightly and that the professional consequences of the carelessness are serious for that person. Suspension, though, will do very little, if anything, to achieve the public purpose. The mistakes occurred in an isolated set of circumstances and, as we have said, do not demonstrate an ignorance of basic rules or an indifference as to rudimentary professional requirements. Suspension of the applicant will not go any way to eradicating such isolated lapses of professional standards by other professionals.
That is not to say that the public should not be aware that such lapses of professional standards, having as they do such serious consequences, are treated seriously. That is so even though some seven years have passed since the applicant's series of lapses and the current proceedings. It is our view that the public interest will be met by reprimanding or admonishing him and by maintaining the order that the applicant pay 80% of ASIC's costs. We note that the Tribunal in Re Australian Securities Commission and Companies Auditors and Liquidators Disciplinary Board (1994) 19 AAR 377; (1994) 12 ACLC 340; (1994) 13 ACSR 373 (Deputy President McMahon, Mr Way and Mr Stanford, Members) considered that admonishment was a milder reproof than a reprimand. In view of the seriousness of the applicant's lapse and the seriousness of the consequences that flowed from it, we consider that a reprimand is the appropriate course. It remains the appropriate course despite the passage of time and despite the significant impact that the matter has already had upon the applicant's professional and personal life. In the context of this case and taken together with what will not be an insignificant financial burden in the form of 80% of ASIC's costs, it reassures the public that breaches of professional standards will not be treated lightly. It also advises the profession that the consequences of such breaches where they have serious impacts upon the public will be serious.
In order to achieve these objects, we consider that the confidentiality order that was made at the conclusion of the hearing should be revoked in so far as it relates to the applicant, the Firm, the Company and Company A, or of any business acquired or operated by Company A and to evidence in relation to those persons or entities. We are mindful that a party may wish to appeal against our decision. In view of that, we will defer revocation of the s. 35 order until the expiration of the appeal period set out in s. 44 of the AAT Act.
For the reasons we have given, we:
1. set aside the decision of the respondent dated 21 December, 1999 in so far it decided that the applicant's registration as a registered auditor be suspended for two years but that the order not come into effect until 19 January, 2000;
2.substitute for that part of the decision under review a decision that the applicant be reprimanded in relation to the audit of the Company in so far as it related to payments made by that company on 30 June, 3 July and 17 July, 1992;
3.otherwise affirm the decision under review; and
4. with effect from the expiration of the appeal period set out in s. 44 of the Administrative Appeals Tribunal Act 1975, revoke the confidentiality order made under s. 35.
I certify that the ninety preceding paragraphs are a true copy of the reasons for the decision herein of
Miss S A Forgie (Deputy President);
Mr K L Beddoe (Senior Member) and
Mr J D Horrigan (Member)Signed: .........................................
M Martinez AssociateDate of Hearing 13 June, 2000
Date of Decision 22 December, 2000
Counsel for the Applicant Mr McMurdo QC
Solicitor for the Applicant Minter Ellison
Counsel for the Respondent Mr Daubney
Solicitor for the Respondent Australian Government SolicitorCounsel for Party Joined Miss E Ford
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