In June 2012, ASIC's chairman stated that ASIC 'was very focused on
proactive surveillance, by working with the media to call things early, to try
and warn consumers and to actually engage with product manufacturers early and
say, 'Is this really the right product you want to be selling to the market?''.
According to Mr Medcraft, ASIC is 'trying to be proactive not just being,
if you want, the ambulance that arrives at the scene of the accident when it
Many witnesses to the inquiry were of the view, however, that ASIC does
not deal with all the complaints it receives adequately; rather they argued
ASIC ignores grassroots warnings of impending collapses and crisis.
The committee has already cited two cases as particular examples of where,
without any effective form of early intervention, an emerging problem was
allowed to develop causing harm to many retail consumers and investors. In this
chapter, the committee's primary focus is on the way in which ASIC receives and
investigates complaints and reports of corporate wrongdoing.
Managing complaints and receiving reports of corporate wrongdoing
As evident in this report so far, a regulator's failure to respond
effectively to an emerging problem can result in significant losses incurred by
consumers and investors. For example, the committee looked at the poor lending
practices that were allowed to continue long after they became evident. Indeed,
over a period of eight or so years the accumulation of many individual acts of
irresponsible or predatory lending caused great harm to many people. According
to the Banking and Finance Consumers Support Association (BFCSA), 'almost all
of the consumers affected who are BFCSA members, could have avoided serious
loss, had ASIC delivered detailed warnings and simultaneously took criminal
action against the promoters'. It stated further that 'in particular ASIC ought
to have immediately banned unsafe products'.
With regard to the CFPL matter, Mr Frazer McLennan could not understand
why ASIC's processes took so long. He stated:
The length of time it took for ASIC to get Commonwealth
Financial Planning to a point where it had to admit to wrongdoings was far too
ASIC's slow response meant that many investors suffered significant
financial loss as well as emotional distress.
Unfortunately these two case studies are not isolated. It is important
to place the committee's current inquiry in a broader context that takes
account of recent corporate failures and subsequent inquiries, which
importantly exposed familiar problems. This inquiry is only the latest to demonstrate,
and further highlight, areas where ASIC needs to improve. To convey some sense
of the problems associated with ASIC's slow response to warning signs, the
committee briefly touches on the findings from two recent inquiries.
A dominant theme in the committee's 2009 report on liquidators was
ASIC's unresponsiveness to the complaints it received about the conduct of some
liquidators or administrators. Many submissions noted that their complaint to
ASIC about the behaviour of an insolvency practitioner was either put aside,
answered months later,
or simply recorded on a database with no subsequent action taking place.
The committee cited account after account of individuals writing to ASIC just
to have, in their view, their concerns brushed away. The lack of regulatory
response to the many and persistent complaints about Mr Stuart Ariff was most
The 2009 inquiry that examined the collapse of Storm Financial also
highlighted ASIC's failure to act early to prevent further losses. Evidence
before the Parliamentary Joint Committee on Corporations and Financial Services
(PJCCFS) highlighted the general understanding that ASIC's response was
inadequate. During that inquiry, CPA Australia suggested that ASIC's approach to
acting on complaints had been too reactive, possibly due to resource
They really need to toughen up on the proactive, doing things
earlier, and if that means more resources...then that is where the energies should
be, because at the moment...they seem to come in either after the fact or when
they go in early we do not see anything actually happen that changes the course
of events that subsequently follows.
A number of submitters to that inquiry suggested that a ready, willing
and able regulator was needed to take the necessary steps to ensure that all
the participants in the industry comply with the laws. Some of the observations
ASIC should strive for a primarily preventive function, through
greater monitoring, supervision and enforcement of obligations imposed on
AFS licensees and other entities falling within its jurisdiction;
ASIC needs to be able to 'respond pre-emptively'.
Evidence before this committee
The criticism about ASIC's slow response and its failure to join up the
dots is also a recurring theme in submissions to this new inquiry. The
submitters who commented on ASIC's tardiness in responding to reports of
possible breaches of the law included retail investors, registered ASIC agents,
licensed financial planners and liquidators.
One submitter was of the view that over many decades, ASIC's inaction
has seen significant, consistent and ongoing consumer and investor losses through
failed entities such as Fin Corp, Westpoint, Rothwells, Tricontinental, Opus
Prime, Lift Capital, Bond Corp, HIH, Ansett, One.Tel, Quintex, Basis Capital,
Great Southern, Timbercorp, Babcock & Brown and Trio Capital. He was of the
view that, had ASIC analysed and understood the real causes of the historical
failures of such entities, it could have either attempted to prevent the losses
or have at least reduced the quantum of losses to consumers. In his opinion,
ASIC could have done so by 'implementing or regulating a system that more
readily identifies companies that have a much higher level of risk, having
potential "red flag" issue/s and or, failure altogether'.
As a specific concern, the Institute of Chartered Accountants similarly
identified the amount of time that it takes ASIC to act and respond to a
complaint or information. It stated that while there was no doubt that ASIC
must be thorough in its investigations, questions have been raised about 'why
it can sometimes take a number of years to respond to allegations made in the
public arena'. The Institute contended that:
In certain cases, a quick and timely response can have the
effect of limiting the adverse consequences of any actual market misconduct
that relates to the allegations. A timely and effective process of working
through such allegations can also send the right signal to others who may have
access to information that would be helpful to ASIC achieving the right
The Australian Shareholders' Association was concerned about ASIC's
complaints management policies and practices, which to the interested or
affected party, appear to be reactive and not alert to potential problems. It gained
the impression that overseas regulators were able to act more quickly to assess
a situation, take action and reach a conclusion compared to Australia where it
seemed litigation, or the threat of such, delayed these steps. In its view, actions
such as 'withdrawing
a product or suspending/banning an individual take too long'.
The Consumer Credit Legal Centre (NSW) likewise expressed concerns about the
'very long time' for ASIC to act on a complaint.
Even where consumer advocates are pleased with the ultimate
outcome, the void that exists between complaint(s) and outcome is disconcerting
at best and downright infuriating where consumer harm is accumulating and
industry practice becoming entrenched.
Mr Brody, Consumer Action Law Centre, also maintained that the time taken
between raising an issue and a result was an area of consistent frustration. As
an example of delay, the Consumer Action Law Centre cited the very large number
of serious complaints about the debt collection firm ACM that it had referred
to ASIC from 2008 requesting it to intervene.
The Law Centre explained that it continued
to refer complaints to ASIC and, 'growing increasingly frustrated with the lack
of response we took the unusual step of criticising ASIC in a 2010 media release'. It noted further that ultimately ASIC commenced proceedings against ACM in May
2011 and secured 'an excellent outcome' in the Federal Court in October 2012.
The Law Centre observed, however,
...a great deal of consumer detriment may have been avoided had
ASIC responded more quickly—it is notable that the 2011 proceedings concerned
conduct by November 2008 and June 2010, and that the court outcome was not
achieved until 2012, some four years after the issue was initially identified.
Indeed, the Commonwealth Ombudsman noted that one of the most frequent
complaints about ASIC lodged with his office was that the regulator had not
investigated and/or taken enforcement action in relation to a report of
misconduct or breach of legislation. He explained:
Complainants typically state they have reported to ASIC what
they believe to be a significant act of misconduct or breach of legislation by
a director, other company official or a company itself. Following receipt of a
letter from ASIC responding to the complainant's report of misconduct and
advising that it will not investigate, the complainant contacts the Ombudsman
because they consider ASIC is not meeting its responsibility as a regulator.
A number of individuals made similar complaints to the committee about
ASIC not pursuing reports of serious breaches.
In their view, signs were present that clearly warranted ASIC's attention but
simply did not register with the regulator. Submitters cited early indications
of a company in trouble or company directors engaging in misconduct that went
unnoticed. These examples included companies failing to lodge required returns
or producing accounts; alterations to a company's registration without a
director's knowledge; company name changes and turnover in board members; a
history of associated entities in receivership and the issue of a stop order;
and non‑payment of employee superannuation entitlements.
Some of the evidence before the committee recounted experiences that
have been raised during other parliamentary inquiries. For example, it appeared
to Mr Lindsay Johnston, who reported on the activities of Mr Stuart Ariff,
...law enforcement agencies and regulators perform no
investigation beyond the substance of the initial complaint. In respect of my
complaints if the ASC [ASIC's predecessor] had acted and made requests for
documentation it would have received at an early stage the documentation that
was ultimately brought before the Court. Had the ASC and ASIC performed as a
regulator as expected by the community, it is highly likely that by 1999 there
would have been some disciplinary action taken against Stuart Ariff and a near
certainty that sufficient evidence would have existed to ensure he was never to
be admitted to practice as an insolvency practitioner.
Ms Anne Lampe also questioned ASIC's management of complaints. While
working at ASIC's media unit, she became aware that ASIC received frequent
complaints about 'dodgy and suspect investment schemes as well as lost
investments in failed companies'. Ms Lompe found that the complaints were 'dutifully
logged and filed'; their recording was methodical; and records well kept. Her
concern was that action stalled with the recording and filing of the reports
and that 'too many complaints remained buried in the archives'. She explained
It was only when the volume of complaints and losses about a
particular scam reached tsunami level, or investors with losses contacted a
member of parliament, or triggered a media inquiry that ASIC seemed to spring
She recalled writing articles after Storm's collapse when she learnt
first-hand from other financial advisers about the lead-up to the failure.
According to Ms Lampe the advisers had known what was happening at Storm and had:
...contacted ASIC well before its demise warning that Storm was
over-leveraging elderly clients and had put them in a one-product-suits-all
model rather than taking into account investors’ individual needs to draw up an
appropriate financial plan. The advisors reported that investors were at great
risk. One lot of intel came from an internal Storm source.
In Ms Lampe's opinion, ASIC could have taken on board the warnings and
whistleblower complaints and used its power to review client files—a random sample
to see 'whether Storm advisors were drawing up appropriate individual financial
plans to meet the needs of its clients'. She suggested:
That would have shown whether each investment plan was
different, or whether they were all stamped from the same template. Such an
inquiry would have shown that there was a sameness and a high risk and alarmingly
high borrowing component in each client file. In short it should take whistleblowers
seriously, rather than shunning them as troublemakers with an axe to grind.
One person in the financial services industry stated that he knew for a
...many people in Queensland tried to warn ASIC about Storm but
on all occasions these warnings were ignored. A far more pro-active approach by
people who understood the true nature and risk of the Storm Financial
methodology could, I believe, have saved an awful lot of time, money, anxiety
for all concerned.
But there were many other submitters who wrote about their experiences
of ASIC's inaction that are completely removed from Storm, Mr Ariff, or CFPL.
Furthermore, they are drawn from many sectors of Australia's corporate world.
They recounted their own personal experiences of making a complaint or
reporting a possible breach of the law, or cited cases where ASIC should have
paid attention to early alarm bells. They raised concerns that ASIC ignores or
fails to take corrective action on early or advanced warning signs of dubious
practices. Dr Peter Brandson referred to distressed victims of banking
malpractice 'being fobbed off'—getting the 'run around'. He stated:
The aim seems to be to let the dissatisfied victim—who has
had little help in actually seeing justice done—let off some steam and then be
left to pick up the pieces of their shattered life while ASIC neatly files the
For example, some complained about ASIC's apparent indifference to indicators
of misconduct by directors or companies in trouble, such as unpaid workers'
entitlements or word of mouth intelligence about a company engaging in suspicious
One such witness stated that in his particular case, he believed the company
was trading while insolvent:
ASIC appear to have ignored complaints made by numerous
injured individuals as well as the findings (however preliminary) of
professionals such as the company's administrator and latterly its liquidator.
This is despite mounting evidence in support of the original complaints made
and despite the fact the evidence gathering and investigation of the companies'
affairs has been the result of other parties unrelated to ASIC and submitted to
them in good faith.
In his view, the magnitude of losses could have been mitigated:
...if ASIC had intervened with a more timely investigation and
possibly issued an enforcement order requiring company officers to undertake
action to protect the interests of the various stakeholders.
Mr Peter Leech, another submitter, raised his concerns in the context of
phoenix activity where four different individuals on four separate occasions
complained about the same company. According to Mr Leech, his original
complaint made very clear that 'if the Director as the Proprietor of the
company cannot pay GST, PAYG and/or Superannuation obligations, then one could reasonably
consider that the Director and the Company could not satisfy Part 1 of Sect 95A'.
He stated further:
Given past history, it is foreseeable that the alleged
non-compliance will occur again. Numerous employees and creditors have been
left without due entitlements. In each complaint and subsequent review after
review—ASIC have 'chosen not to proceed' simply asking us, the complainants, to
give them more evidence. Yet it is the Commission that has the legislative
authority, resources and mandate to pursue such evidence and we, as
individuals, are specifically precluded from such data. If ASIC won't investigate—who
A submitter cited the case of Wellington Capital amending the
constitution of the Premium Income Fund but, despite reports to ASIC, the
regulator failed to take action. According to the submitter the amendment was
later overturned in the Federal Court but too late to reverse the consequences
of the amendment.
Another submitter lodged a detailed complaint with ASIC about a
renewable energy company but, in his words, 'to no avail'. He noted that the
company in question raised approximately $16 million through prospectuses but
did not lodge its required returns for some time. According to the submitter,
shareholders were 'certainly not kept informed'. Assets were transferred to a
US entity and the submitter believes that the company was deregistered in
November 2012. He also referred to a gold exploration listed company. In his
view, ASIC chose to ignore the many warning signs in both cases, and 'could and
should have done more to protect shareholders and question the discharge of
management fiduciary responsibilities'.
Mr Roger Cooper related similar experiences with ASIC's slow response to
his concerns about a questionable company. He informed the committee that by
the time he contacted ASIC for guidance:
Micro Corp had become MCI Technologies Ltd who became Tomato
Technologies Ltd who became Asian Pacific Ltd and they had drawn a lot of flak
from disgruntled users and eventually in August 2012 they were suspended from
In Mr Cooper's words, with patience he tried 'every avenue possible to
try and get some accountability happening'. At that time, Mr Cooper thought the
ASX would be interested in the behaviour of Tomato Technologies, which was a
listed company, and track its record with Consumer Protection Agencies. His
letter to the ASX did not receive 'the dignity of a written reply but merely a
wish[y] washy phone call'.
Mr Cooper noted that, at an early stage in December 2000, the Australian
Financial Review provided a revealing and scathing account of Tomato
Technologies Ltd and its modus operandi. The article referred to 'the dubious
pedigree and track record of its founder and Board members', which, according
to Mr Cooper, raised 'serious questions about the company way back then'. He
informed the committee that:
Tomato Tech. remarkably expanded overseas into the UK, Canada
and the USA. The UK Financial Services Authority and the UK Office of Fair
Trading condemned the company. The BBC consumer TV program Watch Dog twice
featured the company as a warning to consumers. How could all this be under the
radar of ASIC?
In his opinion, ASIC was aware of the fraudulent behaviour of the
company he was dealing with and did nothing:
If organisations like ASIC were actually businesses with
competitors they would go broke. Micro Corporation/Tomato Tech. Ltd had no
institutional investors and even from a layman's vantage point the company
structure and behaviour was suspect but apparently under the auspice of ASIC.
Corporate Watchdog indeed. They were totally indifferent, disinterested and
offered no help to victims whatsoever.
The company name changes and the incredible turnover of board
members would I thought, attract attention, but no. At what stage do alarm
bells go off at ASIC?
Yet another case involved LM Investment Management Limited (LMIM),
the responsible entity (RE) for various registered and unregistered managed
investment schemes, including the LM Managed Performance Fund (MPF).
The Advisers' Committee for Investors (ACI) submitted that during the last
quarter of 2012 ASIC investigated the MPF due to negative press and gave it a
clean bill of health. In 2012, LMIM released MPF accounts, which had been
audited in the previous June, showing an MPF asset value of $377 million with
future developed value of MPF's largest asset at $1.5 billion for Maddison
Estate. LMIM went into voluntary liquidation on 19 March 2013.
The ACI advised that it became increasingly concerned about the sequence
of events that 'failed to protect the interests of investors both on a domestic
and international basis'. It questioned 'the structure, organization and
fairness of Australia's regulatory system'.
The investors' group asked that if ASIC had concerns about LMIM in May/June
2012, why did it let it continue to accept millions of dollars from
unsuspecting investors without either warning investors or placing conditions
on LMIM? It also questioned why ASIC allowed LMIM to continue to accept
investor funds when ASIC's enquiries into the RE in 2012 should have revealed
that LMIM did not obtain any independent valuations for properties it was
purchasing with investor funds. The ACI noted that the 'requirement for
independent valuations for the purchase of large assets is a requirement of
many major countries in the developed world'. In its view, ASIC's failure to
identify this crucial mistake by LMIM 'to obtain independent valuations (not
only at purchase but also during the life of that asset) indicates that there
are serious questions to be asked of ASIC by this inquiry'.
According to the ACI:
...the reports to creditors issued by the voluntary
administrators of LMIM (as early as April 2013) provide details of unpaid and
undocumented loans from LMIM to Drake and his related entities and possible
breaches of duty and other offences under the Corporations Act 2001
(Cth). These facts reported on by the voluntary administrators were clear
grounds for an earlier intervention by the regulator.
The ACI is concerned that by failing to act swiftly and decisively, ASIC
has allowed further damage to occur to investors.
It argued that where breaches of the Corporations Act are identified, ASIC
should 'act quickly to take steps to ensure those breaches are dealt with in a
timely manner'. The ACI informed the committee that:
There are approximately 10,000 LMIM investors, worldwide, and
4,500 in the MPF alone including home based and expatriate Australians. These
investors, some of whom will have no ability to recover from such a devastating
loss, stand to lose a significant part if not all of their investment in the
funds of this Australian company which is now in liquidation. Many of these
investors will lose their life savings.
Although the ACI approached ASIC some months ago urging quick
action, ASIC only took formal steps in the Federal Court to freeze the assets
of the main director Mr Drake in September 2013 some 6 months after the company
was placed into voluntary administration. Given that assets such as cash may be
transferred quickly, why did the regulator in such a large corporate failure
(one of the largest in Australia after the HIH collapse) fail to act
immediately to obtain freezing orders of LMIM, Mr Drake and other related
entities to ensure the status quo at that time was maintained and value
preserved for investors?
According to the ACI, ASIC's failure to take substantial, early steps to
deal decisively with the causes and results of this corporate collapse contrast
starkly with the quick action and early prosecutions after the Bernie Madoff scandal
broke in the United States.
Another group of concerned investors, the Association of ARP Unitholders
Inc, reminded the committee that:
It was the actions of an alert Industry participant who
forced ASIC to take action in the Trio matter, yet any number of opportunities
existed starting with the licensing of executives of Trio through to the
failure to follow up serious valuation questions in conjunction with APRA.
The committee received many other complaints that are too numerous to
detail here about ASIC's supposedly inadequate response to complaints or
reports of corporate misconduct. Some additional cases include a report from a
compliance officer and internal auditor about an accounting practice providing
a 'one shop' service including finance, taxation and financial planning advice.
According to the submitter, ASIC took no action which has resulted in mounting
client investor losses to a level of $10 million to $15 million.
The committee also received a confidential submission dealing with an agricultural
managed investment scheme and the alleged misuse of funds. In this case, the
liquidator reported the misuse of funds raised for the scheme
to ASIC, alleging that funds had been used to 'prop up' previous projects
operated by the responsible entity, which had significant cash flow problems. The
submitter informed the committee that they had never been contacted by anyone
at ASIC in relation to his complaint, 'apart from a boilerplate response, nor
have I heard about any action against the directors of the company'.
Reports from industry professionals
Importantly, some of the people making reports or expressing concerns to
ASIC come from people within the industry, such as registered ASIC agents and
Mr David Pemberton, a CPA who holds a public practicing certificate and
whose firm is a registered ASIC agent, wrote to ASIC on 5 June 2009 on his company
letterhead. He drew to ASIC's attention his misgivings about the activities of a
person with a history of failed enterprises who, in his view, should be
investigated for insolvent trading under the Corporations Act. Mr Pemberton
informed the committee that:
ASIC's bland & generic response of 6 July 2009 was the
second and last contact I received from ASIC in this matter.
He believed that any complaint from a professional should have caused
ASIC to investigate. He explained:
This complaint was very deliberately made to ASIC at its
highest level because of the known issues of ASIC incompetence. ASIC Darwin has
a sizeable office less than three kilometres from my office in Darwin. What is
the price of a local call or for that matter an STD call?
Mr Pemberton advised the committee that many professionals shared his
views on ASIC and 'have ceased reporting suspect activity due to ASIC's chronic
incompetence and inaction'.
In his view:
ASIC needs to be a Kelpie as opposed to being a Bassett
Hound. It's about being proactive and fearless in directing the flock. It's
about knowing when to be quiet, alert and watchful; knowing when to work out
wide or get in close and knowing when to run, bark and if necessary bite.
One experienced financial planner, Mr Ben Burgess, took a complaint to
ASIC on behalf of his client that involved an allegation that a bank had misled
and coerced his client into 'investing into various high risk investments,
despite requesting a much lower risk term deposit'. ASIC was provided with a
complete copy of the client file as well as supporting documentation and
calculations. He explained:
Six months later I had to call ASIC myself to find out what
progress had been made, only to be told 'I'm sorry but ASIC does not handle
individual complaints but only systemic problems'.
To date there has been no progress toward resolution of this
case despite the vast amount of time; effort and expense incurred by the
clients and I in fighting for this complaint and doing a large part of the work
that ASIC itself should have done.
Mr Burgess concluded that ASIC failed 'in a most basic way by not even
bothering to keep me or my clients informed'.
An area of particular note, however, involved professionals that are
required under statute to make reports of possible wrongdoing. These statutory
reports are a valuable source of 'front line' information about possible
breaches of the corporation legislation.
Some such submitters commented on ASIC's tardiness in responding to reports of
possible breaches of the law, including reports from auditors and liquidators.
Under the Corporations Act, auditors are required to notify ASIC in
of circumstances that they suspect, on reasonable grounds, amount to a
contravention of the Act. They are also required, inter alia, to report
circumstances that amount to an attempt by any person to unduly influence,
coerce, manipulate or mislead a person involved in an audit. The same conditions
apply to lead auditors for an audit of a compliance plan. BDO Australia
Under s311 and 601HG of the Corporations Act, an auditor is
obligated to report to ASIC matters that they have reasonable grounds to
suspect amount to a significant contravention of the Corporations Act or, in
the case of matters that are not a significant contravention, the auditor
believes that the matter will not be adequately dealt with.
An auditor who fails to comply with s311, 601HG or 990K (as applicable)
is guilty of an offence.
BDO Australia referred to a section 311 report it produced in 2007.
It stated that 'despite the extensive amount of work and costs involved in
conducting the investigation, there would appear to have been no action taken
by ASIC to investigate the matter' and that 'neither the audit partner who
submitted the section 311 report nor any of the relevant parties have received
any communication from ASIC in relation to the matter'. BDO was concerned,
however, about one particular report, where the investigation involved an
extensive amount of work and costs, but ASIC appeared to have taken no action.
This apparent lack of action, posed a number of questions for the auditor:
Was the matter ever investigated by ASIC?
If the matter was investigated, why were the parties who had the
most knowledge of the alleged breaches of the Corporations Act not contacted by
If the matter was investigated, then why was there no
communication to the audit partner that the matter had been investigated and
BDO Australia was of the view that, as a minimum, the whole process
indicated a deficiency in communication to the underlying parties involved.
Further, the audit partner questioned the ability of ASIC to assist registered
company auditors to 'fulfil their supervisory roles and reporting
responsibilities under existing legislation'. BDO surmised that:
If no action is taken when reported breaches are identified,
auditors should not be burdened with the responsibility and cost of complying
with sections of the legislation which are not going to be enforced.
In this regard, not only is ASIC failing to provide a good example for
its gatekeepers but there is the potential to undermine confidence in the
reporting system and act as a disincentive for reporting suspected corporate
A number of auditors shared this concern about ASIC's response to statutory
reports of suspected breaches. For example, one auditor submitted that 'as an
auditor, we were required to lodge the s.311 notice within 28 days of finding a
breach yet there is no timeframe imposed on ASIC for at least appearing like
they are doing something about it'. In confidence, the auditor informed the committee
that her firm lodged
a section 311 notice with ASIC in relation to one of its audit clients. In a
letter to ASIC, the auditor reported the client's reluctance to assist in the
conduct of the audit and resistance to providing information pertinent to the
audit. The letter also noted instances of the client providing false and
misleading information to the auditor and the possibility of fraud and
The firm issued a qualified disclaimer opinion for the year ended 2011
for the client. The client did not send the firm's opinion to ASIC with their
Form 388 but instead had their solicitor, who was also an auditor, issue an
unqualified opinion for the 2011 year. According to the submitter this 'was
accepted by ASIC even though we were still the listed registered auditors for
this client (which is a company limited by guarantee) for the 2011 year'. The
submitter argued that ASIC allowed the client
to 'opinion shop' and for someone who was not independent to issue an opinion. Moreover,
the submitter informed the committee that this solicitor/auditor had already
been accused of fraud by ASIC on another matter and yet ASIC allowed the client
to utilise them.
The audit firm has had no response from ASIC regarding the status of its
section 311 letter. In its view, it appears that this client has been able to
get away with providing false and misleading information to the auditors, not
assisting the auditor in its enquiries, falsifying information and lodging an
unqualified opinion to ASIC from an auditor who was not the appointed auditor
for the 2011 year.
Mr Peter Murray, a fellow of the Institute of Chartered Accountants,
asked why ASIC's response to reported breaches was so bad. Like others, he
questioned why there are rules and regulations if they are not enforced.
According to Mr Murray, ASIC noted that it received 10,752 complaints, resolved
57 per cent of these and referred six per cent for formal investigation or
surveillance. Further, ASIC has informed him that every complaint was
'registered on ASIC's confidential database, acknowledged, formally assessed
and personally responded to'. ASIC notified him that it:
...encourages Institute members to continue to report alleged
corporate misconduct, within ASIC's jurisdiction, to us. At the very least,
your information will assist us in continuing to develop a significant
intelligence tool which is used, for example, as part of our campaign and
surveillance targeting, licence and professional registration approval process
and in the selection of subjects for formal investigation.
Mr Murray suggested that ASIC should 'classify the importance of
allegations lodged with it (eg A, B, C, D) and, at a minimum, interview the
submitting parties and the claims they make—before responding in a negative
The Corporations Act also places an obligation on liquidators, receivers
and voluntary administrators (external administrators) to report suspected
the Corporations Act to ASIC. For example, sections 422, 438D and 533 of the Corporations
Act require external administrators to report to ASIC on the activities of past
and present company officers or members that involve, inter alia:
suspected breaches of the Corporations Act;
misapplication or retention of funds; and
any negligence, default, breach of duty or breach of trust.
Reports made pursuant to these sections are referred to as statutory
reports and are an important source of information about possible breaches of
the law. Section 533 applies to liquidators who must lodge a report as
soon as practicable and in any event, within six months from the time it
appears to the liquidator that:
- a past or present officer or employee, or a member or contributory, of
the company may have been guilty of an offence under a law of the Commonwealth
or a State or Territory in relation to the company; or
a person who has taken part in the formation, promotion, administration,
management or winding up of the company:
may have misapplied or retained, or may have become liable or
accountable for, any money or property of the company; or
may have been guilty of any negligence, default, breach of duty or
breach of trust in relation to the company; or
the company may be unable to pay its unsecured creditors more than
50 cents in the dollar.
Liquidators also have the discretion to lodge further reports if, in
their opinion, it is desirable to draw the matter to ASIC's attention.
In 2012–13, external administrators lodged 9,788 reports with ASIC. Of
this number, initial external administrators accounted for 95 per cent or 9,254
reports. ASIC recorded that 81 per cent of the initial reports involved
companies with fewer than 20 employees. The construction industry was subject
to the highest number of reports accounting for just over 24 per cent. Of the
initial external administrators' reports, receivers lodged one per cent under
section 422; administrators lodged 3.8 per cent under section 438D; and 95 per
cent of the reports were submitted by liquidators under section 533.
Importantly, external administrators alleged misconduct in more than two‑thirds
of reports (6,761) involving an overall possible 16,562 breaches. Although this
number accounts for an average of between two and three breaches per report,
almost 30 per cent of reports or 2,493 recorded no misconduct.
ASIC asked the external administrator to prepare a supplementary section 422, section
438D or section 533 report for 677 of the 6,761 reports that identified
possible misconduct. In its analysis of the statistics, ASIC explained that its request for an
additional report is a function of its assessment of risk based on a number of
factors, including, but
not limited to:
the nature of the possible misconduct reported;
the amount of liabilities;
the deficiency suffered;
the availability of evidence;
prior misconduct; and
the advice of the external administrator that the reported
possible misconduct warranted further investigation.
In a 2007 report, the Australian National Audit Office (ANAO) observed
that given the large number of statutory reports received by ASIC each year
that allege offences against the Corporations Act, it was appropriate that ASIC
had systems in place to prioritise its regulatory action, through risk scoring.
It found that ASIC's recording of statutory report information was accurate to
a high degree.
The ANAO recognised that ASIC could use a wide variety of possible remedies to
deal with offences identified in statutory reports or other deficiencies that
warranted some sort of regulatory action. They ranged from warning letters to
directors for the less serious offences to prosecution and potentially imprisonment
for more serious offences.
It noted that where ASIC identified that a statutory report raised issues of
regulatory significance, it sought further information about the matter from
the external administrator.
According to the ANAO report, ASIC did not always obtain that additional
information. Based on its sample, it found that in 40 per cent of instances, ASIC
did not obtain additional information that it had requested.
The ANAO concluded:
...the small number of statutory reports subject to regulatory
action by ASIC each year indicates that there is opportunity for greater
regulatory action on these reports.
Mr David Lombe, President of the Australian Restructuring Insolvency and
Turnaround Association (ARITA) was of the view that ANAO's 2007 findings were
still relevant and applicable.
He noted the thousands of reports lodged with ASIC each year but not acted
upon. In Mr Lombe's view, there was a 'general perception within the business
community that, if you do certain things at a certain level, there will be no
He explained further:
The difficulty that we have as official liquidators is that
you get a matter off the court list and often that matter has no funds in it,
so there are no available assets. Often that is a process by which directors
have deliberately done that—it has been a deliberate course of action. If you
report the matter to ASIC and there is no assistance from that space, there is
not much you can do. If you felt really aggrieved by it or you felt that it was
a matter that was of sufficient importance, you may be able to persuade a firm
of solicitors to act on a pro bono basis, but that is very difficult. I found
myself in that sort of situation with Babcock & Brown, where I had
inadequate funds to be able to pursue a proper investigation. The only thing
that was available to me was to ask creditors to fund me, which they did, which
then allowed me to do a public examination, which brought out the conduct of
directors and other stakeholders in that company. If you do not have funds in a
matter, the courses are very limited.
By way of example, Mr Lombe expanded on his concerns citing the
requirement to lodge a section 533 report, which deals with offences committed
by directors. He explained that for the liquidator to understand what has
happened, he or she needs to 'review the books and records, determine the
transactions, try to find out what assets are there, look at insolvent trading
and look at preference payments and all those sorts of things'. The liquidator
is required to file that report, which takes time. So, according to Mr Lombe, the
reports involve both time and money, and often with official liquidations there
are no assets at all and, if there are, creditors are effectively paying for the
report. He noted that thousands of such reports are lodged with ASIC but most
of them come back 'no further action'. In his view, it is frustrating for
liquidators because they feel, 'Why am I bothering to do it?' Mr Lombe
concluded that 'you can understand someone's frustration, where they have
reported offences and nothing happens'.
When asked whether liquidators, in their statutory reports, could assist
ASIC to distinguish the very serious breaches from the less so, ARITA indicated
that it 'might be a useful reform'. After considering the matter further, ARITA
informed the committee that if it were consulted, it could assist ASIC to
determine a risk scoring profile. It explained further, however:
But we consider that the decision on how the information
required by s533 is 'risk-scored' for action is ultimately one for the
regulator and its decision and methods should not be publicly disclosed. For
one thing, this would appear to give the 'green light' to the commission of
certain offences that are deemed not serious enough to warrant action by ASIC.
ARITA also stated that 'a more co-operative approach between ASIC and
liquidators should also be pursued'. The committee believes that ASIC and ARITA
should work closely together to develop a more effective and efficient
reporting mechanism that would assist ASIC to identify the alleged serious breaches
from the less so.
The committee recommends that ASIC, in collaboration with the Australian
Restructuring Insolvency and Turnaround Association and accounting bodies,
develop a self-rating system, or similar mechanism, for statutory reports
lodged by insolvency practitioners and auditors under the Corporations Act
2001 to assist ASIC identify reports that require the most urgent attention
Clearly, many people who lodge complaints and reports of suspected corporate
wrongdoing with ASIC, including Australia's key gatekeepers, are dissatisfied
with ASIC's response. ASIC has left many with the clear impression that the
regulator is unresponsive and indifferent to their concerns. In the following
chapter, the committee considers the likely reasons for this delay or inaction.
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