Australian Audit Thresholds Raised

A change in audit requirements that reduced the number of companies that are required to be audited from fiscal year 2020 is now having a greater impact on transactions in Australia. Companies that are now classified as being “large” and requiring an audit as opposed to “small”, increased to companies generating more than AUD 50 million.

To learn more about what this means for companies toeing the “large” and “small” line, I spoke with Brent Goldman, a corporate advisory partner at Nexia Australia, who specializes in small- to mid-market company transactions and valuations.

Brent has vast experience in delivering a myriad of accounting solutions for firms across the country. During his career, he’s worked as a corporate finance partner in one of the world's largest accounting firms where he spent 10 years in the London office before returning to their Sydney office. Brent has also worked on the client side, working in the corporate development and strategy team in an Australian Stock Exchange (ASX) 20 company.

SS&C Intralinks: Why has Australia raised its audit thresholds?

Brent Goldman: This decision was undertaken by the Australian government primarily to reduce the reporting burden on companies to lower compliance and accounting costs. The argument was that smaller companies were being bogged down and that being relieved of this meant a greater good for business in the long-term where companies could have a greater focus on growth. However, there are certain implications that this brings along, especially in the areas of transparency and a divergence in due diligence for buy-side and sell-side firms.

What are the concerns around transparency with this newly revised accounting regulation?

Companies under AUD 50 million — and that’s a large group of companies — aren’t having their financial information audited and published, which means that internal due diligence is reduced. This, in turn, can create issues around transactions where accounting is done for tax reasons rather than for accounting reasons. Generally, this only becomes an issue when the company seeks a liquidity event; it impacts the decisions that can be made by other transacting parties.

From the perspective of governance, there is a lessened emphasis on rigorous financial reporting across companies under the audit threshold: Companies that have good habits generally stick to them, but companies that have poor accounting practices tend to get worse. There have been glaring cases of unrecognized liabilities and prospective buyers unable to run effective due diligence.

Is there an example you can share with us?

A recent company that ran into trouble around transparency was one in the Retail sector, with a top 20 ASX firm seeking to make a direct acquisition. The retailer didn’t apply accounting standards, affecting its valuation — given the buying party’s need to undertake more work and ultimately assume more risk as the financial results weren’t what they originally had thought. This was notably for a “smaller” (under AUD 50 million) firm, and we are likely to see more of these issues where buyers take on more work to reconcile due diligence.

What is your advice for companies in the market under the audit threshold who are considering selling?

The lack of due diligence is not so much about putting off potential buyers. Conversely, it makes it more difficult to be discovered unless you are well known in your industry. Here is my advice:

1. You have to be ready for opportunistic buys. Your strategic-level information always has to be ready. If you’re considering a sale in the next couple of years, that information has to be available today.
2. Make sure you have a checklist that is strictly adhered to by your staff. Better yet, continue to be audited.
3. Vendor due diligence may become more beneficial for the larger companies that fall under the threshold to ensure that any issues are dealt with before approaching potential buyers.