Ethical and legal aspects of financial management - audited accounts, record keeping, reporting standards, GST, taxation; the role of ASIC, APRA and the ATO; ethical responsibilities of financial managers

What this dot point is asking

NESA wants you to know the legal framework around financial reporting (audited accounts, record keeping, reporting standards, GST and tax), the major Australian regulators (ASIC, APRA, ATO and supporting agencies), and the ethical responsibilities that sit on financial managers. Section II questions on these are typically 4 to 6 marks; Section IV extended responses often ask you to evaluate a contemporary financial-conduct case (Hayne Royal Commission, PwC, AMP fees-for-no-service, Westpac AUSTRAC matter).

The answer

The legal framework

The Corporations Act 2001

The principal Australian corporate law. Administered by ASIC. Among many other things, the Corporations Act:

• Sets out director and officer duties (care and diligence, good faith, no improper use of position or information).
• Requires the preparation, audit and lodgement of financial reports.
• Governs financial-product disclosure (prospectuses, product disclosure statements).
• Regulates insider trading and market manipulation.
• Establishes the rules for company formation, share issuance and external administration (voluntary administration, liquidation).

Penalties for breaches were significantly increased post-Hayne (2019 reforms). Criminal penalties for serious offences can include imprisonment.

Audited accounts

Public companies, large proprietary companies (revenue above approximately $50 million, assets above approximately$25 million, or 100+ employees - thresholds adjust periodically) and registered charities above thresholds must have their financial statements audited by a registered auditor.

The audit provides reasonable (not absolute) assurance that the financial statements give a true and fair view. The auditor checks:

• The accuracy of recorded transactions on a sampling basis.
• The existence and valuation of assets (cash, receivables, inventory, property).
• The completeness of liabilities.
• Compliance with accounting standards.
• Internal controls (the systems that prevent fraud and error).

The Big Four firms - PwC, Deloitte, EY and KPMG - audit most of the ASX 200. Mid-tier firms (BDO, Grant Thornton, RSM, William Buck) audit much of the rest. Audit independence rules limit the consulting work an auditor can do for the same client.

Record keeping

Section 286 of the Corporations Act requires every company to keep written financial records sufficient to:

• Correctly record and explain its transactions and financial position.
• Enable true and fair financial statements to be prepared and audited.

Records must be retained for at least seven years from the date the transaction was completed.

The ATO has separate (but overlapping) record-keeping requirements - five years generally, longer for some categories (capital-gains-tax records must be kept for five years after the asset is disposed).

Digital records are acceptable provided they can be reproduced in writing. Cloud-based accounting (Xero, MYOB, QuickBooks) is now standard for small and medium businesses.

Reporting standards (AASB and IFRS)

The Australian Accounting Standards Board (AASB) is the standard-setter. Since 2005, Australian standards have been substantially aligned with International Financial Reporting Standards (IFRS), with AASB equivalents (AASB 16 mirrors IFRS 16 on leases, AASB 15 mirrors IFRS 15 on revenue, and so on).

The major standards a HSC student should know about by name:

• AASB 101 / IAS 1 - Presentation of Financial Statements.
• AASB 15 / IFRS 15 - Revenue from Contracts with Customers (the 2018 revenue standard that changed how subscription, telco, software and construction revenue is recognised).
• AASB 16 / IFRS 16 - Leases (the 2019 standard that brought operating leases on to the balance sheet; transformed published balance sheets for retailers, airlines and others with large lease portfolios).
• AASB 9 / IFRS 9 - Financial Instruments (forward-looking credit-loss provisioning for banks).

The standards have real effects on reported numbers. AASB 16's introduction transformed published balance sheets for businesses with significant lease portfolios - retail (Wesfarmers, Coles, Woolworths), airlines (Qantas, Virgin Australia), telcos (Telstra). It did not change underlying economics but it did change debt-to-equity ratios and EBITDA disclosures.

GST and other indirect taxes

The Goods and Services Tax (GST) is a 10 percent value-added tax administered by the ATO. Businesses with annual turnover of $75,000 or more (non-profits$150,000) must register for GST.

GST mechanics:

• Charge 10 percent GST on taxable supplies.
• Claim input tax credits for GST paid on business purchases.
• Lodge a Business Activity Statement (BAS) monthly, quarterly or annually.
• Pay the net GST to the ATO (or receive a refund if input credits exceed output GST).

Some supplies are GST-free (most fresh food, education, health, exports) or input-taxed (residential rent, financial services). The categorisation matters for the BAS calculation and is a frequent source of error.

Income tax and other direct taxes

• Company income tax. Two rates: 25 percent for "base-rate entities" (broadly, businesses with turnover under $50 million and predominantly passive-income share below thresholds), 30 percent for all other companies.
• Fringe benefits tax (FBT). Tax on non-cash benefits to employees. FBT year runs 1 April to 31 March.
• Payroll tax. State and territory tax on wages above a threshold (the threshold varies by jurisdiction).
• Superannuation guarantee. Mandatory employer contribution to employee super. Increased to 12 percent from 1 July 2025 (the legislated step-up programme completed in mid-2025).

The regulators

ASIC

The Australian Securities and Investments Commission is the corporate, markets and financial-services regulator. Its principal functions:

• Corporate registration. Registers companies; maintains the ASIC company register.
• Markets supervision. Supervises listed-company disclosure and trading conduct.
• Financial-services licensing. Issues and supervises Australian Financial Services Licences (AFSL).
• Auditor and liquidator supervision. Registers auditors and liquidators; supervises their conduct.
• Enforcement. Investigates and litigates breaches of the Corporations Act, the ASIC Act and ACL (in the financial-services context).

Since the Hayne Royal Commission (2017-2019), ASIC has adopted a "why not litigate?" enforcement posture, with penalties materially increased.

Recent ASIC actions referenced in financial-management studies:

• CommInsure (2017-2020). $700,000 in penalties for misleading conduct on heart-attack policy definitions (a worked example of post-Hayne enforcement).
• AMP fees-for-no-service. Multiple penalty proceedings and remediation programmes following Hayne.
• PwC tax-leaks matter (2023-2026). Investigation continues; partner departures; multiple regulatory inquiries.

APRA

The Australian Prudential Regulation Authority is the prudential regulator of authorised deposit-taking institutions (banks, building societies, credit unions), insurers and super funds.

APRA's role is to ensure these institutions remain financially sound - that they can pay their debts and meet their commitments to depositors, policyholders and super-fund members.

APRA tools:

• Prudential standards. Capital adequacy (CPS 110, CPS 220), liquidity (CPS 220), governance (CPS 510), risk management (CPS 220), remuneration (CPS 511 from 2023).
• Supervisory oversight. Regular review of risk and capital profiles.
• Enforcement. Directions, conditions on licence, court-enforceable undertakings, civil penalties.

The 2017-2018 Westpac AUSTRAC matter (see below) led APRA to impose a $1 billion capital add-on for non-financial risk - a worked example of APRA's enforcement capability.

ATO

The Australian Taxation Office administers the federal tax system. Functions:

• Tax collection across income tax, GST, FBT, super, excise.
• Compliance and audit.
• Binding rulings and public guidance.
• Transfer-pricing oversight for multinationals.
• Super guarantee enforcement.

The ATO has substantial information-gathering powers and can apply Part IVA (the general anti-avoidance rule) to artificial schemes designed to avoid tax.

AUSTRAC

The Australian Transaction Reports and Analysis Centre is the AML/CTF (anti-money-laundering/counter-terrorism financing) regulator. Banks and other "reporting entities" must report suspicious transactions and threshold transactions.

The 2017-2018 Westpac AUSTRAC matter involved 23 million breaches of the AML/CTF Act, with $1.3 billion in penalties - the largest fine in Australian corporate history at the time. The matter triggered CEO resignation, board renewal, and an APRA-imposed$1 billion capital add-on.

Other regulators

• ACCC - competition and consumer law (covered in marketing).
• AASB - accounting standards.
• AUASB - auditing and assurance standards.
• TPB - Tax Practitioners Board (regulates tax agents and BAS agents).

Ethical responsibilities

Beyond legal compliance, financial managers face ethical responsibilities.

Truthful reporting

Financial reports should give a true and fair view, not just technically meet the standards. The 2001 HIH Insurance collapse and the 2001 One.Tel collapse were partly enabled by aggressive accounting that complied with the letter of accounting standards while obscuring the underlying economic position.

Avoiding earnings management

Pulling revenue forward, deferring expenses, channel-stuffing, "round-tripping" - practices that boost reported earnings without economic substance.

Avoiding aggressive tax avoidance

The line between tax minimisation (legal and rational) and aggressive tax avoidance (legal but ethically dubious) is contested. The OECD BEPS (Base Erosion and Profit Shifting) project has progressively tightened international tax rules. Australia's diverted profits tax (introduced 2017) targets aggressive transfer-pricing.

Transparency on remuneration

Listed companies must disclose executive remuneration in detail (the Remuneration Report). Shareholders can vote against the report (the "two strikes" rule can lead to a board spill).

Insider trading prohibition

Trading on price-sensitive information that is not generally available is a criminal offence. Multiple ASIC prosecutions in recent years have resulted in custodial sentences.

Whistleblower protections

The Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019 strengthened protections for corporate whistleblowers. Many financial-services matters now reach regulators through whistleblower disclosures.

Worked Australian examples

The Hayne Royal Commission (2017-2019)

Examined the banking, super and financial-advice industries. Found systemic misconduct - fees for no service (AMP, CBA, NAB, Westpac); misleading conduct (CommInsure, Freedom Insurance); inappropriate financial advice; breaches of responsible lending. Total remediation across the industry has exceeded $5 billion across multiple matters. Both ASIC and APRA were criticised. Post-Commission, regulatory intensity increased substantially.

Westpac AUSTRAC matter (2018-2020)

23 million breaches of AML/CTF reporting. $1.3 billion penalty - the largest in Australian corporate history at the time. APRA imposed a$1 billion capital add-on. CEO resigned. Board renewed.

PwC tax-leaks matter (2017-2026)

Partners used confidential ATO/Treasury policy information to advise multinational clients on tax planning before the policy was published. Triggered Senate inquiry, partner departures, government decision to remove tax advisory work, multiple regulatory investigations across multiple jurisdictions. The matter has reshaped the consulting industry's approach to confidential government information.

Star Entertainment matters (2022-2026)

AUSTRAC enforcement action; NSW and Queensland regulatory inquiries into casino operations; significant penalties; senior leadership changes. The matter combines AML/CTF, conduct and prudential concerns.