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CPA 2014 conference - paper reference number CPA2014-187

Accounting Manipulation in Australian Banking and

Financial Organizations
Kazi Islam*
Lecturer in Accounting, CQUniversity, Australia
Dr. Mohamed Omran
Associate Professor of Accounting, Gulf University for Science & Technology, Kuwait
Dr Mahmud Hossain
Professor of Accounting, CQUniversity, Australia
Contact Address
Kazi Islam
Lecturer in Accounting, CQUniversity, Australia
Builing !", #oo$ %&'%
Bruce (ighway, #oc)ha$*ton, Ql +,-'
Phone. /! , +"%- "000 1office2
3$ail. k.islam!c"u.edu.au or# ksi$%&&&!'ahoo.com.au
4 This *a*er is a *art of the Ph5 wor) of Ka6i Saiul 7sla$ 1Ka6i 7sla$2 who *rovies than)s to 5r
8oha$e 9$ran, Professor 8ah$u (ossain, Professor Shei)h #ah$an, 8r Lawson S$ith, 5r
:ane Anrew, 5r Kathie Coo*er, an 5r 8artin Turner for their suggestions at various stages&
Accounting manipulation in Australian (anking and
)inancial organizations
This stuy e;a$ines the circu$stances of accounting $ani*ulation in Australia
uring the *erio !""<='-!-& The theoretical fra$ewor) of this stuy is *re$ise
on the frau triangle theory& The analysis an inter*retation of finings are >ase
on twoAustralia >an)ing an financial institutions, na$ely (eath 7nternational
(olings Li$ite an Allco ?inance Grou* Li$ite& The stuy o>taine ata
fro$ co$*anies@ annual re*orts, relate investigation re*orts an other *u>lic
ocu$ents& The stuy fins that accounting $ani*ulation is an intentional activity
engenere >y iniviuals@ su>Aective use, $isinter*retation or violation of
accounting stanars& 7t arises fro$ $ulti*le realities constructe >y the
interaction of social=*sychological factors enca*sulate in the frau triangle
theory& Accounting issues, incentive factors, ysfunctional cor*orate governance,
la; e;ternal oversight >y the auitors an regulators, an >ehavioural issues are
foun to >e the )ey factors that fit in the frau triangle theory& The stuy has
*olicy i$*actions for the co$*any $anagers, irectors, regulators, eucators, an
Ke' terms Accounting $ani*ulation, cor*orate governance, ine*enence,
oversight, frau triangle, Australia&
Accounting manipulation in Australian
banking and fnancial organizations
-. Introduction
The *eAorative ter$ accounting manipulation is unerstoo to enco$*ass an escri>e the
$iscellaneous array of intentional $al*ractices in cor*orate financial re*orting& 7n reality,
accounting $ani*ulation is unerta)en >y res*onsi>le iniviuals in the co$*anies with
the ulti$ate o>Aective of *roviing $isleaing anBor ece*tive infor$ation to the intene
reci*ients an users of that infor$ation& Self=interests of the *ersons res*onsi>le for
*roviing infor$ation an the lac) of accounta>ility of the *ersons charge with internal
governance an e;ternal oversight are wiely accuse of as the *erceive causes of
accounting $ani*ulation 1#e6aee, '--0C Datts, '--/C Lee et al&, '--<C Ball, '--"2&
Accounting $ani*ulation, whether *erioic or continuous, $ay eventually cause the
une;*ecte, suen failure of an organisationwith significant averse i$*acts u*on an
re*ercussions for its sta)eholers, the o$estic econo$y an society $ore >roaly&5uring
the *erio '--!='-!-, the cor*orate sectors of so$e western econo$ies 1e&g& the USA, UK
an Australia2 suffere un*receente failures, there>y inflicting not insignificant shoc)s
on their res*ective econo$ies& 7n this way, in '--! the Australian econo$y E an its
acco$*anying *olitical governance syste$ E suffere fro$ the cu$ulative failures of (7(,
Ansett, 9neTel an (arris Scarfe& This era was followe >y the regulatory refor$s
incluing e;*osure of the ASF Cor*orate Governance Princi*les an #eco$$enations in
'--%, the Cor*orate Law 3cono$ic #efor$ Progra$ 1CL3#P2 " Act of '--+ an the new
set of accounting stanars $anatorily a**lica>le fro$ ! :anuary '--0&Australian
econo$y was further *ertur>e >y the failures of ABC Learning Centres, the Allco ?inance
Grou* 1A?G2, Ba>coc) an Brown an Stor$ ?inancial uring '--,='-!-&
Positivist research in accounting continues to uncover the incentives an o**ortunities of
earnings $ani*ulation 1see (ealy & Dahlen, !"""C 5echow & S)inner, '---C 3feni et al&,
'--,C ?iles et al&, '--"C 5echow et al&, '-!!C ?eng et al&, '-!!2& These stuies consier
$any co$*anies to test hy*otheses in e;*laining the o$inant factors of earnings
$ani*ulation& Their research a**roach is well encourage >y the >usiness schools an
acae$ic Aournals 18ouc), '--+C Par)er, '--02& 7n *ractice, iniviual co$*anies $ay
face uniGue circu$stances of accounting $ani*ulation& 9wing to the lac) of case stuies, a
holistic e;*lanation of the circu$stances of >oth earnings an >alance sheet $ani*ulation
in the iniviual co$*anies in Australia a**ears crucial& Therefore, this stuy selects two
cases, (eath 7nternational (olings Li$ite 1(7( Li$ite2 an Allco ?inance Grou*
Li$ite 1A?G Li$ite2, to analyse an inter*ret the circu$stances of accounting
$ani*ulation *rior to an after the regulatory refor$s& (7( Li$ite was Australia@s secon
largest insurance co$*any when it colla*se in '--! with far=reaching i$*acts on its
e$*loyees, shareholers an society at large 1Par)er, '--02& The colla*se of (7( Li$ite
was so significant that the Australian Govern$ent set u* the (7( #oyal Co$$ission
which re*orte in three volu$es in '--% on the causes of the failure of (7( Li$ite, the
nature of accounting $ani*ulation an reco$$enations for regulatory refor$s& A?G
Li$ite was a $aAor Australian invest$ent >an) when it colla*se in '--< uring the
glo>al financial crisis 1G?C2 a$ist allegations of accounting $ani*ulation&
The re$ainer of this *a*eris structure in + sections& Section ' *rovies an overview of
the two selecte co$*anies& Section % outlines the theoretical fra$ewor) an research
$ethos& Section + analyses an evaluates the circu$stances of accounting $ani*ulation&
Section 0 conclues this *a*er&
%. An o.er.ie/ o) HIH 0imited and AF1 0imited
(7( Li$ite ha its origins in 8D Payne Lia>ility Agencies Pty Lt, which was
esta>lishe in !"/< >y two *ro$oters 1irectors2, #ay Dillia$s an 8ichael Payne, to
unerwrite the insurance >usiness& 9ver the su>seGuent ecaes, the co$*any iversifie
its unerwriting >usiness into *ro*erty, *lant an eGui*$ent insurance *lus co$$ercial
*rofessional lia>ility& 3ventually it >eca$e C3 (7( Li$ite in !"<" 1(7( #oyal
Co$$ission, '--%, vol& !, *&0!2& 7n !""', (7( Li$ite was liste on the Australian Stoc)
3;change 1ASF2 an su>seGuently o*erate in !/ countries 1Lee et al&, '--<2& 7ts o*erating
*rofit attri>uta>le to shareholers for the !' $onths ene %- :une !""/ was H0"&' $illion,
which increase to H,<&% $illion in !"",, >ut significantly ecrease to H%,&0 $illion in
!""< 1(7( Li$ite, Annual #e*ort, '---2& ?or the first ti$e, the co$*any then incurre a
loss = H%"&< $illion = in !"""& 7n '---, the co$*any returne to *rofita>ility, with a *rofit
of H!<&+ $illion an as at %- :une '--- ha assets of H<&% >illion an lia>ilities of H,&%
>illion 1(7( Li$ite Annual #e*ort, '---2& (7( Li$ite went into *rovisional liGuiation
on !0 8arch '--! with an esti$ate eficiency of H%&/ = H0&% >illion 1(7( #oyal
Co$$ission, '--%2&
A?G Li$ite was an Australian >ase invest$ent >an) that co$$ence o*erations in
!"," *ri$arily to organise leverage leases for *lant an eGui*$ent& Dith a $erger with
#ecor 7nvest$ents Li$ite in '--/, the new grou* was liste on the ASF on ! :uly '--/
with a $ar)et ca*italisation of a**ro;i$ately H% >illion 1A?G Li$ite, Annual #e*ort,
'--/2& A?G then iversifie its financial services for aviation, shi**ing, rail, infrastructure,
*ro*erty, an financial assets 1A?G Li$ite, Annual #e*ort, '--,2& 7ts net revenue
increase >y /-I to H0+/&- $illion in '--, 1co$*are to '--/ *ro=for$a net revenue2, net
*rofit after ta; increase >y +!I to H'-!&% $illion 1co$*are to '--/ *ro=for$a net *rofit
after ta;es2 an earnings *er share on a nor$alise >asis increase in '--, >y $ore than
'<I 1A?G Li$ite, Annual #e*ort, '--,2& 7n '--<, A?G ha revenues of H!&% >illion, >ut
sustaine a net loss of H!&, >illion while it ha assets of H,&+ >illion an lia>ilities of H/&"
>illion 1A?G Li$ite, Annual #e*ort, '--<2& A?G went into liGuiation in Jove$>er '--<
with an overall eficit of H!&! >illion&
2. +heoretical )rame/ork and research method
This stuy ta)es a holistic view to analyse the overall circu$stances of accounting
$ani*ulation& The frau triangle theory which originates fro$ sociology literature 1Cressy,
!"0%2 has >een use in this stuy to e;*lain accounting $ani*ulation in Australia& This
theory assu$es that the factors of accounting $ani*ulation or frauulent financial
re*orting fall uner three categories. 1i2 incentives an *ressureC 1ii2 o**ortunities, an 1ii2
rationali6ationsBattitue& A >asic *re$ise of this theory is that the three co$*onents of
frau o not wor) in isolation, rather they are interrelate&
The auiting stanars, such as ASA '+- 1AUASB, '--/2 ao*te in Australia an SAS ""
1A7CPA, '--'2 evelo*e in the USA are >ase on the frau triangle theory& All these
stanars now have the forces of law& ?urther, acae$ic stuies have use frau triangle
theory to e;*lain frauulent financial re*orting 1see Al>recht et al&, '--+, '--<C #e6aee,
'--0C Choo & Tan, '--,C Dil)s & Ki$>el$an, '--+C (ogan et al&, '--<C Srivastava et al&,
'--"C (a$$ersley, '-!!C Bens et al&, '-!'C Broy et al&, '-!'2& The incentives an
*ressures that re*resent the first co$*onent of the frau triangle theory are iscusse in
this *a*er ta)ing into account overall econo$ic an inustry conitions, entity conitions,
e;ecutives@ re$uneration, an analysts@ e;*ectations of earnings or *ressures fro$ the
creitBrating agencies&The o**ortunities of accounting $ani*ulation are e;a$ine in view
of su>Aectivity in accounting stanars or violation of the stanars an regulations, >oar
ine*enence, financial e;*ertise an internal control& Any conflicting interests of e;ternal
auitors or their negligent oversight $ay also create accounting $ani*ulation
o**ortunities& 7neffective enforce$ents >y securities or financial regulators $ay also >e
res*onsi>le for accounting $ani*ulation& #ationali6ation is ty*ically unerstoo as
ver>alisation or arrogant attitue cou*le with ishonest >ehaviour&
?or ata, the stuy relieson annual re*orts of the co$*anies, investigation re*orts, court
hearings an Aug$ents, an other *u>lic ocu$ents incluing $eia articles& The $etho
of analysis of ata is inter*retive=social constructivist which is riven >y a *hiloso*hical
>elief of su>Aective realities&
3. Anal'sis and interpretation o) )indings
3.- Incenti.es and pressures )or manipulation
Macro4economic and industr' conditions
At the ti$e of the (7( colla*se, overall econo$ic conitions were eteriorating, as was
a**arent fro$ the nu$>er of cor*orate colla*ses that occurre in Australia an elsewhere&
Si; $onths >efore 3nron@s colla*se in late '--!, there were a nu$>er of high *rofile
cor*orate colla*ses in Australia, incluing national retailer (arris Scarfe 1*lace in
receivershi* in A*ril '--!2, high *rofile teleco$$unications co$*any 9ne&Tel 1sus*ene
share traing an a**ointe an a$inistrator in 8ay '--!2, one of the two the $aAor
o$estic airlines in Australia, Ansett 1in Se*te$>er '--!2, an Australian $ining co$*any
Pas$inco 1went into voluntary a$inistration in Se*te$>er '--!2 1#o>ins, '--/C Par)er,
'--0, *&%<+2& The high *rofile colla*ses in Australia uring '---='--' so$ewhat
re*licate cor*orate failures in the !"/-=!"<-s *erio >y #ei 8urray, (&G& Pal$er,
Stanhill, Ca$>rige Creit, Astea$, the (oo)er Cor*oration, Dest$e;, Qinte; an the
Bon Cor*oration 1Clar)e et al&, '--%2& 7n aition to such trau$atic '--! cor*orate
colla*ses, worsening econo$ic an traing conitions for the insurance inustry were
note in the ?inal #e*ort of the (7( #oyal Co$$ission.
By the $i=!""-s the general insurance cycle in Australia was close to its *ea)
L 9n the stoc) $ar)et, the insurance ine; out*erfor$e the all orinaries
ine; an the >an)ing ine; in that year& Thereafter the cycle turne own&
Low interest rates an a reuction in invest$ent returns, cou*le with a general
cut in *re$iu$ rates >ecause of co$*etition, hit the sector@s *rofita>ility& By
the en of !""< *rofit falls an so$e losses were >eing re*orte across the
sector& The situation was aggravate >y unusually large losses on unerwriting.
in the year ene 5ece$>er !""< the inustry re*orte its highest ever
unerwriting loss E nearly +- *ercent higher than any unerwriting result in the
*revious '- years& 1(7( #oyal Co$$ission, '--%, vol& !, *&//2
Dhile the ownturn in the insurance inustry ha le to various $ergers, the following
e$erging factors also ha the *otential to esta>ilise the inustry 1(7( #oyal Co$$ission,
'--%, vol&!2.
The traitional >ounaries >etween >an)ing an insurance were >lurring, *aving the
way for increase co$*etition in the insurance sector >y the $aAor >an)s&
Avances in technology were leaing to $aAor changes across the whole financial
Pu>lic lia>ility insurance, wor)ers co$*ensation an *rofessional lia>ility insurance
classes were generally uner=reserve across the inustry&
3cono$ic an inustry conitions *revalent in Australia an overseas in the last years of
the !""-s an in the early years of the '---s co$*rise the averse e;ternal environ$ent
which confronte the cor*orate worl uring this *erio&
Another roun of cor*orate $eltown >egan in the secon half of the '---='-!- ecae&
5uring '--,='-!-, the Australian an glo>al econo$y witnesse the severe i$*act of the
glo>al financial crisis with $ar)et ownturns, earnings volatility, e;cessive leverage, a
liGuiity crisis an Ao> cuts& Australia@s econo$ic conitions re$aine Guite >uoyant
uring this *erio an sustaine a $uch lower shoc) than the US an 3uro*ean econo$ies&
Jonetheless, AS7C relying u*on its assess$ent of $ar)et conitions esti$ate that
a**ro;i$ately H,% >illion was lost in value as a result of cor*orate an invest$ent *rouct
colla*ses fro$ ! :anuary '--< to %! 8ay '--" 1AS7C, '--"2& The failures of ABC
Learning Centres, ADB, Stor$ ?inancial, 9*es Pri$e, Ba>coc) an Brown, an Clive
Peters uring '--,='-!-, inicate how the financial an non=financial sectors in Australia
were severely affecte >y the G?C& As the G?C continue to unfol, $ore cor*orate
failures occurre in the Australian econo$y& The ongoing G?C as well as volatile
econo$ic an inustry conitions $ay have ha contagion effects on the failure of A?G in
'--< 1AS7C, '--"2& A?G@s a$inistrator 8cGrathJicol hel the view that the $ain factors
contri>uting to failures of various leaing co$*anies uring the G?C were $ostly source
in the su>stantial eterioration in e>t an eGuity $ar)ets that occurre 18cGrathJicol,
5ntit' conditions
Earnings growth and profitability
Ty*ically, net *rofit an earnings growth are wiely consiere )ey factors in eter$ining
the level of *rofita>ility, earnings *er share an share *rice over ti$e& All these factors
inicate whether a co$*any can satisfy earnings e;*ectations of e;ecutives, investors,
analysts an other $ar)et *artici*ants&
Ta>le !. (7( Li$ite@s net *rofit to shareholers 1H $illion2
,eporting periods 6et pro)it to shareholders
:anuary to 5ece$>er !"", 1!' $onths2 /!&<
:anuary to 5ece$>er !""< 1!' $onths2 %,&/
:anuary to :une !""" 1/ $onths2 10<&<2
:anuary !""< to :une !""" 1!< $onths2 1'!&'2
:uly !""" to :une '--- 1!' $onths2 !<&+
Source. (7( Li$ite, Annual #e*orts, !"",='---
7n the years ening %! 5ece$>er !""0 to !"",, (7( re*orte consistently growing
o*erating *rofit after e;traorinary ite$s an inco$e ta; 1(7( #oyal Co$$ission, '--%,
vol& !, *&;viii2& ?ro$ !"",, (7( Li$ite@s financial *erfor$ance was affecte >y earnings
volatility& As evient in Ta>le ! a>ove, (7( Li$ite@s net *rofits attri>uta>le to
shareholers ro**e fro$ H/!&< $illion in !"", to H%,&/ $illion for the !""< calenar
year& Dith a**roval fro$ AS7C, (7( change its financial year fro$ :anuary=5ece$>er to
:uly=:une, fro$ !""<& Accoringly, its net loss for si; $onths to :une !""" was H0<&<
$illion an net loss for eighteen $onths fro$ :anuary !""< to :une !""" was H'!&'
$illion& Then sur*risingly, the co$*any recore a net *rofit attri>uta>le to shareholers
of H!<&+ $illion for the !' $onths ene %- :une '---&
Ta>le '. #evise earnings with growth an *rofita>ility in (7( Li$ite
1H $illion, other than ratios an *ercentages2
Mear Jet inco$e after ta; 1!""/. H0"&'2 Profita>ility ratios 3PS
1in cents2 !' $onths
ene :une %-
A$ount 1H2 Change 1H2 Growth 1I2 #93 #9A
!"", ,<&% !"&! %'&%I !/&%I === '0&/
!""< %,&0 1+-&<2 10'&!I2 /&0I === "&"
!""" 1%"&<2 1,,&%2 1'-/&!I2 10&-I2 === 1-&+2
'--- !<&+ 0<&' !+/&'I '&-I === 1-&/2
Source. (7( Li$ite, Annual #e*ort, !"",='---
(7( Li$ite@s '--- annual re*ort isclose a revise su$$ary of the co$*any@s net *rofit
attri>uta>le to shareholers for the financial year to :une each year 1Ta>le '2& Accoringly,
(7( Li$ite@s net inco$e after ta; to :une was H0"&' $illion in !"",, H,<&% $illion in
!"",, an H%,&0 $illion in !""<& 7ts net loss for the twelve $onths to :une !""" was H%"&<
$illion which was al$ost ou>le the net loss of H'!&' $illion for eighteen $onths to :une
!"""& Dith the revise earnings nu$>ers, (7( Li$ite@s net inco$e growth 1net *rofit
attri>uta>le to shareholers for !' $onths ene in %- :une2 was u* %'&%I in !"", then
own 0'&!I in !""< an own a further '-/&!I in !""" 1see Ta>le '2& Then in '---, (7(
Li$ite ha an une;*ecte *rofit of H!<&+ $illion = net inco$e growth of !+/&'I& (7(
Li$ite eclare a ivien in !""" an '--- >y e;hausting retaine earnings 1(7( #oyal
Co$$ission, '--%2& (7( Li$ite@s net inco$e volatility ha effects on return on eGuity
1#932 an earnings *er share 13PS2& 7ts #93 in !"", was !/&%I an then ecline to
/&0I in !""<& 7t fell further to a negative 0&-I in !"""& Then in '---, the co$*any
re>oune with a *ositive #93 of 'I&
There ha >een a shar* ecline in earnings *er share fro$ '0&/ cents in !"", to "&" cents in
!""<& 3arnings *er share nu$>ers a**eare negative with -&+ an -&/ cents in !""" an
'--- res*ectively& 7t is a**arent that the co$*any re*orte fictitious earnings nu$>ers in
'---& 5es*ite the net *rofit of H!<&+ $illion with net inco$e growth of !+/&'I in '---, its
3PS was a negative -&/ cents = the lowest ever& The (7( #oyal Co$$ission Guestione the
veracity of (7( Li$ite@s earnings volatility as follows&
?or the !< $onths to :une !""" there was a loss of H'!&' $illion& 7n the year
ening %- :une '--- the grou* returne to *rofit, >ut only to the e;tent of H!<&+
$illion& 7t is $y o*inion that, were it not for Guestiona>le accounting treat$ent
of so$e transactions, the loss in !""" woul have >een greater an the *rofit in
'--- woul have >een a loss& 7n >oth !""" an '--- the co$*any eclare a
ivien >ut in oing so e;hauste its store of retaine *rofits& 1(7( #oyal
Co$$ission, '--%, vol& !, *&;viii2
7n light of the significant eterioration in (7( Li$ite@s *rofita>ility an ca*ital >ase
uring '--- an the resultant eterioration in the share *rice cause >y 1i2 $ar)et
ifficulties in the UK an the USA, an 1ii2 losses fro$ the acGuisition of ?A7
1(7( #oyal
Co$$ission, '--%, vol& !&, *&/-2, the su>seGuent sections reveal how the use an a>use of
As there were revisions in the earnings nu$>ers >ase in the changes in financial year, #93 ratios were
ta)en fro$ the '--- annual re*ort& #eturn on assets 1#9A2 ratios have not >een calculate owing to
unavaila>ility of ata relate to total assets for each financial year ene in :une&
?A7 was an Australian >ase insurance co$*any which also ha o*erations in a nu$>er of Asian an
Pacific general insurance $ar)ets& Being acGuire in early !""" for a total consieration of a>out H%--
$illion, ?A7 >eca$e a wholly=owne su>siiary of (7( Li$ite 1(7(#C, '--%, vol& !& '2&
reinsurance an uner=*rovisioning >y the $isa**lication of accounting stanars,
contri>ute to an unerstate$ent of losses in !""" an overstate$ent of *rofits in '---&
7n a si$ilar vein, A?G Li$ite was su>Aect to ra$atic earnings volatility >etween '--/
an '--<& As re*orte in the :une '--0='--, annual re*orts, its '--0 net inco$e was H/!&<
Ta>le %. 3arnings growth & *rofita>ility of A?G
1H $illion, other than ratios & *ercentage2
Mear Jet inco$e after ta; 1'--0. H/!&<2 Profita>ility ratios 3PS
1in cents2 !' $onths
ene :une %-
A$ount 1H2 Change 1H2 Growth
'--/ "/&" %0&! 0/&<I !/&-0I ,&+!I +"&+4
'--, '!!&, !!+&< !!<&0I "&"0I '&'0I /%&"
'--< 1!,,%!&/2 1!,"+%&%2 1"!,&"I2 1%!"&!/I2 1'%&',I2 1+<0&02
Source. A?G Li$ite, Annual #e*orts, '--/='--<&
As reveale in Ta>le % a>ove, A?G Li$ite@s net inco$e 1*rofit2 after ta; rose to H"/&"
$illion 1a 0/&<I increase2 in '--/C then it grew further >y !!<&0I to H'!!&, $illion in
'--,& But es*ite net earnings after ta; having significantly increase in '--, an earnings
*er share increase fro$ +"&+ cents in '--/ to /%&" cents in '--,, the *rofita>ility ratios
fell rastically in '--,& 9ne li)ely e;*lanation is that A?G Li$ite coul increase net
*rofit in '--, >y !!<&0 I >ecause of the $erger with #ecor, whilst its return on eGuity
an return on assets ecline in '--, >y $ore than /I an 0I res*ectively owing to an
increase in eGuity an assets of the grou*& But the following year '--< *rove a fatally
stressful year for the newly $erge A?G Li$ite=#ecor fir$s, ue to an enor$ous net
loss after ta; of H!&, >illion, which co$*rise a nine=fol ecline in earnings *erfor$ance
with acco$*anying revelations of negative earnings growth, *rofita>ility an 3PS& To >e
sure, A?G Li$ite@s H!&, >illion loss for '--,='--< was one of the largest in Australian
cor*orate history 1The Australian, Jove$>er 0, '--<2& Accoring to the a$inistrator@s
re*ort to creitors, reGuire *ursuant to Section +"%A of the Cor*orations Act '--!, the
)ey causes of A?G Li$ite@s ulti$ately fatal uner=*erfor$ance in '--< were as follows
18cGrathJicol, 8arch /, '--"2.
Losses of H!%" $illion on eGuity accounte invest$ents
An increase in financing costs of H"+ $illion
Asset i$*air$ent charges of H!&/ >illion&
7t is noteworthy that es*ite severe earnings volatility in '--, an '--<, A?G Li$ite was
not accuse of inco$e s$oothing, >ut rather of >alance sheet isclosure *ro>le$s& A
scrutiny of its isclosure *ractices reveals A?G Li$ite@s efforts to re*ort >etter earnings
nu$>ers in the financial years *rior to its colla*se& ?irstly, A?G Li$ite@s >asic 3PS of
+"&/ cents an ilute 3PS of +,&/ cents for the financial year to %- :une '--/ were
restate as +,&/ an +,&% cents res*ectively in '--,& The $ar)et *artici*ants@ 1e&g&
investors, an analysts2 *erce*tion of the grou*@s earnings ca*a>ility for '--/ $ay have
re$aine unchange until an e;*lanatory restate$ent was *rovie in the '--, annual
re*ort& As articulate >y the efficient $ar)et hy*othesis, investors an other $ar)et
*artici*ants react to infor$ation when it is release >y a co$*any& Seconly, A?G Li$ite
acGuire goowill an intangi>les >ecause of acGuisitions an the $erger with #ecor
7nvest$ents Lt on ! :uly '--/& Accoring to the GAAPs, >oth goowill an intangi>les
are su>Aect to Auge$ents an i$*air$ent every year& As e;tracte fro$ the annual re*orts,
A?G Li$ite@s i$*air$ent losses were H'/&+ $illion an H!&/ >illion for the years to %-
:une '--, an '--< res*ectively& 7n >oth these years, A?G Li$ite encountere
ifficulties cause >y eteriorating asset values& (owever, its '--, i$*air$ent losses i
not inclue any i$*air$ent charges for goowill& Conversely, A?G Li$ite@s $anage$ent
Austifie inclusion of goowill i$*air$ent charges of H<<0&! $illion in H!&/ >illion total
i$*air$ent losses for the year ene %- :une '--<& 7f goowill i$*air$ent losses ha
instea >een charge an re*orte for the year ene %- :une '--,, the net *rofit coul
have >een a loss& As re*orte >y Nerrener 1'-!-, '% 8arch2, it has also e$erge that in its
ying ays, A?G Li$ite sol so$e assets to entities 1relate *arties2 within the grou*, not
for cash >ut to >oo) earnings an signal *rofita>ility&
Solency issues !leerage and li"uidity#
(7( Li$ite@s overall leverage was critical to running as a going concern&
Ta>le +. Leverage of (7( Li$ite 1H $illion, other than *ercentages2
Mear Assets ?inancing assets
Assets Lia>ilities 3Guity Assets to
>y eGuity
?inance >y
As on %! 5ec !"", %,"</&, %,+'/&+ 0/-&% ,&!; !+&!I <0&"I
As on %- :une !"""
#estate on %- :une '---
As on %- :une '--- <,%',&! ,,%<<&- "%"&! <&"; !!&'I <<&<I
Source. (7( Li$ite, Annual #e*orts, !"",='---
As shown in Ta>le + a>ove, (7( Li$ite@s leverage ratio in !"", was ,&!; which
increase to <&'; in !""" an to <&"; in '--- 1Ta>le +2& 9therwise state, (7( Li$ite ha
only H! of eGuity every year when it neee H,&! to H<&" to finance its assets >etween !"",
an '---& ConseGuently, (7( Li$ite ha to e*en on e>t for financing <0&"I to <<&<I
of assets&
Ta>le 0. LiGuiity ratio of (7( Li$ite 1H $illion, other than *ercentages2
Mear Current assets Current lia>ilities Current ratio
As on %! 5ec !"", !<+"&! !0"+&" !&!/.!
As on %- :une !"""
#estate on %- :une '---
As on %- :une '--- %,+0-&0 %,-'/&% !&!+.!
Source. (7( Li$ite, Annual #e*orts, !"",='---
As etaile in Ta>le 0, (7( Li$ite@s liGuiity fell to critical, unsta>le levels& 7t ha Aust
over H! in current assets to *ay current lia>ilities of H!& Given this *recarious liGuiity
*osition an without the reGuisite ca*ital >ase to enure cyclical ownturns, (7( Li$ite
ha to $aintain a resilient >alance sheet in aition to elivering a satisfactory return on
eGuity to shareholers 1(7( #oyal Co$$ission, '--%2& (7( Li$ite@s assets an lia>ilities
increase in !""" ue *ri$arily to the acGuisitions of ?A7, Great States, Cotesworth Grou*
an associate LloyOs Synicates 1Annual #e*ort, !"""2& (7( Li$ite also restate its
:une !""" assets an lia>ilities on %- :une '---& 7ts liGuiity increase to !&!0.! fro$ the
*reviously state !&-".!&
Ta>le / >elow e*icts how A?G Li$ite@s leverage ratio uring '--0='--, range
>etween !&<; an %&"; an hence was not as e;cessive as that in (7( Li$ite&(owever, it
is unerstana>le that A?G Li$ite@s leverage increase annually, >eco$ing e;cessive
*rior to colla*se&
Ta>le /. Leverage of A?G Li$ite 1H $illion, other than *ercentages2
Perio Assets ?inancing assets
Assets Lia>ilities 3Guity Assets to
Assets finance
>y eGuity
Assets finance
>y e>t
'--0 <!-&-/ %0<&0% +0!&0+ !&<; 00&,I ++&%I
'--/ !,%-<&<< ,-+&,+ /-+&!+ '&'; +/&'I 0%&<I
'--, <,0<%&// /,%<!&%< ','-'&'< %&"; '0&,I ,+&%I
'--< ,,+,<&,/ /,"%%&+< 0+0&'< !%&,; ,&%I "'&,I
Source. A?G Li$ite, Annual #e*orts, '--/='--<
7n '--<, when A?G Li$ite neee H!%&,, its eGuity coul *rovie finance su**ort of H!
only& Given its *arlous eGuity >ase as reveale in Ta>le /, A?G Li$ite was uner *ressure
to increasingly e*en on e>t financing, which increase fro$ ,+&%I in '--, to "'&,I in
'--<& The $aAor *ortion of its e>t was short=ter$& This create liGuiity *ro>le$s
1wor)ing ca*ital crisis2 in '--, an '--<& As a result, A?G Li$ite chose to
$iscategoriseite$s if assets an lia>ilities in its >alance sheet, there>y o>scuring the true
state of its solvency *ro>le$s& 3;tracting infor$ation fro$ A?G@s $anage$ent, A?G
Li$ite@s a$inistrator su>seGuently re=esti$ate A?G Li$ite@s current assets at H%&+
>illion against H+&, >illion current lia>ilities in '--<& The result was that, the grou* ha a
wor)ing ca*ital eficiency of H!&% >illion which re*resente a current ratio of less than H!
in '--< 18cGrathJicol, '--"2& 7ts e;cessive e*enence on e;ternally source e>t
co$>ine with its liGuiity crisis were fatally e;acer>ate, when Australia@s >iggest $argin
leners re$ove A?G fro$ their $argin lening stoc) list 1see :i$ene6, '--<, ?e>ruary
-'2& #e*orte that.
Two of its four $argin leners sol their security E a>out half APT@s Allco
holings E while the re$aining two, incluing Jational Australia Ban), are in
negotiations with APT over a stanstill agree$ent that woul *rotect >oth
*arties fro$ crystallising $ore fire sale losses >y offloaing the re$aining
shares in the current environ$ent& 1Bartholo$eus6, '--<, ?e>ruary ''2
Cash flows
Cash flows argua>ly *rovie a >etter inicator than accrual >ase accounting of a
co$*any@s a>ility to sustain its overall activities 1(ertenstein & 8cKinnon, !"",2& Ta>le ,
reveals that (7( Li$ite@s overall net cash flows were negative in two out of three years&
Ta>le ,. Cash ?lows of (7( Li$ite 1H $illion, other than *ercentages2
Mear Cash flows fro$ ifferent activities Jet C?
9*erating activities 7nvesting activities ?inancing activities
!"",4 !//&< 1'0<&,2 1'&/2 1"+&02
!"""44 1%+!&+2 0%!&+ '0,&/ ++,&/
'---444 1/,<&%2 0+%&< 10-&<2 1!<0&%2
Source. 4?igures are for the year ene on %!&!'&", 1(7( Li$ite, Annual #e*ort, !"""2&
44?igures are for !< $onths fro$ !&!&"< to %-&/&"" 1(7( Li$ite, Annual #e*ort, !"""2&
444?igures are for the year ene on %-&/&'--- 1(7( Li$ite, Annual #e*ort, '---2&
Although (7( Li$ite ha negative cash flows of H"+&0 $illion for the year ene
5ece$>er !"",, it i not then e*en on financing activities as it generate *ositive cash
flows of H!//&< $illion fro$ o*erating activities& But its net cash flow *osition was
negative in !"", $ostly >ecause of investing activities& The figures in Ta>le , further
e$onstrate the worriso$e state of (7( Li$ite@s cash flow *ositions for !""" an '---&
The co$*any ha *ositive net cash flows of H++,&/ $illion for the !< $onths to %- :une
!"""& (owever, this a$ount was not source fro$ o*erating activities, >ut rather, fro$
investing activities of H0%!&+ $illion an financing activities of H'0,&/ $illion& 7ts
o*erating cash flow *osition was a negative H%+!&+ $illion for this *erio& The co$*any@s
net cash flows fro$ o*erating activities continue to >e negative with H/,<&% $illion for
the year ene %- :une '--- when (7( Li$ite was una>le to generate cash flows fro$
financing activities& At this *oint, the co$*any totally e*ene on selling its own assets to
reuce negative net cash flows&
The huge volu$e of negative cash flows fro$ o*erating activities fro$ ! :anuary !""< to
%- :une '--- along with e;cessive leverage, earnings volatility an negative earnings *er
share uring !"""='---, signalle (7( Li$ite@s *otential failure in the su>seGuent
*erios& The see$ingly unavoia>le conseGuence was that (7( Li$ite >eca$e insolvent
in 8arch '--!, a$ist serious assertions of its unrelenting atte$*ts to hie e>ts an
s$ooth *rofits 1(7( #oyal Co$$ission, '--%2&
An si$ilarly, regaring A?G Li$ite, Ta>le < reveals enor$ous volatility in its net cash
flows >etween '--0 an '--<&
Ta>le <. Cash ?lows of A?G Li$ite 1H $illion, other than *ercentages2
Mear Cash flows fro$ ifferent activities Jet C?
9*erating activities 7nvesting activities ?inancing activities
'--0 0!&%- 1%,!&-+2 %!!&00 1<&!"2
'--/ 0,&,< 1%,+&"+2 %'%&!" /&-%
'--, '%,&!" 1'/%&0/2 +/0&-! +%<&/+
'--< 1'"&%,2 1!/<&<%2 !0+&-! 1++&!"2
Source. A?G Li$ite, Annual #e*orts, '--/='--<
Prior to the $erger of Allco Li$ite with #ecor 7nvest$ents Li$ite in '--/, Allco
Li$ite@s net cash flow *osition was a negative H<&!" $illion for '--0& After this $erger,
A?G Li$ite@s net cash flow *osition was *ositive >ut insignificant with H/&-% $illion for
'--/, an then net cash flows for '--, lea*t to H+%<&/+ $illion, so$e ,% ti$es larger than
for '--/& The co$*any@s aggressive e;*ansion an iversification of >usiness activities
were su**orte >y increasing cash flows fro$ >oth o*erating activities an financing
activities >etween '--0 an '--,& (owever, A?G Li$ite ulti$ately colla*se in August
'--< with negative cash flows fro$ o*erating activities of H'"&%, $illion an reuce cash
flows fro$ financing activities of H+/0&-! $illion for '--, to H!0+&-! $illion for '--<&
57ecuti.e remuneration
The re$uneration *ac)ages for e;ecutive irectors an senior officers in (7( Li$ite
co$*rise salary, su*erannuation, *erfor$ance=>ase >onus, an long=ter$ incentives,
incluing share ownershi*s an o*tions 1(7( Li$ite, Annual #e*ort, !""", '---2&
Ta>le ". Brea)=u* of e;ecutive re$uneration in (7( Li$ite 1H other than *ercentages2
Mear 3;ecutives Salary 7ncentives
Total I of salary
Salary 9thers
# # Dillia$s !,+0-,!<< ========= !-,!/' !,+/-,%0- ""&%I -&,I
T K Cassiy "-/,/!0 ========= !-,!/' "!/,,,, "<&"I '&!I
5 ?oera ,<",,-< ========= !-,!/' ,"",<,- "<&,I '&%I
G 9 Stureste*s ",/,!%' ========= !-,!/' "</,'"+ ""&-I !&-I
( ? # Dein %,',+%! !%,,"!! ,,%+0 0!,,/<, ,!&"I '<&!I
Total +,+"0,-,+ !%,,"!! +,,""% +,/<-,",< "/&-I +&-I
# # Dillia$s !,!+-,/'0 0--,--- ,,-/, !,/+,,/"' /"&'I %-&<I
T K Cassiy //+,<%% ========= ,,-/, /,!,"-- "<&"I !&!I
5 ?oera /+/,/-' ========= %-,0'/ /,,,!'< "0&0I +&0I
G 9 Stureste*s ,--,'!" ========== ,,-/, ,-,,'</ ""&-I !&-I
( ? # Dein 0'",+!- !!<,"!< === /+<,%'< <!&,I !<&%I
Total %,/<!,/<" /!<,"!< 0!,,', +,%0',%%+ <+&/I !0&+I
Source. (7( Li$ite, Annual #e*orts, !"",='---
7n *ractice, a ifferential scale was a**lie for the *ay$ent of re$uneration to the to* five
e;ecutives& As shown in Ta>le " a>ove, only one of the to* five e;ecutives E the C39 =
receive long=ter$ incentives of H!%,,"!! an H!!<,"!<, in aition to his regular salary in
!""" an '--- res*ectively&
The C39, #ay Dillia$s, receive H0--,--- as stoc) o*tions in '---& Jone of the other to*
e;ecutives was grante any *erfor$ance=>ase >onus or stoc) o*tions& 7n this situation, the
salary of the to* e;ecutives other than that of C39 #ay Dillia$s an (?# Dein co$*rise
>etween "0&0I an ""&%I of their total re$uneration uring !"""='---& Although (7(
Li$ite@s net *rofit after ta; increase fro$ a negative figure 1net loss2 of H%"&< $illion in
!""" to a *ositive figure 1net *rofit2 of H!<&+ $illion in '--- 1Ta>le !2, total re$uneration
of the three e;ecutives Cassiy, ?oera an Stureste*s ecrease in '---, while total
re$uneration of the C39 an (?# Dein increase in '--- vis=P=vis their total
re$uneration in !"""& The stoc) o*tion of H0--,--- to the C39 was li)ely lin)e to
financial *erfor$ance, a net *rofit of H!<&+ $illion in '---& (7( Li$ite@s net inco$e
over the !"",=!""" *erio ecline >y 0'&!I in !""< an '-/&!I in !""" 1Ta>le !2& The
(7( Li$ite ?inal #e*ort ocu$ente how the salary of C39 #ay Dillia$s increase
a>out ++I fro$ H,,0,--- to H!&!' $illion >etween early !"", an 8arch !""" 1(7(
#oyal Co$$ission, '--%, vol& %, *&'<+2& There was no cogent e;*lanation in the
co$*any@s annual re*orts a>out increases in C39 re$uneration fro$ !"", to '---, es*ite
its falling *rofita>ility&By contrast, the re$uneration *olicies of A?G Li$ite were guie
>y an e;*licit *hiloso*hy to align senior e;ecutives@ *erfor$ance with >usiness
*erfor$ance& This lin)e the contri>ution of the senior e;ecutives to a re$uneration
regi$e, cou*ling >usiness *erfor$ance with achieve$ent of iniviual o>Aectives 1A?G
Li$ite, Annual #e*ort, '--,='--<2&
As averte to >elow, >usiness *erfor$ance an s*ecific o>Aectives were lin)e to
re$uneration *olicies via a co$>ination of relatively $oest >ase salaries an
*erfor$ance=riven incentive arrange$ents 1A?G Li$ite, Annual #e*ort, '--,, *&+<2&
Ta>le!-. Brea)=u* 1A2 of e;ecutive re$uneration in A?G Li$ite 1Actual H a$ount2
Mear 3;ecutives Salary Bonus Shares 9*tions &
9thrs Total
5avi Clar)e !<,,+!0 '0-,--- !+!,/+- === === === 0,",-00
8 Stefanovs)i %"",<!< /--,--- ',-!",%%/ <',,%! === ","-- %,!!!,<!0
Ti$ To %+/,<"- +0-,--- !,,,'< !+-,+!- === === "00,-'<
5avi Neal %!!,+%! === === <',,%! === ","-- +-+,-/'
:ohn Love %0/,0,, !---,--- === === === === !,%0/,0,,
8ar) Dorrall %--,--- 0--,--- === <',,%! === ","-- <"',/%!
#o> 8oran %--,--- 0--,--- === <',,%! === ","-- <"',/%!
Total ','-!,+%! %,%--,--- ',!,<,,-+ %,!,%%+ === %",/-- <,!"!,,""
5avi Clar)e <',,'%0 === <+<,/"' %!",0+' === === !,""0,+/"
8Stefanovs)i +%/,<,! === %,,<!,%// 1<',,%!2 === ,/%,!'" +,<"<,/%0
Ti$ To +-0,%<, === 1!,,,'<2 1!+-,+!-2 === === '+,,'+"
5avi Neal %<",-!+ === === 1!%,,0,2 ,0-,--- === !,!'0,'0,
:ohn Love %'/,',, === === ',,/-< <--,--- === !,!0%,<<0
8ar) Dorrall %0-,--- === === 1!%,,0,2 0--,--- === <%/,'+%
#o> 8oran %/0,"-" === === 1!%,,0,2 /0-,--- === !,--',!0'
Total %,!--,/<% === +,/!',%%- 1<',,%<2 ',,--,--- ,/%,!%" !!'0<<"!
Source. A?G Li$ite, Annual #e*orts, '--,= '--<
Ta>le !!. Brea)=u* 1B2 of e;ecutive re$uneration in A?G Li$ite 1Actual H$2
3;ecutives I of salary incluing su*erannuation I of *erfor$ance relate re$uneration
'--, '--< 5ifference '--, '--< 5ifference
5avi Clar)e %'&%, +!&+/ "&-" /,&/% 0<&0+ 1"&-"2
8 Stefanovs)i !%&!, '+&0- !!&%% </&<% ,0&0- 1!!&%%2
Ti$ To %/&%' -&-- === /%&/< -&-- ===
5avi Neal ,"&0% %+&0, 1++&"/2 '-&+, /0&+% ++&"/
:ohn Love '/&'" '<&'< !&"" ,%&,! ,!&,' 1!&""2
8ar) Dorrall %+&,' +!&<0 ,&!% /0&'< 0<&!0 1,&!%2
#o> 8oran %+&,' %/&0! !&," /0&'< /%&+" 1!&,"2
Source. A?G Li$ite, Annual #e*orts, '--/='--<
Ta>les !- an !! a>ove reveal the re$uneration *ai to the C39 5avi Clar)e, 5e*uty
C39 8ichael Stefanovs)i, C?9 Ti$ To an four other senior e;ecutives& Cash >onus,
shares, o*tions an rights, retention incentives, an other $onetary an non$onetary
>enefits were consiere as *erfor$ance relate *ay& The *erfor$ance relate
re$uneration of those senior e;ecutives range >etween /0I an <,I of their total
re$uneration in '--,, an /%I to ,/I in '--<& The grou*@s lower earnings *erfor$ance
ha irect effects on the reuction in *erfor$ance relate *ay in '--<& As etaile in Ta>le
', A?G Li$ite@s net inco$e attri>uta>le to shareholers increase fro$ H"/&" $illion in
'--/ to H'!!&, in '--,, while it sustaine a net loss of H!&, >illion in '--< with resulting
ecline in 3PS fro$ /%&" cents in '--, to a negative figure of +<0&0 cents in '--<& An
relately, A?G@s share *rice e;*erience a shar* ecline fro$ H!-&/+ on %- :une '--, to
H-&+- on %- :une '--< 1A?G Li$ite, Annual #e*ort, '--<, *&%!2>efore A?G Li$ite
went into receivershi* in Jove$>er '--<& #e$ar)a>ly, while no one receive cash >onus
an non$onetary >enefits in '--<, 5e*uty C39 an C?9 e;ecutives receive retention
incentives or other >enefits of si$ilar a$ounts&
Anal'sts8 e7pectations
8ar)et analysts ha for so$e ti$e viewe with sce*ticis$ the earnings an stoc) *rices of
(7( Li$ite& Dhen not satisfie with (7( Li$ite@s earnings, their o*inions *erha*s $ore
accurately trac)e the *ros*ects an stoc) *rices of the fir$& 7n !""<, $ar)et analysts were
ivie with res*ect to their Q>uyR, QholR an QsellR o*inions, forecasting ifferent
*ros*ects for (7( Li$ite& $he Agenews*a*er su$$e u* the overall $ar)et *osition >y
Guoting an unna$e analyst.
#arely o you get such a ichoto$y of o*inion on a stoc) >etween analysts& 7t
$a)es it really har for the fun $anagers to ecie what to o& 1(7( #oyal
Co$$ission, '--%, vol& !, *& /<2
The o*inion of $ar)et analysts was es*ecially *olarise in !""<, ue to an averse
conAunction of the release of the *oor first half=year results in Se*te$>er !""< an
announce$ent of the >i for ?A7 Aust three wee)s later 1(7( #oyal Co$$ission, '--%, vol&
!, *&/<2& Dhen the acGuisition of ?A7 was co$*lete, Stanar & Poor@s owngrae (7(
Li$ite@s creit rating fro$ QAR to QA=R an at the sa$e ti$e u*grae ?A7 fro$
QBBBEQto QA=R 1(7( #oyal Co$$ission, '--%, vol& ! *&/<2& 5es*ite this owngrae,
so$e $ar)et analysts still too) an o*ti$istic view of the enlarge fir$@s *ros*ects
following the ?A7 ta)eover 1(7( #oyal Co$$ission, '--%, vol& !, *& /"2& That lingering
sense of $ar)et o*ti$is$ however, ulti$ately issi*ate.
By $i=!""" a $ore cautious tone was evient throughout the $ar)et as
concerns e$erge a>out (7(@s *rofit for !""<=!"""& Dhen a *rofit result >elow
e;*ectations was confir$e on '0 August, the $eia coverage was critical&
1(7( #oyal Co$$ission, '--%, vol& !, *&/"2
Then su>seGuent events *ro$*te ra$atic reactions fro$ $ar)et analysts an the $eia&
9n a *ositive note, >y the en of 9cto>er !""", the analyst 9r 8innett ha u*grae its
reco$$enation to shareholers to Qaccu$ulateR (7( Li$ite@s shares, noting confience
in the stoc) >ase on an e;tension of (7( Li$ite@s alliance with the Jational Australia
Ban)& That *ositive attitue continue when (7( Li$ite reveale on '0 :anuary '--- that
it e;*ecte an i$*rove$ent in results for the si; $onths to %- 5ece$>er !""" 1see (7(
#oyal Co$$ission, '--%, vol& !, *&,-2& That favoura>le $eia coverage >egan to fae
away $ore or less *er$anently fro$ late 8ay '---, coinciing with a shar* fall in the
*rice of (7( Li$ite@s shares 1(7( #oyal Co$$ission, '--%, *&,!2& A '/ 8ay '---
article in The Australian entitle Q?ailing (7( Li$ite has only itself to >la$eR, $ostly
criticise ele$ents of a *oorly run >usiness run >y an entrenche $anage$ent tea$ le >y
#ay Dillia$s, incluing the failure to e;tract the *otential synergies fro$ (7( Li$ite@s
three acGuisitions an the $etho of uner=*rovisioning& The !"""='--- full=year results,
when release, were well >elow $ar)et analysts@ e;*ectationsC an (7( Li$ite@s shares
were sus*ene fro$ traing for a ay on !% Se*te$>er '---& ?urther, as o>serve in the
#oyal Co$$ission@s ?inal #e*ort 1(7( #oyal Co$$ission, vol& !, **&,-=,%2.
Stanar an Poor@s revise its creit watch on (7( Li$ite to Snegative@&
A $ar)et analyst@s view was re*orte in the Australian ?inancial #eview for their
o*inion that. QThis is the ti* of the ice>erg& This >usiness is hae$orrhagingR&
Creit Suisse, ?irst Boston an 9r 8innett all owngrae (7( Li$ite@s shares&
Although 9r 8innett later u*grae its reco$$enation fro$ Shol@ to
Saccu$ulate@ on the strength of the C39@s resignation on !' 9cto>er '---, $ar)et
analysts an investors *rogressively withrew any resiual su**ort for (7( Li$ite
fro$ the en of '--- until its colla*se in 8arch '--!&
A?G Li$ite ha secure its continue e;istence, relying u*on long=ter$ relationshi*s
with >orrowers, co=investors, asset=$anagers, co$$ercial >an)s, stoc)>ro)ers an
avisors 1Annual #e*ort, '--,2& Dhilst ostensi>ly recognising the legiti$ate interests of
sta)eholers, in reality, as state earlier, A?G Li$ite i not isclose a H0- $illion loan
to APT, hi current lia>ilities of a**ro;i$ately H!&" >illion, i not charge goowill
i$*air$ent in '--, an sol assets to relate *arties 1not for cash2& These accounting
contrivances were unerta)en to i$*rove earnings, ris) an solvency 1see Ta>les, ', +, 0
an /2& Analysts reacte accoringly& 7t has >een re*orte that that.
Australia@s to* invest$ent analysts shoul >e asha$e of the$selves& As of
5ece$>er '--,, five out of seven >ro)ers an >an)s covering Allco were
avising investors to >uyC none was saying QsellR& Three $onths later the shares
were *ractically worthless& 1Barry, '-!-, 8ay2
7n '--<, when A?G Li$ite@s outloo) an *erfor$ance worsene, the S&PBASF revise
their inices, an elete A?G fro$ the to* '-- 1S&P@s, '--<>, Se*te$>er 02& Dhen A?G
Li$ite, 8a; Securities an 8ortgage Trust issue AH0%0 $illion $eiu$=ter$=notes
18TJs2, S&P@s #atings Services *rovie a CreitDatch on it in negative ter$s 1S&Ps,
'--<a, 8arch '/2&
3.% Opportunities to carr' out manipulation
Accounting issues in HIH 0imited
The #oyal Co$$issioner o>taine evience of (7( Li$ite $anage$ent@s involve$ent in
Guestiona>le accounting entries& (e was eventually a>le to *rovie a etaile e;*lanation
of such accounting $ani*ulation& As :ustice 9wen e;*laine in his final re*ort, (7(
Li$ite@s Qfinancial state$ents were istorte >y Guestiona>le entries, heavy reliance on
one=off en=of=year transactions, an aggressive accounting *racticesR 1(7( #oyal
Co$$ission, '--%, vol& !, *&;lvi2& Destfiel 1'--%a2 argues that (7( Li$ite@s accounting
re*orts conceale *otential losses&
Although Ta>le !' >elow is not an e;haustive list, it is inicative of the *rinci*al
accounting stanars that were $isa**lie or $isinter*rete to facilitate a $isleaing
*erce*tion of (7( Li$ite@s financial *erfor$ance an strengths uring !"",='---&
Ta>le !'. 8aAor accounting issues in (7( Li$ite 1!"",='---2
#elevant accounting stanars effective uring !"",='---
Uner=*rovisioning AASB !-'%, %inancial reporting of general insurance actiities
#e=insurance AASB !-'%, %inancial reporting of general insurance actiities
AASB !--', Eents occurring after reporting date
5isclosure of intangi>le assets
incluing goowill, future inco$e ta;
>enefits, eferre acGuisition costs
an eferre infor$ation technology
AASB !-!%, Accounting for goodwill
AASB !-'-, &ncome ta'
AASB !-'%, %inancial reporting of general insurance actiities
Accounting *olicies = going concern
AASB !--!, Accounting policies
#elate Party isclosures AAS '' an AASB !-!,, (elated party disclosures
Sources. Base on the Accounting StanarsC (7( Li$ite, Annual #e*orts, !"",='---C (7( #oyal
Co$$ission, '--%
7t is a stereoty*ical *heno$enon E an hence relate accounting *ractice E in the insurance
>usiness that while *re$iu$ inco$e is receive on a regular *erioic >asis, the *ay$ent of
clai$s is ty*ically eferre, i&e&, they are $ae in su>seGuent accounting *erios or years&
Because of this technical asy$$etry the non=conte$*oraneity of recei*ts an *ay$ents E a
Slong=tail@ insurer coul >eco$e technically insolvent >ut re$ain o*erational for a
significant *erio of ti$e 1(7( #oyal Co$$ission, '--%2&
Given this situation, aeGuate *rovisioning for future clai$s an isclosure of relevant
infor$ation in a ti$ely $anner was $anatory to )ee* investors an other )ey
sta)eholers well=infor$e& As (7( Li$ite@s *rovision for outstaning clai$s was a>out
0- *ercent of lia>ilities on the >alance sheet with uner=*rovisioning >etween H'&/ >illion
an H+&% >illion, :ustice 9wen conclue that that the >iggest single cause of (7(
Li$ite@s colla*se was the failure to *rovie *ro*erly for future clai$s 1(7( #oyal
Co$$ission, '--%, vol& !2&
Ta>le !% >elow *resents the esti$ates of uner=*rovisioning in (7( Li$ite, C&G, an
?A7 for '---& 7f uner=*rovisioning was re=esti$ate at H%-' $illion, (7( Li$ite@s
re*orte reinsurance lia>ility of H+,+%- $illion coul have >een H+,,%' $illion in the year
to %- :une '---& Dith a % *ercent further allowance for future hanling costs, uner=
*rovisioning woul >e further re=esti$ate at H+++ $illion&
Ta>le !%. Uner *rovisioning in (7( Li$ite for the year to %- :une '--- 1H$2
9aluation o) the cases 57tent o) under4pro.isioning
(7( Li$ite C&G lia>ility *ortfolio <+&/
(7( Li$ite C&G *rofessional ine$nity *ortfolio 0"&-
(7( Li$ite C&G Dor)ers co$*ensation *ortfolio '&<
(7( Li$ite C&G = uniscounte value of >uiler@s warranty '-&-
(7( Li$ite C&G@s US lia>ility clai$s '0&-
(7( Li$ite A$erica 1 without (7( grou* H00 $illion2 ,'&-
?A7 = uniscounte value of >uiler@s warranty '-&-
?A7 = ou>tful reinsurance recoveries !<&/
Total aAust$ents 1H+,,%' = H+,+%-2
?urther allowance 1%I2 for future hanling costs
7naeGuate *rovision in the financial state$ents to %- :une
Source. 3sti$ates of Slee an :ustice 9wen as state in (7( #oyal Co$$ission ?inal #e*ort, '--%, vol&
%, **&0/=0,
Since (7( Li$ite faile to set asie enough *rovision to cover future insurance clai$s,
this accounting treat$ent ha si$ultaneous effects on the inco$e state$ent an >alance
sheet, >ecause it increase *rofits in the re*orting year1s2 an cause a great ris) 1lia>ility2
of non=*ay$ent in future years& (7( Li$ite@s inherent uner=*rovisioning *ro>le$s
co$*oune over ti$e an >eca$e critical when (7( Li$ite inherite une;*ecte losses
fro$ uner=*rovisioning in ?A7& The #oyal Co$$ission referre to ine*enent re*orts
a>out uner=*rovisioning *ractices in ?A7& ?or e;a$*le, Swiss #e 7nsurance Co$*any
iscusse with the officers of ?A7 an re*orte in 9cto>er !"", the a>sence of a
$ethoology for the clai$s=haning *rocess, *ro>le$s in clai$s=reserving guielines, the
a>sence of a clai$s $anual a>out >asic controls an *rocesses, an the failure to $onitor
clai$s >elow H!--,---& Then on >ehalf of Swiss #e 7nsurance, in A*ril !""<, General
Australia Li$ite conucte >asic ue iligence a>out ?A7@s outstaning clai$s lia>ilities
relating to reinsurance contract an re*orte that ?A7@s Q>ig si;R loss reserves were
recognise only after receiving a $onthly or Guarterly state$ent of account, an hence no
case reserves were >oo)e in a ti$ely $anner 1see (7( #oyal Co$$ission, '--%, vol& ',
**&!-"=!!-2& 7n the u*shot, the #oyal Co$$issioner $ae nu$erous averse finings
a>out financial re*orting issues relating to uner=*rovisioning in ?A7, as follows.
The reserving *ractices within ?A7 over a long *erio of ti$e were
unsatisfactory giving rise to significant uner=reserving fro$ at least %- :une
!"", an *ossi>ly >efore that *erio& The causes of the uner=reserving were
$ultifacete& They inclue *oor clai$s $anage$ent >ut also eli>erate
$ani*ulation of clai$s esti$ates >y $anage$ent for the *ur*ose of i$*roving
re*orte *rofit as at various re*ort ates& ?urther, once the e;tent of the uner=
reserving was unerstoo >y $anage$ent, which see$s to have occurre in the
last Guarter of !"",, ste*s were ta)en to conceal the uner=reserving fro$ the
Boar, the auitors, the e;ternal actuaries an AP#A a$ongst others& The
ece*tion continue until shortly after the acGuisition of ?A7 >y (7( Li$ite in
the circu$stances referre to a>ove& 1(7( #oyal Co$$ission '--%, vol& ',
Before ?A7 was ta)en over >y (7( Li$ite, inflicting $aAor financial a$age u*on it, ?A7
ha a history of accounting $al*ractices& (owever, the #oyal Co$$ission too) the view
that o**ortunities of accounting stanar $isa**lications in ?A7 an (7( Li$ite or
$isinter*retations *rovie >y the $anage$ent an auitors >oth occurre ue to their
intentional $al*ractice1s2 an wea)nesses in the *rinci*al accounting stanar, AASB
!-'%C %inancial reporting of general insurance actiities* The a**lication of this stanar
was contentious for various reasons, as follows 1(7( #oyal Co$$ission, '--%, vol& !,
The Seferral an $atching a**roach@ to re*orting of general insurance transactions
uner AASB !-'% *rovie incentives for insurers to uner=*rice their *roucts an
hence to o$inously unerstate *otential lia>ilities& Accoring to AP#A, it was
*ossi>le to entirely avoi GPS '!-, >ecause it allowe u*=front recognition of future
clai$s in the current year rather than allowing the loss to >e eferre into future years
when the actual clai$s will arise&
The su>Aective Auge$ents >ase on assu$*tions a>out *resent value of the e;*ecte
future cash flows associate with the clai$s&
The iscounting *rovisions in relation to calculation of the future cash flows uner
AASB !-'% in Australia were si$ilar to those in the UK, >ut ifferent fro$ the
relate reGuire$ents in the USA&
The clash >etween the Pruential Stanar GSP'!-, +iability aluation for general
insurers an AASB !-'% 1when rea with SAC +2 a>out the accounting treat$ent of
*ruential $argins&
The conflicts >etween AASB !-'% an 7ASC reco$$enations as to the value of
insurance lia>ilities 1an assets2, >ecause, 7ASC reco$$ene that the value of
insurance lia>ilities 1an assets2, whether calculate as the entity=s*ecific value or the
fair value, shoul always reflect ris) an uncertainty while this *ractice was not
acce*ta>le uner AASB !-'%&
The conce*t of a Qtrue and fairR view has always >een contesta>le& The true an fair view
of the value of (7(@s lia>ilities was also trou>leso$e, >ecause this value was calculate
>ase on what )nowlegea>le an willing *arties 1(7( Li$ite an *olicyholers2 woul
*ay to resolve those lia>ilities 1(7( #oyal Co$$ission, '--%2& :ustice 9wen@s o*inion
a>out this was that, Qlia>ilities shoul not >e value accoring to the efinition of Sfair
value@ containe in the various 7AS stanars an in AASB !-%% as Qthe a$ount for which
a lia>ility coul >e settle >etween )nowlegea>le an willing *arties in an ar$s@ length
transactionR 1(7( #oyal Co$$ission, '--%, vol& !, *&!+,2& Su>seGuently, a new stanar
7AS !%" was issue to >etter conce*tualise fair value& (owever, this stanar also attracte
criticis$ fro$ acae$ics an the accounting *rofession&
Dhile the a>ove *ro>le$s variously i$*acte on the overall financial re*orting of (7(
grou*, there arose the Guite se*arate issue a>out how the *rinci*les *rescri>e in AASB
!-'% in regar to recognition of revenue an lia>ilities, allowe re*orting organisations to
$ani*ulate *rofit& The #oyal Co$$ission too) the following view.
AASB !-'% reGuires insurers to recognise *re$iu$ revenue 1an reinsurance
e;*enses2 in accorance with the *attern of insurance ris) uner relevant
contracts& Dhile the stanar oes *rovie guiance as to the inter*retation of
the state$ent Sin accorance with the *attern of the incience of ris)@, it
nevertheless allows entities to $ani*ulate the ti$ing of the recognition of
*re$iu$s& 7f an entity consiere that an insurance 1or reinsurance2 *olicy
*er$itte it to recognise all *re$iu$s 1or reinsurance recoveries2 yet elay the
recognition of lia>ilities 1or reinsurance *re$iu$ e;*enses2 then this coul
result in the recognition of *rofit >eing >rought forwar artificially in the early
*erio of such a contract& 1(7( #oyal Co$$ission, '--%, vol& !, *&!0'2
As AASB !-'% inconsistencies *rovie insurers with the o**ortunity to uner=*rice
*roucts an $ani*ulate accounts for financial re*orting *ur*oses, the (7( #oyal
Co$$ission reco$$ene $oifications to this stanar& AP#A agree with $any of the
finings an reco$$enations of the #oyal Co$$ission an suggeste re$oving the
o**ortunities of accounting iscretion fro$ this stanar& The AASB reissue the stanar
in :uly '--+ as AASB !-'% ,eneral insurance contracts to incor*orate so$e overue
i$*rove$ents to accounting for insurance contracts&
A further Guite istinct accounting *ro>le$ in (7( Li$ite concerne re=insurance& 9wing
to a seriously eficient level of reserves in (7( Li$ite an ?A7, (7( Li$ite
$anage$ent o*te for reinsurance, although in reality, reinsurance was shown to consist of
sha$ transactions that were actually loans 1Lee et al&, '--<, *&,-!2&
An in this res*ect, the #oyal Co$$ission note that.
The o>Aective was to use reinsurance to off=set any increase in reserves on the
>alance sheet with a corres*onence recovery uner a reinsurance contract& The
arrange$ents were structure so as to achieve an accounting treat$ent that
woul allow the co$*any to efer to later years e;*ensing the *re$iu$ *ai to
o>tain the recoveries& 1(7( #oyal Co$$ission, '--%. vol& !, *&;;;i2
Therefore, the $otivation in (7( Li$ite for entering into reinsurance arrange$ents was
*reo$inantly earnings $ani*ulation& A variety of a>usive an unAustifia>le reinsurance
*rogra$$es 1arrange$ents2 i$*acte on grou* *rofit in !""" an '---& ?or e;a$*le, (7(
Li$ite >oo)e a *rofit of H"'&+ $illion for :une !""" in relation to so=calle reinsurance
arrange$ents with res*ect to contracts that only co$$ence on '0 August !""" 1(7(
#oyal Co$$ission, '--%, vol& !, *&;;;ii2& The i$$eiate recognition of inco$e resulting
fro$ this ty*e of reinsurance arrange$ent coul not >e Austifie uner any accounting
stanar& 7n the re*orting year to %- :une '---, there was an instance of a reinsurance
arrange$ent for which the contract was e;*ecte to continue for a further *erio of '=0
years& Although an e;ternal actuary cast ou>ts a>out the long=ter$ efficacy of this
arrange$ent, (7( Li$ite i not isclose it to the auitors an conseGuently, (7(
Li$ite was a>le to >oo) an after=ta; *rofit of H<+ $illion 1(7( #oyal Co$$ission, '--%,
vol& !, *&;;;iii2& 7f this arrange$ent was isclose to the auitors or not a**rove, the
#oyal Co$$issioner notes that, (7( Li$ite@s net *rofit of H!<&+ $illion for the year to
%- :une '--- coul have >een a loss of H// $illion& Dith a si$ilar u>ious reinsurance
arrange$ent, (7( Li$ite@s UK >ranch was a>le to enhance its >alance sheet solvency for
UK regulatory *ur*oses 1(7( #oyal Co$$ission, '--%, vol& !, *&;;;iii2& 8oreover, a
nu$>er of reinsurance arrange$ents were a**rove >y the auitors es*ite >eing
so$ewhat Guestiona>le having regar to AASB !--', Eents occurring after balance sheet
date1see Ta>le !+2&
Ta>le !+. #einsurance arrange$ents in (7( Li$ite an co$*liance with stanars
Accounte for
as at
entere into
Swiss #e insurance %! 5ec !""" 7n :an '--- ?lawe 5isregare
(annover #e
insurance 17&772
%- :une !""" 7n Aug !""" ?lawe 5isregare
Preference shares in
%- :une '--- 7n 9ct '--- ?lawe 5isregare
Source. (7( #oyal Co$$ission, '--%, vol& %, *&!/"
There were nu$erous reinsurance contracts which aversely i$*acte u*on (7( Li$ite
an ?A7& A$ongst the$, three ty*es of reinsurance contracts coul >e attri>ute to
aAust$ents to net assets >y a reuction of H%0! $illion in total 1Ta>le !02&
Ta>le !0. 3ffects of reinsurance contracts on (7( Lt consoliate accounts 1H $illion2
#einsurance arrange$ent AAust$ent ate Jet assets overstate Profit overstate
Swiss #e insurance %- :une '--- !%!&- !%!&-
(annover #e insurance 17&772 %- :une '--- !"'&- !"'&-
GC#A an J7 contracts 1?A72 %- :une '--- '<&! '<&!
+otal 2:-.- 2:-.-
Source. (7( #oyal Co$$ission, '--%, vol& %, *&0<
(eliance on intangibles
Another $aAor accounting *ro>le$ erive fro$ heavy e*enence on intangi>les& 7n
accounting literature intangi>les = es*ecially goowill = have always >een ealt with an
re*orte on a su>Aective Auge$ent >asis& This ena>les $anage$ent to o>scure the *ro*er
isclosure of *otentially $ar)et=sensitive infor$ation&
Ta>le !/. 5isclosure of intangi>les in (7( Li$ite financial re*orts 1H $illion2
Mear Goowill 8anage$ent rights Total
Share holers@
a$ortisation cost
a$ortisation cost
As on %! 5ec !"", /,&' 1'0&!2 === === +'&! 0/-&%
As on %- :une !""" %"'&! 1+0&/2 === === %+/&0 "+/&+
As on %- :une '--- 000&" 1<-&/2 !"&% 1-&'2 +"+&+ "%"&!
Source. (7( Li$ite, Annual #e*orts, !""/='---
Ta>le !,. 9ther co$*onents of assets not isclose as (7( Lt intangi>les 1H $illion2
Mear 5eferre acGuisition costs ?uture inco$e ta; >enefits 1?7TB2
5isclose as Total 5isclose as Ti$ing
9n %! 5ec
Current assets !%"&< Jon=current other assets '0&! '<&! 0%&'
9n %- :une
Current assets ',<&% Jon=current other assets !+0&' ',&' !,'&+
9n %- :une
Current assets %-+&% Jon=current other assets "!&' !%,&' ''<&+
Source. (7( Li$ite, Annual #e*orts, !""/='---
(7( Li$ite@s intangi>les a>ru*tly an ine;*lica>ly lea*t in value fro$ H+' $illion on %!
5ece$>er !"", to H%+/&0 $illion on %- :une !""" an H+"+&+ $illion on %- :une '---
1Ta>le !/2& 7n the first two re*orting *erios, the grou*@s intangi>les totally relie on
goowill& 9n %- :une '---, its intangi>les consiste of goowill an $anage$ent rights&
(owever, the Guantu$ of $anage$ent rights was negligi>le = only H!" $illion& Therefore,
fro$ infor$ation isclose in the financial re*orts on %- :une '---, when (7( Li$ite@s
intangi>les 1+"+&+ $illion2 were 0'&/I of shareholers@ eGuity 1H"%"&! $illion2, the
a$ount of (7( Li$ite@s goowill 1H+,0&% $illion2 after a$ortisation costs alone
re*resente 0-&/I of shareholers@ eGuity 1Ta>le !/2&
There was a $aAor ivergence >etween what (7( Li$ite re*orte an what the (7(
#oyal Co$$ission consiere to >e the *ro*er a$ount an co$*onents of the fir$@s
intangi>les& Ta>le !, shows so$e co$*onents not inclue in an isclose as (7(
Li$ite@s intangi>les& As unerstoo >y the #oyal Co$$issioner, ,0I of (7( Li$ite@s
shareholers@ eGuity woul rely on intangi>les, if goowill an $anage$ent rights along
with eferre acGuisition costs, eferre infor$ation technology costs an future inco$e
ta; >enefits were consiere as intangi>les 1(7( #oyal Co$$ission, '--%, vol& !, **&;i;=
;;2& As the co$*any@s net tangi>le asset >ac)ing *er share of H!&%" at %! 5ece$>er !"",
fell to only %% cents >y %- :une '---, the #oyal Co$$issioner note that, (7( Li$ite
ao*te a strategy to show co$*onents of intangi>les as tangi>le assets 1(7( #oyal
Co$$ission, '--%, vol& !, **&;i;=;;2&
Concerns a>out accounting for various intangi>les 1their su>Aectivity an legiti$acy2 were
ventilate >y the (7( #oyal Co$$issioner :ustice 9wen, in these ter$s.
7 o not thin) there can >e any real argu$ent that future inco$e ta; >enefits an
eferre infor$ation technology cots are tangi>les& There is, however, ou>t
whether eferre acGuisition costsEwhile answering the eu*he$istic escri*tion
Ssoft assets@Efall into the sa$e category& 1(7( #oyal Co$$ission, '--%, vol& !,
This is not to say reliance on intangi>les is illegiti$ate& But the tren is
istur>ing for at least two reasons& ?irst, the value to >e attri>ute to intangi>les
is often a $atter of Auge$ent an is *articularly susce*ti>le to error E witting
or unwittingC in the accounting *ractices of (7( Li$ite goowill >eca$e
so$ething of a re*ository for the un*leasant an unwante conseGuences of
*oor >usiness Auge$ent& Secon, when ti$es get tough it is ifficult to convert
intangi>les to cashC as other sources of cash isa**ear, the intrinsic value of
intangi>les is seriously calle in Guestion& 1(7( #oyal Co$$ission, '--%, vol&
!, *&;;2
?urther analysis of accounting treat$ent an isclosure of the various co$*onents of
(7(@s intangi>les follows& ?irstly, (7( Li$ite@s goowill, co$*rising su>stantial *ortion
of intangi>les, significantly increase following its ?A7 acGuisition in !"""& Uner AASB
!-!%, Accounting for goodwill, the a$ount of goowill was esti$ate as the e;cess of the
cost of acGuisition over net assets& The calculation of goowill uner this stanar was
criticise for inherent a$>iguity& 7t was rigorously revise as *art of the evelo*$ent
*rocess of 7AS %<, &ntangible assets, ao*te in Australia as AASB !%< with effect fro$ !
:anuary '--0& The #oyal Co$$issioner argue that goowill was efine in AASB !-!%
in conce*tual ter$s as future >enefits fro$ unientifia>le assets, >ut in *ractice, goowill
was ty*ically $easure Aust as a resiual a$ount arising fro$ the e;cess of the cost of
acGuisition over net assets of the acGuire entity 1(7( #oyal Co$$ission, '--%, vol&!,
*&!/!2& :ustice 9wen *ut forwar co$*elling argu$ents of the ifficulties arising out of
a**lication of AASB !-!% as follows. 1i2 there was no guiance as to how an assess$ent of
goowill 1e;cess of the cost of acGuisition over net assets2 woul *resent future >enefits
fro$ unientifia>le assetsC an 1ii2 to increase goowill, there $ight >e $ore i$*ortance
*lace on the resiual a$ount an less on consiering the $anner in which the future
>enefits fro$ unientifia>le assets were realise 1(7( #oyal Co$$ission, '--%, vol& !,
Seconly, on an a**lication of AASB !-'-, &ncome ta'- (7( Li$ite classifie future
inco$e ta; >enefits accoring to ti$ing ifferences an incurre ta; losses 1Ta>le !,2& This
stanar also ha s*ecific *rescri*tions a>out offsetting future inco$e ta; >enefits against
*rovisions for eferre inco$e ta;& The #oyal Co$$issioner uncovere. 1i2 a *rovision for
eferre inco$e ta; of H!%!&% $illion offset against future inco$e ta; >enefits relating to
ta; losses. an 1ii2 a *rovision for inco$e ta; of H"/&, $illion offset against future inco$e
ta; >enefits relating to ta; losses an ti$ing ifferences& (owever, (7( Li$ite@s financial
re*orts i not isclose any *rovision for ta; or for eferre inco$e ta; 1(7( #oyal
Co$$ission, '--%, vol& %2&
Thirly, uring investigations, the #oyal Co$$issioner, :ustice 9wen, iscovere in the
auit wor) *a*ers of Arthur Anersen that eferre 7T costs were recognise as assets in
5ece$>er !""<, :une !""" an :une '--- as H%- $illion, H/% $illion an H<< $illion
res*ectively& There was no accounting stanar or *ronounce$ent a>out this ite$C an
li)ewise, there was no s*ecific isclosure in the financial state$ents a>out these nu$>ers
1(7( #oyal Co$$ission, '--%, vol& %, **&!!0=!!/2& 9wing to the lac) of infor$ation,
Ta>le !, oes not inclue any a$ount for this ite$& Arthur Anersen faile to fin
aeGuate auit evience a>out it E ientifying at least H<&/ $illion as not *ro*erly
ca*italise for this ite$& The #oyal Co$$issioner o*ine that such eferre 7T costs
shoul have >een treate as an o*erating e;*ense in the consoliate financial state$ent
1(7( #oyal Co$$ission, '--%, vol& %, *&0<2&
?ourthly, eferre acGuisition costs were categorise an isclose as current assets an the
future inco$e ta; >enefits as non=current other assets, not as intangi>les 1Ta>le !,2& 7f
eferre acGuisition costs were treate as an intangi>le asset rather than as a current asset,
(7( Li$ite@s liGuiity *osition, ceteris paribus, was $ore critical ue to the resultant
ecrease in current assets against current lia>ilities& Uner AASB !-'%, a recovera>ility
assess$ent was necessary to calculate the recovera>le a$ount of eferre acGuisition costs
an write own the ifference as an e;*ense when its cost was less than the recovera>le
a$ount& (7( Li$ite faile to unerta)e a recovera>ility test for re*orting at %- :une !"""
an '--- 1(7( #oyal Co$$ission, '--%, vol& %, **&!!'=!!+2&
Accounting policies on going concern issues
The conte$*orary accounting stanar AASB !--!, Accounting Policies, ha s*ecific
reGuire$ents for co$*anies to *re*are financial re*orts on a going concern >asis& This
stanar suggests isclosure in notes to the accounts of any issues li)e ris)s or
uncertainties that affecte or ha the *otential to affect the going concern& (7(@s :une !"""
an :une '--- financial re*orts were *re*are on the >asis of a going concern assu$*tion&
(owever, accounting *olicies of (7( Li$ite i not isclose any state$ent or
e;*lanation of ris)s an uncertainties in the following circu$stances.
(7( Li$ite ha worsening unerwriting losses, rising fro$ H%%&< $illion for the
year ening on %! 5ece$>er !"", to H!,%&, $illion for !< $onths to %- :une !"""
an to H!-%&0 $illion for the year to %- :une '--- 1Annual #e*orts, !"""='---2&
The grou* heavily relie on intangi>les which were ifficult to convert to cash in
averse financial conitions 1(7( #oyal Co$$ission, '--%2&
The grou*@s overall cash flow for the year to %- :une '--- was a negative H!<0&%
$illion which $ostly resulte fro$ negative o*erating cash flow of H/,<&% $illion
1Ta>le ,2
7t ha negative 3PS nu$>ers in !""" an '--- 1Ta>le '2&
LiGuiity a**roache critical levels for the entire !"",='--- *erio 1Ta>le 02&
Leverage fro$ ,&!; on %! 5ece$>er !"", to <&"; on %- :une '--- increase
e*enence on e>t financing fro$ <0&"I to <<&<I res*ectively of total assets
1Ta>le +2&
(elated party disclosures
#elate *arty isclosures have long >een consiere a significant ite$ in accounting
stanars& The rationale is that isclosure of relate *arty transactions *rovie an
a**reciation of the interest in, an a level of control or influence over, or i$*ose >y, the
re*orting entity& 7n Australia, AAS '' S#elate *arty isclosures@ was first issue in !""<
>y the Australian Accounting #esearch ?ounation an was su>seGuently reissue several
ti$es& AASB !-!,, .(elated party disclosures/ was issue in !""% an reissue in !"",
with changes in the reGuire$ents for relate *arty isclosures& (owever, the i$*ortance of
relate *arty isclosures increase when the fact ca$e to the light that $any co$*anies,
incluing 3nron, Tyco, Ael*hia an (7( Li$ite that colla*se >etween '--! an '--%
ha not isclose aeGuate infor$ation a>out relate *arty relationshi*s an transactions&
As a conseGuence, AASB !'+ S#elate *arty isclosures/- eGuivalent to 7AS '+, was issue
in '--+ with intense focus on relate *arty isclosures& This stanar was reissue an
>eca$e effective fro$ '--0 as *art of the array of Australian eGuivalents to the
7nternational ?inancial #e*orting Stanars 17?#S2& This stanar su*ersee the *revious
stanars AAS '' an AASB !-!,, >ut was a**lica>le in consieration of AASB ' SShare=
>ase *ay$ent@ an AASB !-+/ S5irector an e;ecutive isclosures >y isclosing entities@
for *rescri>ing the overall reGuire$ents for relate *arty isclosures in Australia 1CA
?inancial #e*orting (an>oo) '--0, *&/<%2& AASB !'+ was further reissue in '--" with
$oifications in the efinition of relate *arty
, >ut the efinition of relate *arty
re$aine the sa$e& These salient facts suggest that when (7( Li$ite
colla*se in '--!, there were relevant accounting stanars in Australia with regar to
relate *arty isclosures&
Ta>le !< >elow reveals the relate *arty relationshi*s in (7( Li$ite an relate
transactions which were co$*le;& These $ostly evelo*e fro$ the connections of
#oney Aler, a irector of (7( Li$ite& The C39 #ay Dillia$s an another irector,
?oera, also face legal charges arising fro$ #oney Aler@s relate *arty relationshi*s
with an irect or inirect influence over ?A7, (7( Li$ite, (7(C, PP3, A3UT an Aler
Cor*oration& #elevantly, he was either a irector, shareholer, or in control of a trust&
An issue was a *ay$ent of H!- $illion >y an (7( Li$ite su>siiary to a
co$*any of which #oney Aler was a sole irector& By use of a trust
$echanis$, a**ro;i$ately H+ $illion was use to acGuire (7( Li$ite shares,
venture ca*ital unliste invest$ents were *urchase fro$ another Aler
co$*any, an loans were $ae to entities which were associate with Aler&
1PricewaterhouseCoo*ers, '-!!, *&!%2
Ta>le !<. #elate *arty relationshi*sBtransactions in (7( Li$ite
#elate *arty relationshi*s #elate *arty transactionsB>enefits
Uner AASB !'+ 1*aragra*h "2, a relate *arty is consiere as a *erson 1or close $e$>er of that *erson@s
fa$ily2, an entity or the entities incluing *arent entity, su>siiaries, fellow su>siiaries, or associate
co$*anies, an even the )ey $anage$ent *ersonnel or irectors& Since at the centreof the conce*t of
relate *arty is the interest an influence of relate *arties, this stanar assu$es that one *arty controls
another or is controlle >y the otherBs or they have Aoint controls&
AASB !'+ 1*aragra*h "2 efines a relate *arty transaction as a transfer of resources, services or
o>ligations >etween relate *arties, irres*ective of whether a *rice is charge&
?A7 >eca$e a wholly=owne su>siiary of (7(
Li$ite& #oney Aler was a $aAor shareholer
of ?A7&
Aler was a**ointe to the (7( Li$ite >oar in
A*ril !""", an was also engage as a consultant
in (7( Li$ite&
Aler along with other irectors receive
re$uneration 1co$*ensation2
(7( Li$ite Casualty an General 7nsurance
Co$*any Lt 1(7(C2 was a wholly=owne
su>siiary of (7(&
#oney Aler an #ay Dillia$s, the C39 of (7(
Li$ite, were the irectors of (7(C&
Aler was the sole irector of another co$*any
Pacific 3Guity Pty Lt 1PP32&
(7(C *ai H!- $illion as loan to PP3&
1PP3 an Aler as PP3@s sole irector,
su>seGuently use this fun for
Australian 3Guities Unit Trust 1A3UT2 was
esta>lishe an PP3 >eca$e the trustee of A3UT&
Aler Cor*oration Pty Lt was another co$*any
where Aler was a sole irector, an Aler an
his wife were the only shareholers&
A3UT issue share units to (7(C at an
issue *rice of H!- $illion&
A3UT issue share units to Aler
Cor*oration at an issue *rice of H'0,---&
A3UT investe a**ro;i$ately H+ $illion
to acGuire (7( Li$ite shares 1earlier
*urchase >y PP3 >efore A3UT trust ee
was co$*lete2
A3UT $ae venture ca*ital unliste
invest$ents 1store, Planet Soccer an
Jo$a2 fro$ Aler Cor*orationC an
A3UT *rovie loans to entities associate
with Aler anBAler Cor*oration
Source. Pre*are >ase on (7( #oyal Co$$ission, '--%C Destfiel, '--%>
Accounting stanars o not restrict relate *arty transactions, >ut reGuire aeGuate
isclosures to ena>le the investors an other users of infor$ation to assess the interests an
influence of the relate *arty relationshi*s& As re*orte >y the (7( #oyal Co$$ission,
#oney Aler ha significant interests in (7( Li$ite@s su>siiary ?A7 an in other relate
organisations, >ut he )e*t (7( Li$ite uninfor$e of these interests& These transactions
occurre with no >oar or $e$>er a**roval an without isclosureC the loans were given
without *ro*er ocu$entation or security >eing sought an the *ay$ent was $ae so that
it woul not co$e to the attention of other (7( Li$ite irectors& AS7C ulti$ately >rought
an action against Aler for nu$erous contraventions of the Cor*orations Act relating to
irectors@ uties. AS&C Adler 01rs T'--'U JSDSC !,!&
Accounting issues in AF1 0imited
Three ty*es of accounting activities *rovie o**ortunities for accounting $ani*ulation in
A?G Li$ite. 1i2 $isclassifications of assets an lia>ilitiesC 1ii2 inaeGuate isclosures
a>out relate *arty transactionsC an 1iii2 i$*air$ent of goowill&
Classification of assets and liabilities
The current an non=current classification of assets an lia>ilities hel* calculate relevant
financial ratios in orer to $easure a fir$@s wor)ing ca*ital sufficiency an a>ility
1liGuiity2 to $eet short=ter$ o>ligations& 7t is foun in A?G Li$ite@s annual re*orts that
A?G consoliate >alance sheet for the years ene :une '--, an '--< i not *ro*erly
classify its assets an lia>ilities& 3ven in notes to the accounts, the co$*any i not
isclose aeGuate infor$ation a>out the nature an categories of assets an lia>ilities&
9wing to $isclassifications of the assets an lia>ilities on the a>ove >alance sheets, it
woul >e ifficult for the e;ternal users of accounting infor$ation to.
istinguish current assets fro$ non=current assets
ifferentiate current lia>ilities fro$ non=current lia>ilities
calculate current ratios to assess A?G@s a>ility to $eet the co$*any@s short=ter$
o>ligations an *erfor$ ay=to=ay o*erations&
Dhen A?G Li$ite >eca$e insolvent in August '--<, a$inistrators atte$*te to assess
the fir$@s o>ligations to creitors an its a>ility to $eet those o>ligations& A**lying section
+%/A of the Cor*orations Act of '--!, when a$inistrators atte$*te to review current
ratio an wor)ing ca*ital sufficiency, they foun that.
The consoliate financial state$ents o not clearly elineate current assets
fro$ non=current lia>ilities or current lia>ilities fro$ non=current lia>ilities&
This has $ae a review of the >alance sheet ifficult& 18cGrathJicol, '--",
After A?G Li$ite went into liGuiation in August '--<, ue to serious eficiencies in
*rior financial re*orting, the a$inistrators ha to *rivately elicit su>stantial further
financial infor$ation fro$ Allco Li$ite@s $anage$ent for the year ening :une '--<&
Since A?G Li$ite o>scure its critical liGuiity *osition, attri>ute to H!&% >illion
wor)ing ca*ital eficiency 1e;cess of current lia>ilities over current assets2, this section@s
tas) is ascertaining if the non=isclosure of currentBnon=current classification of the ite$s,
was allowe uner accounting stanars or a violation of stanars an cor*orate law&
The international financial re*orting stanars 17?#Ss2 along with a**lica>le *rior
international accounting stanars 17ASs2 ao*te in Australia as AASBs, *rovie
$anatory re*orting reGuire$ents fro$ ! :anuary '--0 uner section %%+ of the
Cor*orations Act of '--!& AASB !-!, Presentation of financial statements reGuires
classifications of assets an lia>ilities into current an non=current categories& Accoring to
this stanar.
TAn entityU L shall *resent current an non=current assets, current an non=
current lia>ilities, as se*arate classifications on the face of its >alance sheet L
e;ce*t when a *resentation >ase on liGuiity *rovies infor$ation that is
relia>le an is $ore relevant& Dhen that e;*ectation a**lies, all assets an
lia>ilities shall >e *resente >roaly in orer of lia>ility& 1AASB, '--,,
*aragra*h 0!2
Also with the stanar, a lia>ility is to >e classifie as current when it satisfies the
following criteria.
1a2 it is e;*ecte to >e settle in the entity@s nor$al o*erating cycleC 1>2 it is
hel *ri$arily for the *ur*ose of >eing traeC 1c2 it is ue to >e settle within
twelve $onths after the re*orting ateC or 12 the entity oes not have an
unconitional right to efer settle$ent of the lia>ility for at least twelve $onths
after the re*orting ate 1AASB !-!, *aragra*h, /-2&
This stanar has relevance to other *aragra*hs that *rovie an e;tensive e;*lanation of
reGuire$ents a>out the classification of assets an lia>ilities into current an non=current
categories& 3ven the *rior stanar, AASB !-+-, Statement of financial position ha a
reGuire$ent for the re*orting entity to treat current assets an current lia>ilities se*arately
fro$ non=current assets an non=current lia>ilities unless assets an lia>ilities *resente in
the >roaer orer of liGuiity *rovie $ore relevant an relia>le infor$ation 1*aragra*h
02& Therefore, the $isclassification of assets an lia>ilities >y A?G Li$ite, a**eare to
contravene the relevant accounting stanars&
&mpairment of goodwill
A?G $erge with #ecor in :uly '--/& As a result of this >usiness co$>ination, the grou*
acGuire a**ro;i$ately H!&! >illion in goowill 1Ta>le !,2& 7n co$*liance with AASB %,
2usiness combinations, an AASB !%<, &ntangible assets, this goowill figure was
isclose in the >alance sheet, se*arate fro$ intangi>le assets& (owever, $anage$ent
a**lie a su>Aective Auge$ent to calculation an isclosure of i$*air$ent charges for
goowill& As state *reviously, A?G@s net loss for the year to :une '--< was H!&, >illion E
ue $ostly to an i$*air$ent loss of H!&/ >illion& Al$ost 0/I 1i&e& H<<0&! $illion2 of this
i$*air$ent loss consiste of the i$*air$ent charges for goowill& Although A?G@s
financial catastro*he was attri>ute to a significant eterioration in e>t an eGuity $ar)ets
resulting in reucing asset values an increasing cost of e>t in the secon *art of '--, an
throughout '--< 18cGrathJicol, '--"2, in '--,, its goowill was not treate as i$*aire&
This was es*ite AASB % s*ecifically reGuiring that.
After initial recognition, the acGuirer shall $easure goowill acGuire in a
>usiness co$>ination at cost less any accu$ulate i$*air$ent losses
1*aragra*h 0+2&
Before the new accounting stanars 17?#Ss2 >eca$e effective glo>ally fro$ :anuary
'--0, goowill was a$ortise annually& The new stanar ao*te in Australia as AASB %,
2usiness combinations 1*aragra*h 002 an AASB !%/, &mpairment of assets 1*aragra*hs "=
!- an <-=<"2 o not reGuire the acGuire goowill to >e a$ortise annually, >ut reGuire it
to >e teste for i$*air$ent annually, or $ore freGuently when events or changes in
circu$stances inicate that it $ight >e i$*aire&
(elated party disclosures
Prior to the colla*se of A?G Li$ite in '--", AASB !'+ (elated party disclosures
effective fro$ :anuary '--0 along with AASB ' Share-based payment effective fro$ '--/,
*rescri>e the >asic reGuire$ents for relate *arty isclosures& Therefore, AASB !'+ *rior
to its revision in '--" was a**lica>le to A?G Li$ite to assess relate *arty relationshi*s
an $a)e relate *arty isclosures& AASB !'+ reGuires isclosures of )ey $anage$ent
*ersonnel@s co$*ensation in total an for each of the following five categories. short=ter$
e$*loyee >enefits, *ost=e$*loy$ent >enefits, other long=ter$ >enefits, ter$ination
>enefits, an share=>ase *ay$ent 1*aragra*h !/2& 7n aition to the reGuire$ents in
*aragra*h !/, AASB !'+ reGuires that fir$s isclose the nature of relate *arty
relationshi*s as well as infor$ation a>out the a$ount of the transactions an the a$ount of
outstaning >alances 1*aragra*h !,2& The *ur*ose of such isclosure is to *rovie an
unerstaning of the *otential effect of the relate *arty relationshi* on the financial
state$ents 1*aragra*h !,2& AASB !'+ further reGuires that isclosures reGuire >y
*aragra*h !, are to >e $ae se*arately for the *arent, entities with Aoint control or
significant influence over the entity, su>siiaries, Aoint ventures in which the entity was a
venturer, )ey $anage$ent *ersonnel of the entity or its *arents, an other *arties
1*aragra*h !<2&
Ta>le !" >elow reveals a nu$>er of A?G relate *arty relationshi*s an transactions that
whilst not as iverse as those in (7( Li$ite, were still co$*le; an Guestiona>le& 7n
*articular, a nu$>er of the relate *arty transactions were riven >y the self=interest of
irectors of A?G or its su>siiaries& ?or e;a$*le.
A?G Li$ite acGuire #u>icon where two of A?G Li$ite@s irectors 15avi Coe
an Goron ?ell2 ha $aAor shareholings
Dhen so$e A?G Li$ite irectors were associate with APT, A?G Li$ite
*rovie a H0- $illion loan fun to APT to reuce the *ossi>ility of $argin calls
over A?G Li$ite@s stoc) owne >y APT 1see Ta>le '!2
Both #u>icon an #7L ?inance were the su>siiaries of A?G Li$ite an they were
in relate *arty relationshi*s&
Ta>le !". #elate *arty relationshi*s B transactions in A?G Li$ite
,elated part' relationships ,elated part' transactions;(ene)its
AcGuisition of #u>icon >y A?G Li$ite in
5ece$>er '--,&
Prior to this acGuisition, #u>icon shareholers
were Goron ?ell 1++&"I2, A?G Li$ite
1'-&+I2, 5avi Coe 1!"&"I2 an 8atthew
Coo*er 1!+&<I2&
5avi Coe an Goron ?ell were A?G
Li$ite@s irectors at the ti$e of acGuisition
of #u>icon&
A?G Li$ite acGuire ,"&/I shares in #u>icon that it
i not own 1an unreasona>le irector relate
APT 19verseas (olings Jo& !2 Pty Lt was
an entity associate with certain irectors of
A?G Li$ite&
As *er loan agree$ent on !< 5ece$>er '--,, A?G
Li$ite agree to give a loan u* to H0- $illion to APT,
>ut H0!&! $illion was outstaning on this facility&
The loan was avance to *rovie APT with funing an
sufficient liGuiity to ensure that $argin loans over A?G
Li$ite stoc) owne >y APT were not calle >y APT@s
$argin leners&
#7L ?inance Pty was a su>siiary of A?G
#u>icon was associate with certain irectors
of A?G Li$ite&
#7L ?inance Pty e;ecute a loan agree$ent with various
#u>icon entities&
The loan agree$ent allowe #u>icon to raw u* to H!0-
$illion, >ut H!,/&0 $illion was outstaning on this
A?G Li$ite irectors an irectors of
5irectors of A?G Li$ite@s i not receive a >onus either
in '--, or '--<, >ut irectors of A?G Li$ite@s
su>siiaries receive >onuses, an the *ay$ents were
li)ely to >e $ae to the reci*ients in their ca*acity as
e$*loyees of the grou*&
Source. Pre*are >ase on +%"A #e*ort to Creitors 18cGrathJicol, '--"2 an 8eia articles
Corporate go.ernance pro(lems
Narious re*orts on cor*orate governance consier ine*enence of the >oar an its auit
co$$ittee as the )ey to internal control, governance, an integrity in the financial
re*orting *rocess 1see Ca>ury #e*ort, !""'C Bosch #e*ort, !""0C (iggs #e*ort, '--%C
S$ith #e*ort, '--%2& Theoretically, ine*enence of the >oar an its ifferent co$$ittees
is *erceive in view of the ratio of ine*enent non=e;ecutive irectors to the >oar an
their influence over the e;ecutive irectors or $anage$ent in the ecision $a)ing *rocess&
The ASF Cor*orate Governance Princi*les '--% as a$ene reco$$en ine*enence of
the >oar an its auit co$$ittee su>Aect to the following conitions.
The $aAority of the $e$>ers of a >oar are ine*enent non=e;ecutive irectors, an
the chair$an of the >oar an C39 shoul not >e the sa$e *erson 1#eco$$enation
The auit co$$ittee consist of at least three $e$>ersC $aAority of the$ >eing
ine*enentC all of the$ financially are literate, an at least one $e$>er have
financial e;*ertise 1#eco$$enation +&'2&
These reGuire$ents ca$e into effect after the colla*se of (7( Li$ite in '--!& (owever,
ha these reGuire$ents >een incor*orate in the regulations, there was no certainty that
accounting $ani*ulation woul not have occurre& (7( Li$ite i >eco$e insolvent
a$ist strong allegations of accounting $ani*ulation when its >oar i not have C39
uality an a $aAority of the >oar $e$>ers 1seven out of thirteen in !""" an five out of
seven in '---2 were non=e;ecutive irectors 1(7( Li$ite, Annual #e*orts, !"""='---2&
5es*ite this structure, >oar ine*enence was uner$ine, >ecause three $e$>ers in
!""" an two $e$>ers in '--- were for$er *artners of Arthur Anersen, an one
$e$>er@s law fir$ was engage >y (7( Li$ite in >oth years 1(7( Li$ite, Annual
#e*ort, !"""='---2& (7( Li$ite >oar chair$an Geoffrey Cohen was inactive an other
non=e;ecutive irectors were *assive in the ecision $a)ing *rocess, an as a
conseGuence, the C39 #ay Dillia$s was a>le to assu$e such a o$inant role that there
was a culture in the >oar not to challenge $anage$ent leaershi* 1(7( #oyal
Co$$ission, '--%2& 7n *articular, infor$ation was filtere, that is, not *lace >efore the
>oar unless there was an a**roval fro$ the C39& 9n only a very few occasions the >oar
either reAecte or $aterially change a *ro*osal *ut forwar >y $anage$ent while on
several occasions, the chair$an@s reGuest was reAecte >y the C39 1(7( #oyal
Co$$ission, '--%2& All u*, the >oar was too reay to acce*t what $anage$ent was
saying without testing the $atter with a**ro*riate analysis 1(7( #oyal Co$$ission, '--%,
vol& !, *&;;v=;;;vi2& That la; >oar oversight, in essence, co$*rise the failure to chec)
wea) $anage$ent ecisions >ase u*on *oor Guality $anage$ent infor$ation an
inaeGuate accounting syste$s or a lac) of ue iligence, which in turn, le to the ris) of
losses fro$ the UK o*erations, the US acGuisition, an the ?A7 ta)eover 1(7( #oyal
Co$$ission, '--%2& Given these circu$stances, :ustice 9wen reache the following
conclusion 1(7( #oyal Co$$ission, '--%, vol& !, *&!!'2.
7 a$ not convince that a $anatory reGuire$ent for >oars to have $aAority
of non=e;ecutive irectors is either necessary or esira>le& L& 7t is custo$ary
to s*ea) of Sine*enent irectors@ >ut 7 thin) this gives the wrong e$*hasis&
Dhat is reGuire is ine*enent Auge$ent& The istinction is su>tle >ut
7n !""" an '---, the (7( Li$ite auit co$$ittee consiste of four $e$>ers
& As two of
the$ were *rofessional accountants, this co$$ittee ha financial e;*ertise& But es*ite
>eing co$*rise entirely of non=e;ecutive $e$>ers, the auit co$$ittee@s ine*enence
was Guestiona>le, >ecause its two $e$>ers with financial e;*ertise were the e;=e$*loyees
of Arthur Anersen 1(7( Li$ite, Annual #e*orts, !"""='---2&
Si$ilar to (7( Li$ite, there were internal control an governance issues in A?G
Li$ite when the co$*any o>scure liGuiity an solvency levels >y $isclassification of
(7( Li$ite@s auit co$$ittee in !""" an '--- consiste of non=e;ecutive irectors incluing Geoffrey
Cohen 1>oar chair, chair$an of auit co$$ittee an for$er senior *artner of Arthur Anersen2, :ustin
Garener 1for$er *artner of Arthur Anersen2, Charles A>>ott 1lawyer2, an #o>ert Stitt Q&C 1lawyer2
1(7( Li$ite, Annual #e*orts, !"""='---2&
assets an lia>ilities, faile to isclose significant relate *arty transactions, an a**lie
su>Aective Auge$ents in regar to i$*air$ent of goowill& Dith new a**oint$ents
>oar was >roaene in the year ene :une '--,& The e;*ane >oar consiste of nine
$e$>ers incluing five non=e;ecutive irectors, >ut Aust three of these nine $e$>ers
were ine*enent& An >oar chair$an 5avi Coe was hi$self an A?G Li$ite e;ecutive
e$*loyee& Boar ine*enence was also co$*ro$ise >y self=interest threats arising fro$
relate *arty transactions
with two $e$>ers incluing >oar chair$an 5avi Coe&
7n '--<, the si6e
of the >oar was reuce to four $e$>ers, three >eing ine*enent non=
e;ecutive irectors& (owever, the resignation of a nu$>er of >oar $e$>ers was
istur>ing& Accoring to auiting stanar ASA '+-, the auitor@s res*onsi>ility is to
consier frau in an auit of a financial re*ort, in res*ect of which high turnover in the
senior $anage$ent *ositions or those charge with governance, $ay create an
o**ortunity for $isstate$ents in the financial re*orts&
The A?G Li$ite >oar ha an Auit an Co$*liance Co$$ittee 1ACC2 to liaise >etween
the >oar an the auitors, an to oversee integrity in the financial re*orting *rocess& ?or
the year ene %- :une '--,, the ACC ha three ine*enent $e$>ers incluing an
ine*enent chair$an 1A?G Li$ite, Annual #e*ort, '--,2& (owever, u*on resignation
of the ACC chair$an on '0 :anuary '--<, the grou* i not a**oint a new $e$>er until
the en of :une '--< 1Annual #e*ort, '--<2& As a result, the ACC was not in co$*liance
with #eco$$enation +&' of the ASF Cor*orate Governance Princi*les in failing to have
at least three $e$>ers fro$ '0 :anuary to %- :une '--<&
Also of concern is whether the Auit an Co$*liance Co$$ittee of A?G Li$ite ha
sufficient financial e;*ertise
& 7n the year ene %- :une '--,, two $e$>ers of the ACC
were fro$ engineering an econo$ics >ac)groun res*ectively with aeGuate
$anage$ent e;*erience in ifferent organisations while the thir $e$>er #o> 8ansfiel,
a Gualifie accountant 1?CA2, was re*lace >y Jeil Lewison on !/ August '--/ 1A?G
Li$ite, Annual #e*ort, '--,2& The >oar was a**reciative of Jeil Lewis@s inustry
e;*erience an *rofessional )nowlege that he gaine fro$ senior $anage$ent *ositions
in financial an non=financial organisations& (owever, the A?G Li$ite annual re*orts
1:une '--, an '--<2 i not isclose anything a>out his eucational Gualifications&
Therefore, >ase on availa>le infor$ation of ACC $e$>ers, the co$$ittee ha lac)e
technical accounting )nowlege 1financial e;*ertise2 since 8ansfiel was re*lace on !/
August '--/& This $ight have resulte in the ACC@s failure to *ro*erly co$*rehen the
7n '--,, 5avi Clar)e was a**ointe as the C39 an Jeil Lewis was a**ointe as an ine*enent, non=
e;ecutive irector to >ring iversity of *rofessional e;*erience in the >oar 1A?G Li$ite, Annual
#e*ort, '--,2&
A?G Li$ite acGuire #u>icon on !" 5ece$>er '--,& A?G Li$ite@s e;ecutive chair$an 5aviCoe an non=
e;ecutive irector Bar>ara Dar were irectors of #u>icon with shareholings of !"&" an ++&" I res*ectively
1Annual #e*orts, :une '--, an '--<2& After acGuiring #u>icon, A?G Li$ite allowe #u>icon to raw a loan
u* to H!0- $illion 1Ta>le 0&'!2&
7n late 8arch '--<, A?G Li$ite acce*te resignations of 1!2 the 3;ecutive Chair$an 5avi Coe, 1'2 Chief
9*erating 9fficer as well as 5e*uty 8anaging 5irector 8ichael Stevans)i 1non=e;ecutive irector, 1%2 5avi
Turn>ull 1e;ecutive irector2, an 1+2 Goron ?ell 1ine*enent non=e;ecutive irector2& After these
resignations, the >oar consiste of four $e$>ers with 1!2 5avi Clar)e continuing as C39, 1'2 5e*uty
Chair$an Bo> 8ansfiel as ine*enent $e$>er an active chair$an of the >oar, an 1%2 #o 3ington an
Jeil Lewis as ine*enent non=e;ecutive irectors 1A?G Li$ite, Annual #e*ort, :une '--<2&
A?G Li$ite@s Auit an Co$*liance Co$$ittee 1ACC2 in '--, an '--<. 1i2 Bar>ara Dar, econo$ics
grauate 1ACC Chair$an2, 1ii2 #o 3ington, engineering grauate with 5&Phil& 19;on2, an 1iii2 Jeil Lewis
1eucation not isclose2 who re*lace Bo> 8ansfiel, ?CA on !/ August '--/ as a co$$ittee $e$>er&
(owever, Bar>ara Dar resigne on '0 :anuary '--< 1A?G Li$ite, Annual #e*orts, '--/='--<2&
a**lication of accounting stanars in regar to classification of assets an lia>ilities,
i$*air$ent of goowill an relate *arty isclosures& An as isclose in the '--, an
'--< annual re*orts, the A?G Li$ite >oar ha esta>lishe a #elate Party Co$$ittee
1#PC2& The #PC chair$an, Bo> 8ansfiel, was an ?CA& (owever, the #PC faile to
raise legiti$ate concerns when significant relate *arty transactions re$aine unisclose
in the co$*any@s annual re*orts&
7n conclusion, the su>stantive res*onsi>ilities of the A?G Li$ite >oar coul not >e
avoie or elegate, irres*ective of the ACC an #PC roles, in regar to
$isclassification of assets an lia>ilities an non=isclosure of relate *arty transactions&
As state earlier, (7( Li$ite@s C39 #ay Dillia$s isregare the concerns of any
insier or irector a>out the co$*any@s >usiness Auge$ent an ecisions& 7t is unli)ely
that no>oy raise any issues a>out an i$$inent *erfect stor$ in A?G Li$ite& As
re*orte in $he Australian.
Allco@s e*uty $anaging irector 8ichael Stefanovs)i sent an e$ail to
1acting2 chair$an Bo> 8ansfiel in 5ece$>er '--, citing a nu$>er of issues
that were aversely affecting the co$*any& These inclue $ar)et hostility to
the H%%- $illion ta)eover of the #u>icon *ro*erty grou*, the *ros*ect of
isa**ointing *rofit isclosures an concerns a>out a relate=*arty transaction
involving a co$*any owne >y Allco e;ecutives, Allco Princi*als Trust
1APT2& 18oran, '-!->, 8arch '%2&
Dhen A?G Li$ite@s for$er chief e;ecutive 5avi Clar)e was as)e in the ?eeral Court
a>out Stefanovs)i@s concern a>out a serious contagion ris) with APT, leaing to financial
catastro*he an nee for an earnings warning, 5avi Clar)e agree the e$ail was
iscusse in the >oar >ut argue that Stefanovs)i never reco$$ene issuing such a
warning 1$he Australian, 8arch '%, '-!-2&
The Cor*orations Act of '--! *rescri>es statutory res*onsi>ilities of the >oar to *resent
a true an fair view of the co$*any@s affairs& #ecently, AS7C >rought a ?eeral Court
action against Centro Grou* irectors for i$*ro*er classification of a**ro;i$ately H!&0
>illion in >orrowings for the year ene %- :une '--,. AS&C 3ealey T'-!!U ?CA ,!,& 7n
his Aug$ent, :ustice 8ileton i not fin that the irectors of Centro Grou* were
ishonest& But he e;*resse the view that irectors were eficient in not ientifying the
e>t classification an guarantee issues, not >eing aware of relate accounting *rinci*les
1stanars2, an also not having $ae $ore etaile inGuiries of $anage$ent an
avisors& The '-!! AS&C 3ealey Aug$ent reGuires irectors to a**ly financial literacy
or e;*ertise to the >usiness, oversee the level of engage$ent of $anage$ent, structure the
>oar an auit co$$ittee@s role, an assess the Guality of infor$ation they receive an
*rovie& :ustice 8ileton@s Aug$ent confir$s the o>vious *oint that having e;*ertise in
one area oes not release a irector fro$ their $ini$u$ uty to *ay attention to all >oar=
level issues an ecisions&
Independence and o.ersight roles o) the e7ternal auditors
Auitor ine*enence
is assesse in view of the auitor@s interest, attitue an wor)ing
conitions which *hysically an *sychologically create a setting for auit engage$ent an
o*inion in the auit re*ort& 7n *ractice, various threats
to auitor ine*enence $ay arise
fro$ the interests an wor)ing conitions of the auitor, which $ay reuce the cali>re of
the auitor@s client ris) re*ort an auit o*inion&
Arthur Anersen was the auitor of (7( Li$ite& 7t consistently regare (7( Li$ite as
a Q$a;i$u$ ris) auit clientR 1(7( #oyal Co$$ission, '--%, vol& !, *&;lvi2& This view of
the auitor was groune in the eteriorating financial conitions of (7( Li$ite an its
cor*orate governance eficiencies since !"""& The iscussion in the *revious sections
*rovies evience of the various for$s of accounting $ani*ulation in (7( Li$ite uring
this *erio& (owever, (7( Li$ite@s auitor Arthur Anersen always *rovie an auit
re*ort without Gualifie o*inion or e$*hasis of $atter& Dhat cause Arthur Anersen@s
silence in not re*orting the finings of their analytical *roceures
in relation to (7(
Li$ite@s financial conitions an the co$*any@s ulti$ate a>ility to run as a going concern
$ight >e ue to various i$*licit eviation fro$ auitor ine*enence 1see AP3S !!-,
#a$sey #e*ort, '--!2&
The $aterial facts suggest at least two ty*es of threats to auitor ine*enence in (7(
Li$ite& ?irstly, a fa$iliarity threat was *ro$inent, >ecause three irectors 1Geoffrey
Cohen, 5o$inic ?oera an :ustin Garener2 were the for$er *artners of the accounting
fir$ Arthur Anersen 1(7( #oyal Co$$ission, '--%, vol& %, *&</2& Seconly, a self=
interest threat was create fro$ *ressure on Anersen *artners to $a;i$ise fees fro$ non=
auit wor) 1(7( #oyal Co$$ission, '--%, vol&!, *&"/2&
Ta>le '-. Auitor@s 1Arthur Anersen2 fees in (7( Li$ite 1Actual a$ount in H2
Statutory an avisory services %! 5ec& !"", %- :une !""" %- :une '---
Auit fees 1auit an review of financial
re*orts, an other regulatory auit services2
"<-,--- ',+!,,--- !,,--,---
Jon=auit fees 1avisory an ta;ation
+%/,--- ,0,,--- !,/%!,---
Total auitor re$uneration !,+!/,--- %,!,+,--- %,%%!,---
I of avisory & ta;ation co$*liance services %-&<I '%&"I 0-&-I
Source. (7( Li$ite Annual #e*orts, !"""='---C (7( #oyal Co$$ission, '--%, vol&%, *&</
Ta>le '- reveals that total fees of Arthur Anersen significantly increase fro$ H!&+
$illion in !"", to H%&' $illion an H%&% $illion in the su>seGuent two re*orting years& The
non=auit fees of H!,/%!,--- co$*rising 0-I of the total fees for the year ene %- :une,
'--- a**eare to >e %&, ti$es higher than the non=auit fees for the year ene %!
5ece$>er !"", an '&' ti$es higher than that for the re*orting year of eighteen $onths
Auitor ine*enence is conce*tually categorise as ine*enence in fact an ine*enence in a**earance&
7ne*enence in fact is )nown as an un>iase attitue of the auitor uring auit while ine*enence in a**earance is
unerstoo as how users of accounting infor$ation *erceive an inter*ret the circu$stances that the auitor is not
*reo$inantly wor)ing as a consultant 1an avocate2 for fees&
AP3S !!-Code of ethical ethics for professional accountants- ientifies various threats to auitor ine*enence such as
self=interest threat, self=review threat 1arising fro$ Auge$ent or avice fro$ *revious auitor2, avocacy threat,
fa$iliarity threat, an inti$iation& 7n the wa)e of the auitor@s ine*enence issues raise in relation to the co$*anies
that faile uring '--!='--%, the Cor*orations Act of '--! 1a$ene >y the CL3#P " Act of '--+2 an AP3S !!-
Code of ethics for professional accountants, have *rescri>e various safeguars to reuce threats to auitor
ine*enence& The reco$$enations of the #a$say #e*ort 1'--!2 an (7( Li$ite ?inal #e*ort 1'--%2 >eca$e the
>asis of a nu$>er of the safeguars *rescri>e in the CL3#P " Act of '--+&
As *er ASA 0'- Analytical procedures, analytical *roceures are auitor@s assess$ent of a co$*any
co$*aring its financial conitions with inustry average an with *revious years@ financial infor$ation&
Jon=financial ata are also use to unerstan an evaluate a co$*any& Analytical *roceures are
unerta)en *rior to acce*ting a client an >efore for$ing an auit o*inion&
ene %- :une !"""& Counter=intuitively, these non=auit fees increase in the years when
Arthur Anersen regare (7( Li$ite as a $a;i$u$ ris) auit client&
(7( Li$ite $anage$ent@s attitue was unco$*ro$isingly hostile to consieration of any
Gualifie auit o*inion or e$*hasis of $atter& 7n 8arch !""", the (7( Li$ite@s auitors
ha a $eeting with non=e;ecutive irectors of the auit co$$ittee in the a>sence of
$anage$ent 1(7( #oyal Co$$ission, '--%, vol& !, *&"/2& An auit engage$ent *artner
aringly *rovie a Gualifie o*inion an sought to *rogress the i$*lication of this issue in
the $eeting of non=e;ecutive irectors of the auit co$$ittee& 7n res*onse, (7( Li$ite@s
C39 #ay Dillia$s >eca$e u*set an as a result, that auit *artner was re*lace 18a) et
al&, '--02& Ulti$ately, Arthur Anersen i not *rovie any Gualifie o*inion in the auit
re*ort, reflective of its own Guestiona>le auit a**roach. QAnersen@s auit wor) in
relation to the !""" an '--- auits was characterise >y a lac) of sufficient auit
evience to su**ort its conclusionsR 1(7( #oyal Co$$ission, '--%, vol& %, *&!/"2&
Accoring to :ustice 9wen.
Anersen@s a**roach to the auit in !""" an '--- was insufficiently
rigorous to engener in users confience as to the relia>ility of (7(
Li$ite@s financial state$ents& This etracte fro$ the users@ a>ility to
a**reciate fully (7(@s true financial *osition& 1(7( #oyal Co$$ission,
'--%, vol& !, *&lvii2
KP8G was the auitor of A?G Li$ite& 7ts role as an auitor was also Guestiona>le& As
foun in this stuy, when A?G Li$ite@s leverage, liGuiity an cash flow *ositions were
*erilous in the years *rior to its colla*se, the grou* atte$*te to o>scure its liGuiity an
solvency *osition, >y i$*ro*erly classifying its assets an lia>ilities& The grou* also
atte$*te to conceal the true financial conition of the co$*any, or concoct a >etter
*osition, without charging losses for goowill i$*air$ent in '--, an without $a)ing
aeGuate isclosures for relate *arty transactions& Before *roviing an unGualifie
o*inion, KP8G shoul have consiere two sets of accounts. 1i2 non=isclosure of a H0-
$illion loan to a relate *artyC an 1ii2 H!&" $illion of current lia>ilities shown in the
>alance sheet as non=current lia>ilities& Jonetheless, regaring the sources of KP8G@s
a**arently eficient *erfor$ance of its A?G Li$ite auiting uties, this stuy oes not
fin that there was a fa$iliarity threat to KP8G@s ine*enence& (owever, an i$*licit self=
interest threat $ay well have 1un2 su>tly influence the auit fir$@s ine*enent o*inion
stance uring the relevant *erio&
Ta>le '!. Auitor@s fees in A?G Li$ite 1H2
*tatutor' and ad.isor' ser.ices %&&<
Auit fees 1auit an review of financial re*orts,
an other regulatory auit services2
%+!,!"0 %,!!-,-,/ %,0/+,'!0
Jon=auit fees 1avisory an ta;ation services2 !,+!0,0-- ',"/%,"+' !,,!!,/-+
Total auitor re$uneration !,,0/,/"0 /,-,+,-!< 0,',0,<!"
I of avisory & ta;ation co$*liance services <-&/I +<&<I %'&+I
Source. A?G Li$ite Annual #e*orts, '--,='--<
As shown in Ta>le '!, the total auit fees increase fro$ a**ro;i$ately H!&< $illion in
'--/ to H/&! $illion in '--, an H0&% $illion in '--<& 1Annual #e*orts, '--/='--<2&
Uner the Cor*orations Act of '--! as a$ene >y the CL3#P " Act of '--+, auitors are
allowe to *rovie consultancy services for a $a;i$u$ *erio of !- hours in the current
year an !- hours in the *revious year& 7t is worriso$e how an why non=auit fees of A?G
Li$ite@s auitors consiste of <-&/I for the year ene :une '--/, +<&<I for '--, an
%'&+I for '--< res*ectively of their total re$uneration fro$ that co$*any&
The negligence of the auitor in failing to re*ort a>out the $isclassification of assets an
lia>ilities was ta)en u* >y the AS7C an conseGuently, 8r Dhittingha$, A?G Li$ite@s
auitor an *artner of KP8G, was sus*ene fro$ the *rofession for a year 1AS7C, 8eia
#elease, '--<2& Dhen a si$ilar allegation arose against Centro auitors, the ?eeral Court
foun the co$*any auitor was negligent in failing to re*ort to the shareholers a>out
$isclassification of >alance sheet ite$s. AS&C 3ealey T'-!!U ?CA ,!,&
57ternal monitoring and en)orcements
A wie range of e;ternal >oies an entities co$*rising govern$ent agencies, securities
regulators, an s*ecialise control authorities 1e&g& the #eserve Ban) of Australia for
financial institutions an AP#A, the *ruential authority for insurance co$*anies2 have
various res*onsi>ilities to oversee the governance, o*erations an *erfor$ance of a
co$*any& As (7( Li$ite was a liste insurance co$*any, the Australian Pruential
#egulation Authority 1AP#A2 an the Australian Securities an 7nvest$ents Co$$issions
1AS7C2 were su**ose to oversee (7( Li$ite& (owever, AP#A i not aeGuately
e;ercise its *owers an ischarge res*onsi>ilities in *erfor$ing its oversight role over (7(
Li$ite 1Par)er, '--02& AP#A was criticise for not >eing aeGuately staffe to ientify
the wea)nesses in the (7( Li$ite syste$s 1see Ke$*, '--!C 3lias, '--!C Leung &
Coo*er, '--02& Accoring to :ustice 9wen, AP#A $isse $any warning signs a>out (7(
Li$ite, >ecause Qit was so slow to act an $a)e Auge$ents a>out vital $atters 1(7(
#oyal Co$$ission, '--%, vol& !, *&li2& Argua>ly.
AP#A shoul have intervene to *rotect *olicyholers@ interests when the
co$*any@s share *rice fell fro$ H!&-0 to +0 cents in Se*te$>er '--- following
the announce$ent of the H'' $illion loss in the secon half of !"""='---&
Besies >eing aware of the sliing share *rice uring !""" an '---, AP#A
shoul also have >een alerte >y conAecture that (7( woul have ifficulty in
$eeting new hurles& This le to a further shortco$ing of regulators in failing
to )ee* the securities $ar)et infor$e& 18a) et al&, '--0, *&'02
AS7C@s 1non2e;ercise of its regulatory *owers was also Guite *ro*erly criticise& This
regulatory agency was 1re2esta>lishe >y the Co$$onwealth Govern$ent via the AS7C
Act of '--!, an given a wie, e;*ane array of statutory *owers with the e;*licit
o>Aective of $aintaining the confience of an continue *artici*ation >y investors in
Australia@s financial syste$& Auitors of the co$*anies registere with AS7C uner the
Cor*orations Act of '--! are reGuire to for$ an o*inion as to whether the auite
financial state$ents co$*ly with the Australian Accounting Stanars 1AASBs2 an
e;hi>it a true an fair view of a co$*any@s *erfor$ance an financial conition& To
ischarge the state res*onsi>ilities, it is $anatory for auitors to co$*ly with the
Australian Auiting Stanars 1ASAs2 an Professional Conuct Stanars& Uner section
!'"' 1!2 of the Cor*orations Act '--!, AS7C can e;ercise isci*linary an re$eial
*owers if the auitor of a registere co$*any fails to aeGuately an *ro*erly carry out the
uties of an auitor&
7n relation to the auit of (7( Li$ite, the #oyal Co$$issioner foun that, QAS7C li$ite
its involve$ent in (7( Li$ite@s affairs >ecause of a *erce*tion that AP#A was
res*onsi>le for an was in fact closely an effectively $onitoring the situationR 1(7(
#oyal Co$$ission, '--%, vol&, *&liv2& ConseGuently, AS7C@s role was eficient in not
enforcing $easures to increase >oar effectiveness an oversee auitor ine*enence
issues when (7( Li$ite was aggressively e;*aning, without e;ercising *ro*er >usiness
Auge$ent& An es*ite earnings volatility anBor e;cessive leverage in this e;*ansionary
*erio, there was no Gualifie o*inion or e$*hasis of $atter in the auit re*orts& The #oyal
Co$$issioner too) the view that AS7C@s concerns were largely confine to res*oning to
negative $eia co$$entary in the secon half of '--- an $onitoring actions in the lea=
u* *erio to the liGuiation of (7( Li$ite 1(7( #oyal Co$$ission, '--%, vol&!2&
Unli)e AS7C@s seentary role in the oversight of (7( Li$ite, AS7C was $ore *roactively
concerne a>out res*onsi>ilities an o*inions of the auitor KP8G
in relation to the
Guality of isclosure in A?G Li$ite@s yearly financial re*orts to %- :une '--,& 7n fact,
AS7C conucte an investigation uner section !%1!2 of the AS7C Act '--!, an uncovere
the $isclassification of a**ro;i$ately H!&" >illion in interest >earing lia>ilities 17BLs2 as a
non=current lia>ility which shoul have >een shown as a current lia>ility& 7t is $anatory
uner AASB !-! to *ro*erly classify assets an lia>ilities into current an non=current
categories& Therefore, in $isclassifying its 7BL, A?G Li$ite >latantly violate Australian
accounting stanars& The auit fir$ KP8G, in not *roviing Gualifie o*inion or
e$*hasis of $atter on the $isclassification issue, also faile to co$*ly with Australian
Auiting Stanars as reGuire >y section %-, of the Cor*orations Act '--! 1AS7C, '-!-,
Jove$>er, '"2& Given this fact, AS7C an A?G Li$ite@s lea auitor 8r Dhittingha$
reache an enforcea>le unerta)ing in '-!- a>out the *ro*er classification of all A?G
Li$ite@s 7BLs 1AS7C, '-!-, Jove$>er '"2.
sufficient a**ro*riate auit evience o>taine >y the auitor
auit wor) was conucte with an attitue of *rofessional sce*ticis$
a $oifie auit o*inion was issue ue to non=co$*liance with the accounting
there was an aeGuate unerstaning of the entity@s internal control environ$ent to
assess ris) of $aterial $isstate$ent
ris) of $aterial $isstate$ent an relate isclosures were aeGuately
aeGuate consieration was given to $ateriality an its relationshi* to auit ris)
aeGuate consieration was given to $ateriality in eter$ining the nature, ti$ing an
e;tent of auit *roceures
the auit *lan was aeGuately evelo*e to reuce auit ris)&
As etaile in AS7C@s enforcea>le unerta)ing in Jove$>er '-!-, KP8G@s lea auitor
Christo*her Dhittingha$ isagree with AS7C@s concerns, >ut recognise their
significance, sought e;*lanation fro$ A?G Li$ite a>out $isclassification of the 7BLs,
avise A?G Li$ite to re=issue half yearly financial re*orts on ', ?e>ruary '--<# an
then issue a $oifie review re*ort with e$*hasis on $isclassification issues& (owever,
e$*owere >y its enforcea>le unerta)ing, AS7C sus*ene Dhittingha$ fro$ *erfor$ing
any auit uty or function for a *erio of nine $onths an a *enalty of H!-,--- was
i$*ose u*on hi$&
As state in the 3nforcea>le Unerta)ing 1AS7C, '-!-, Jove$>er '"2, Christo*her Dhittingha$ was an
auit *artner of K8PG& (e hel the lea *osition of an auit tea$ consisting of $ore than '- KP8G
*rofessionals with a**ro;i$ately !-- KP8G e$*loyees atvarious stages, 1ii2 wor)e continuously as a
registere auitor since %- 5ece$>er '--', an 1iii2 signe the '--, auit re*ort without *roviing any
Gualifie o*inion on A?G Li$ite@s financial re*ort for the year to %- :une '--,&
3.2 Attitudes;,ationalizations
#ationali6ation is a *rocess of Austifying self=interest& As note earlier, it ty*ically e;hi>its
an arrogant attitue cou*le with ishonest >ehaviour, *rovies false ho*e an shifts the
>la$e for *rior failures to others& #ationali6ation was evient in the (7( Li$ite colla*se&
As the #oyal Co$$ission uly note, Qthere were $any as*ects in which the governance
of (7( Li$ite was not >ase on o*enness, integrity an accounta>ilityR 1(7( #oyal
Co$$ission, '--%, vol& %, *&'/!2& 7n fact, a>solute o$ination over its wea) ecision
$a)ing *rocesses an cor*orate culture, $ore or less, co$*elle (7( Li$ite@s C39 #ay
Dillia$s to rationali6e his evient *rior $anagerial inco$*etence an u>ious ethical
>ehaviour& (e ha create an environ$ent where. 1a2 the >oar chair$an e;iste in na$e
onlyC 1>2 the >oar i not have control over ecision $a)ing *rocessesC an 1c2
infor$ation was filtere an sanitise >efore >eco$ing availa>le for others& ?ro$ the
co$$ence$ent of the >usiness until #ay Dillia$s ste**e asie in 9cto>er '---, QJo one
rivalle hi$ in ter$s of authority an influence& The han an influence of Dillia$s were
*ara$ountR 1(7( #oyal Co$$ission, '--%, vol& !, ;;vii2& #oney Aler, an influential
irector of (7( Li$ite, re*ortely charge #ay Dillia$s in '--! as follows 1Clar)e,
'--,, *&++02&
Mou have accu$ulate aroun you fantastic, loyal, long=service yes=$en, >ut
they are all !",-s ty*e $anagers with no view of the future&
Dhen (7( Li$ite was on the verge of colla*se in '---, the >oar atte$*te to force
C39 #ay Dillia$s to resign an have hi$ e;ert *ressure on irector #oney Aler to o
li)ewise& Both of the$ rationali6e their *ositions in ifferent ways& ?or e;a$*le, in the
hour >etween the auit co$$ittee $eeting an the full >oar $eeting of !' Se*te$>er,
Dillia$s as)e Aler to re$ain >ehin in the >oarroo$ an re*ortely engage with hi$
in the following enlightening ialogue, Q7@ve offere $y resignation an 7 woul li)e you
to resign tooR 1Destfiel, '--%>, *&!<<2& But even at that eleventh hour Aler@s res*onse
was unco$*ro$ising in a self=intereste re*uiation of Dillia$s@ reGuest to resign
1Destfiel, '--%>, *&!<<2.
7 have no intention of resigning& 7@$ a relatively young $an, 7 have a long
career ahea of $e an it woul not loo) goo if 7 resigne& 7t@s not in $y
5es*ite having sanctione accounting $ani*ulations in the conte;t of su>stantial cor*orate
governance *ro>le$s, (7( Li$ite@s C39 #ay Dillia$s still eneavoure to rationali6e
his own activities an in *articular the failure of (7( Li$ite, as >eing entirely ue to a
fiscal=econo$ic own turn, an not >ecause of ine*t or inco$*etent ecision $a)ing&
Dhen the co$*any@s lia>ilities e;ceee its assets >y an un*receente H+ >illion, (7(
Li$ite@s $anage$ent continue to give false ho*e to the $ar)et eclaring that it hel,
Qsu>stantial reserves to $eet *olicy holersR 18a) et al&, '--0, *&',2& 7n '--<, on his
release fro$ Syney@s Silverwater :ail, #ay Dillia$s >elately a*ologise to (7( Li$ite
shareholers who lost $oney in the '--! failure of (7( Li$ite& As re*orte in the $eia,
he a*ologise in the following so$ewhat isingenuous ter$s.
The last thing in the worl 7 woul ever have wante was for (7( to fail, for
*eo*le to >e hurt an for *eo*le to suffer financial loss& L& 7 really a$ very
sorry that occurre& 1A2C 4ews- :anuary !+, '--<2
7n $ar)e contrast, there were no allegations that the senior $anage$ent of A?G Li$ite
ha an over=>earing, o$inant attitue or create a culture of fear to su**ort their
activities& (owever, in efence of their activities, they entirely faile to ac)nowlege what
they ought not to have one, or shifte >la$e in relation to the grou*@s *erfor$ance an
re*orting& As e;tracte fro$ the hearings in the ?eeral Court in Syney 18oran, '-!-a,
8arch ''2.
5avi Clar)e, A?G Li$ite@s $anaging irector, a$itte that its >usiness structure
was Qco$*le;R an Qo*aGueR, >ut he ha >een Qwor)ing har to aress that
Dhen A?G Li$ite@s share *rice fell fro$ H!-&+0 on ! August '--, to H0&++ on !"
5ece$>er '--,, 5avi Clar)e Austifie this *rice fall as an outco$e of the averse
$ar)et senti$ent towars the Q8acGuarie Ban) 8oelR which heavily relie on
geare assets&
7n relation to A?G Li$ite@s >aseline earnings, when the Court hear a>out Q?7AJ9
e;erciseR $eaning Qfailure is not an o*tionR, 5avi Clar)e argue that he ha no
o>Aection to Q?7AJ9 e;erciseR >ut he sai, QDhat 7 on@t li)e is the suggestion that
this was so$ething out of the orinaryR&
5avi Coe, A?G Li$ite@s e;ecutive chair$an, also Austifie its stance a>out a nu$>er of
transactions& (e sent an e$ail to AG? Li$ite@s $anaging irector 5avi Clar)e a>out
iscussions hel with *rivate eGuity fir$ TPG an sai Sthe worst ecision of $y life was
not to close out those *ositions earlier@ R 18oran, '-!-c, 8arch ',2& #egaring the
#u>icon transaction, he state that.
7 was certainly not atte$*ting to inicate that 7 == that A?G Li$ite woul not
u$* the #u>icon transaction& L 9n the #u>icon transaction, 7 $a)e no
s*ecific reference to it fro$ an A?G *oint of view& 7t was not $y *osition to o
thatC 7 han@t vote on the transaction& An what 7 give is $y *ersonal view as
to the *otential for growth shoul that transaction *rocee& 18oran, '-!-c,
8arch ',2
5ue to the $is=categorisation of lia>ilities, A?G Li$ite was a>le to isguise a current
lia>ility of a**ro;i$ately H!&" >illion& AS7C *enalise KP8G an i$*ose restrictions on
A?G@s lea auitor, Christo*her Dhittingha$, to wor) as an auitor& (owever, KP8G
atte$*te to shift the >la$e arguing that they e*ene on $anagers@ infor$ation an this
accounting $alfeasance i not have any i$*act on the failure of A?G Li$ite&
:. Conclusions
The salient fining of this *a*er is that accounting $ani*ulation in (7( Li$ite an A?G
Li$ite were $ore or less cause >y si$ilar factors, as enca*sulate in the frau triangle
theory& The conte$*orary glo>al an o$estic econo$ic conitions uring !"",='--!,
entity@s earnings volatility, negative cash flows, liGuiity crisis an e;cessive leverage, all
ha effects on accounting $ani*ulation an the failure of (7( Li$ite in '--!& Si$ilarly,
e;ternal econo$ic an inustry conitions uring '--,='--< an co$*any@s earnings
volatility, negative cash flows, liGuiity crisis, an e;cessive leverage i$*acte u*on
accounting $ani*ulation an the failure of A?G Li$ite >y the en of '--<& The stuy
fins e;ecutives re$uneration as one of the rivers of accounting $ani*ulation in these
Both co$*anies $ae o**ortunistic, su>Aective use of accounting stanars or si$*ly
violate the$ to $as) ris), anBor artificially enhance the annual inco$e an winow
ress >alance sheet& 8isclassification of assets an lia>ilities, i$*air$ent *ro>le$s an
lac) of relate *arty isclosure were the $aAor accounting issues in A?G Li$ite& Uner=
*rovisioning an accounting treat$ents for intangi>les were the $ost significant
accounting *ro>le$s in (7( Li$ite& A?G Li$ite@s auit co$$ittee lac)e financial
e;*ertise an ine*enence in '--<& Dhile (7( Li$ite@s auit co$$ittee ha financial
e;*ertise, there was a fa$iliarity threat to auitor ine*enence& 9verall, wea)nesses in
the internal control an governance regi$e were $ore e>ilitating in (7( Li$ite than
A?G Li$ite& Although there was no C39 uality in (7( Li$ite, its >oar was *assive
or ineffective in $a)ing >usiness ecision& The e;cessive consultancy fees vis=P=vis
regular auit fees *ai to the auitors $ight >e one of the reasons for la; oversight >y the
e;ternal auitors of >oth co$*anies& The e;ternal oversight of AS7C an AP#A were not
effective in *erfor$ing oversight over the financial re*orting of (7( Li$ite& AS7C@s
oversight role regaring e;ternal auit in A?G Li$ite was $ore effective >ut not in a
ti$ely $anner&
A?G Li$ite@s senior e;ecutives an >oar creatively narrate to rationali6e their
activities& (7( Li$ite@s senior e;ecutives ao*te an assertive, o$inating *ersona,
creating an intolerant, o**ressive cor*orate culture& A?G@s C39 5avi Coe co$$itte
suicie& (7(@s C39 #ay Dillia$s eventually *u>licly a*ologise& The regulators an
stanar=setting >oies nee to consier the finings of this stuy in evelo*ing future
accounting an cor*orate governance regulations& The >usiness schools shoul give $ore
e$*hasis on *roviing ethical eucation&