This summarizes an academic paper that examines accounting manipulation in two Australian companies, Heath International Holdings Limited and Allco Finance Group Limited, prior to and after regulatory reforms in the early 2000s. It analyzes the circumstances of accounting manipulation using the fraud triangle theory, which posits that fraud arises from incentives/pressures, opportunities, and rationalizations. The paper finds that accounting issues, incentive factors, dysfunctional corporate governance, lax external oversight by auditors and regulators, and behavioral issues contributed to accounting manipulation at the two companies and fit within the fraud triangle framework.
This summarizes an academic paper that examines accounting manipulation in two Australian companies, Heath International Holdings Limited and Allco Finance Group Limited, prior to and after regulatory reforms in the early 2000s. It analyzes the circumstances of accounting manipulation using the fraud triangle theory, which posits that fraud arises from incentives/pressures, opportunities, and rationalizations. The paper finds that accounting issues, incentive factors, dysfunctional corporate governance, lax external oversight by auditors and regulators, and behavioral issues contributed to accounting manipulation at the two companies and fit within the fraud triangle framework.
This summarizes an academic paper that examines accounting manipulation in two Australian companies, Heath International Holdings Limited and Allco Finance Group Limited, prior to and after regulatory reforms in the early 2000s. It analyzes the circumstances of accounting manipulation using the fraud triangle theory, which posits that fraud arises from incentives/pressures, opportunities, and rationalizations. The paper finds that accounting issues, incentive factors, dysfunctional corporate governance, lax external oversight by auditors and regulators, and behavioral issues contributed to accounting manipulation at the two companies and fit within the fraud triangle framework.
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 AB*+,AC+ 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 researchers& Ke' terms Accounting $ani*ulation, cor*orate governance, ine*enence, oversight, frau triangle, Australia& ii Accounting manipulation in Australian banking and fnancial organizations -. Introduction The *eAorative ter$ 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& 0 Avances in technology were leaing to $aAor changes across the whole financial sector& Pu>lic lia>ility insurance, wor)ers co$*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 $ar)ets that occurre 18cGrathJicol, '--"2& 5ntit' conditions Earnings growth and profitability Ty*ically, net *rofit an earnings growth are wiely consiere )ey factors in eter$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 1 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& 2 ?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/!&< $illion& 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 I #93 I #9A I '--/ "/&" %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 $illion, other than *ercentages2 Mear Assets ?inancing assets Assets Lia>ilities 3Guity Assets to eGuity ?inance >y eGuity ?inance >y e>t As on %! 5ec !"", %,"</&, %,+'/&+ 0/-&% ,&!; !+&!I <0&"I As on %- :une !""" #estate on %- :une '--- ,,,'0&+ <,-0!&! /,,"&- ,,!-+&! "+/&+ "+/&+ <&'; <&'; !'&'I !'&'I <,&<I <,&<I As on %- :une '--- <,%',&! ,,%<<&- "%"&! <&"; !!&'I <<&<I Source. (7( Li$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 $illion, other than *ercentages2 Mear Current assets Current lia>ilities Current ratio As on %! 5ec !"", !<+"&! !0"+&" !&!/.! As on %- :une !""" #estate on %- :une '--- %0"/&< %,0-&0 %'<"&! %,'/'&< !&-".! !&!0.! As on %- :une '--- %,+0-&0 %,-'/&% !&!+.! Source. (7( Li$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 eGuity 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$ite 1H other than *ercentages2 Mear 3;ecutives Salary 7ncentives Bo*tions 9ther >enefits Total I of salary Salary 9thers !""" # # Dillia$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 & rights #etention 7ncentive 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 costs AASB !-!%, Accounting for goodwill AASB !-'-, &ncome ta' AASB !-'%, %inancial reporting of general insurance actiities Accounting *olicies = going concern issues 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$$ission, '--% )nder-proisioning 7t is a stereoty*ical *heno$enon E an hence relate accounting *ractice E in the insurance >usiness that while *re$iu$ inco$e is receive on a regular *erioic >asis, the *ay$ent of clai$s is ty*ically eferre, i&e&, they are $ae in su>seGuent accounting *erios or years& Because of this technical asy$$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+++ $illion& !0 Ta>le !%. Uner *rovisioning in (7( Li$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$$ission '--%, vol& ', *&!%<2 Before ?A7 was ta)en over >y (7( Li$ite, inflicting $aAor financial a$age u*on it, ?A7 ha a history of accounting $al*ractices& (owever, the #oyal Co$$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$$ission, '--%, vol& !, **&!+!=!/-2. The Seferral an $atching a**roach@ to re*orting of general insurance transactions uner AASB !-'% *rovie incentives for insurers to uner=*rice their *roucts an hence to o$inously unerstate *otential lia>ilities& Accoring to AP#A, it was *ossi>le to entirely avoi GPS '!-, >ecause it allowe u*=front recognition of future clai$s in the current year rather than allowing the loss to >e eferre into future years when the actual clai$s will arise& The su>Aective Auge$ents >ase on assu$*tions a>out *resent value of the e;*ecte future cash flows associate with the clai$s& The iscounting *rovisions in relation to calculation of the future cash flows uner AASB !-'% in Australia were si$ilar to those in the UK, >ut ifferent fro$ the relate reGuire$ents in the USA& The clash >etween the Pruential Stanar GSP'!-, +iability aluation for general insurers an AASB !-'% 1when rea with SAC +2 a>out the accounting treat$ent of *ruential $argins& The conflicts >etween AASB !-'% an 7ASC reco$$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$$ission an suggeste re$oving the o**ortunities of accounting iscretion fro$ this stanar& The AASB reissue the stanar in :uly '--+ as AASB !-'% ,eneral insurance contracts to incor*orate so$e overue i$*rove$ents to accounting for insurance contracts& (e-insurance A further Guite istinct accounting *ro>le$ in (7( Li$ite concerne re=insurance& 9wing to a seriously eficient level of reserves in (7( Li$ite an ?A7, (7( Li$ite $anage$ent o*te for reinsurance, although in reality, reinsurance was shown to consist of sha$ transactions that were actually loans 1Lee et al&, '--<, *&,-!2& An in this res*ect, the #oyal Co$$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 #einsurance arrange$ents Accounte for as at Contract entere into Auit a**roach 5isclosure *ro>le$ Swiss #e insurance %! 5ec !""" 7n :an '--- ?lawe 5isregare AASB!--' (annover #e insurance 17&772 %- :une !""" 7n Aug !""" ?lawe 5isregare AASB!--' Preference shares in ?A7 %- :une '--- 7n 9ct '--- ?lawe 5isregare AASB!--' 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 intangi>les Share holers@ eGuity1net assets2 At cost Accu$ulate a$ortisation cost At cost Accu$ulate a$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$ing iff& Ta; losses Total 9n %! 5ec !"", Current assets !%"&< Jon=current other assets '0&! '<&! 0%&' 9n %- :une !""" Current assets ',<&% Jon=current other assets !+0&' ',&' !,'&+ 9n %- :une '--- Current assets %-+&% Jon=current other assets "!&' !%,&' ''<&+ Source. (7( Li$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$$ission, '--%, vol& !, *&;i;2 This is not to say reliance on intangi>les is illegiti$ate& But the tren is istur>ing for at least two reasons& ?irst, the value to >e attri>ute to intangi>les is often a $atter of Auge$ent an is *articularly susce*ti>le to error E witting or unwittingC in the accounting *ractices of (7( Li$ite goowill >eca$e so$ething of a re*ository for the un*leasant an unwante conseGuences of *oor >usiness Auge$ent& Secon, when ti$es get tough it is ifficult to convert intangi>les to cashC as other sources of cash isa**ear, the intrinsic value of intangi>les is seriously calle in Guestion& 1(7( #oyal Co$$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$$ission, '--%, vol& !, *&!/!2& Seconly, on an a**lication of AASB !-'-, &ncome ta'- (7( Li$ite classifie future inco$e ta; >enefits accoring to ti$ing ifferences an incurre ta; losses 1Ta>le !,2& This stanar also ha s*ecific *rescri*tions a>out offsetting future inco$e ta; >enefits against *rovisions for eferre inco$e ta;& The #oyal Co$$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 transactions + 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 3 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& 4 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 invest$ents2 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, '--", *&!'2 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& '0 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 transaction2& 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 Li$ite& #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 facility& A?G Li$ite irectors an irectors of su>siiaries 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 '&!2& 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$$ission, '--%, vol& !, *&!!'2. 7 a$ not convince that a $anatory reGuire$ent for >oars to have $aAority of non=e;ecutive irectors is either necessary or esira>le& L& 7t is custo$ary to s*ea) of Sine*enent irectors@ >ut 7 thin) this gives the wrong e$*hasis& Dhat is reGuire is ine*enent Auge$ent& The istinction is su>tle >ut i$*ortant& 7n !""" an '---, the (7( Li$ite auit co$$ittee consiste of four $e$>ers 0 & 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 $isclassification of 5 (7( Li$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 / the >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 6 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$ite, Annual #e*ort, '--,2& 7 A?G Li$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- $illion 1Ta>le 0&'!2& 8 7n late 8arch '--<, A?G Li$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& 9 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$$ission, '--%, vol&!, *&"/2& Ta>le '-. Auitor@s 1Arthur Anersen2 fees in (7( Li$ite 1Actual a$ount in H2 Statutory an avisory services %! 5ec& !"", %- :une !""" %- :une '--- Auit fees 1auit an review of financial re*orts, an other regulatory auit services2 "<-,--- ',+!,,--- !,,--,--- Jon=auit fees 1avisory an ta;ation services2 +%/,--- ,0,,--- !,/%!,--- Total auitor re$uneration !,+!/,--- %,!,+,--- %,%%!,--- I of avisory & ta;ation co$*liance services %-&<I '%&"I 0-&-I Source. (7( Li$ite Annual #e*orts, !"""='---C (7( #oyal Co$$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 $onths 10 Auitor ine*enence is conce*tually categorise as ine*enence in fact an ine*enence in a**earance& 7ne*enence in fact is )nown as an un>iase attitue of the auitor uring auit while ine*enence in a**earance is unerstoo as how users of accounting infor$ation *erceive an inter*ret the circu$stances that the auitor is not *reo$inantly wor)ing as a consultant 1an avocate2 for fees& 11 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$$enations of the #a$say #e*ort 1'--!2 an (7( Li$ite ?inal #e*ort 1'--%2 >eca$e the >asis of a nu$>er of the safeguars *rescri>e in the CL3#P " Act of '--+& 12 As *er ASA 0'- Analytical procedures, analytical *roceures are auitor@s assess$ent of a co$*any co$*aring its financial conitions with inustry average an with *revious years@ financial infor$ation& Jon=financial ata are also use to unerstan an evaluate a co$*any& Analytical *roceures are unerta)en *rior to acce*ting a client an >efore for$ing an auit o*inion& %- ene %- :une !"""& Counter=intuitively, these non=auit fees increase in the years when Arthur Anersen regare (7( Li$ite as a $a;i$u$ ris) auit client& (7( Li$ite $anage$ent@s attitue was unco$*ro$isingly hostile to consieration of any Gualifie auit o*inion or e$*hasis of $atter& 7n 8arch !""", the (7( Li$ite@s auitors ha a $eeting with non=e;ecutive irectors of the auit co$$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$ite 1H2 *tatutor' and ad.isor' ser.ices %&&< =>C %&&$ K=M1 %&&? K=M1 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 stanars 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 assesse 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$& 13 As state in the 3nforcea>le Unerta)ing 1AS7C, '-!-, Jove$>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 interest& 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 *erce*tionR& 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 co$*anies& 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 %0 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& REFERENCES