Wake-up call on director disclosures
If the preliminary findings of an investigation into the collapse of global construction and engineering group Hastie are proved to be true then the corporate regulator should throw the book at certain key directors and their external auditors.
An explosive 98-page report prepared by administrators PPB Advisory concludes that the directors of Hastie Group may have potentially breached their duties and the corporations law by failing to ensure the group's financial statements gave a "true and fair view" of the financial position and performance of the company and offering securities when the disclosure documents contained misleading or deceptive statements.
Of the seven potential directors' breaches identified in the report, two are criminal and as such attach jail and financial penalties. It says the decline in performance following a series of acquisitions and poor retention of key management after they had completed their earn-out periods indicated "potential mismanagement, poor strategy implementation and monitoring by the board".
The report is damning of the board, accuses the audit and risk committee of being "largely inactive" and says the auditors may have breached Australian Auditing Standards. It has also reported most of the directors to ASIC for non-compliance.
Section 438B of the Corporations Act requires the directors of a company in administration to provide the administrator with a statement in a prescribed format outlining the financial position of the company, including net book values and estimated realisable values for all known assets together with details of known liabilities.
According to PPB, most directors have declined the request.
Given the seriousness of the contents of PPB's report it is paramount that these preliminary findings should not be shelved like so many others including a similarly critical report on the collapse of Babcock & Brown.
One of the roles of an administrator is to investigate the cause of a company's collapse. In this case PPB found that the company's discovery last year of $20 million of accounting irregularities was not necessarily the cause of its collapse, merely a symptom of a poor culture, poor systems and a board that did not appear to have "an inquiring mind" as to the reliability of financial statements and overall reporting.
This isn't the first time a company has faced allegations of accounting irregularities and it won't be the last. Indeed, Sims Metals issued a statement to the ASX on Monday advising the market that the value of inventory in its British business had been materially overstated by $60 million due to control failures and "potential fraudulent conduct by local and regional plan management".
The findings of the Hastie report prompted PPB to send a separate report to ASIC outlining its concerns and recommending further investigation. ASIC is understood to have been on the case for the past few months so the ball is now in its court.
The problem is that most directors involved in company collapses walk away scot-free. Few are banned as company directors regardless of whether they have a string of collapses against their name.
Of the few company directors who have been found guilty of breaches, most have faced the punishment of being hit with a wet lettuce. In the case of Centro, shame was deemed an appropriate punishment, despite the billions of dollars that shareholders lost, while the non-executive directors of ABC Learning walked away, despite the havoc wreaked, as did directors of Babcock & Brown and others.
The report's preliminary findings also raise questions about the role of the group's auditors and its advisers involved in the preparation of a prospectus in June 2011 to raise $160 million in equity.
The role of auditors hit the headlines last year when Banksia collapsed and its auditors were found to have signed off on accounts weeks before its $660 million collapse. Other controversies included the role of the auditor in Centro in signing off on billions of dollars of accounting errors. It follows an audit inspection report from ASIC last year which found that from inspections of 20 auditor firms over the past 18 months, audit quality went backwards.
The ASIC report shows that if the government is serious about improving the integrity of corporate Australia it needs to significantly boost the regulator's budget and change the way officers are remunerated so that it can attract staff with the necessary skills to properly investigate companies.
Meanwhile, the investigation into Hastie gives a fascinating insight into what goes on inside some big listed companies once the corporate veil is pulled back. This alone should be a wake-up call to the government and regulators to get tough.