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Compass reporting a case of poor direction

by Michael West | Jan 31, 2012 | Business

Shareholders were poorly informed about improper auditing procedures used for some months last year.

AS SHAREHOLDERS and creditors in the collapsed Compass Resources were kept wallowing in an information vacuum last year the company had, for some months, two auditors. This and other irregularities, enabled by poor regulatory oversight, have emerged in an investigation into the company’s disclosures.

Readers may recall that Compass Resources stealthily disclosed to the Australian Securities Exchange on Melbourne Cup day last year a half-yearly financial report that spanned, not the six months, but a mere 42 days.

Here was a ”half -year” financial report that covered 11.5 per cent of the year. And there were no comparisons, so any interested observer could be forgiven for inquiring as to what had come before, in the wake of one of this country’s ugliest corporate train wrecks.

Compass director Richard Swann and his helpers from Grant Thornton argued that this sliver of a financial report was justified because the Australian Securities and Investments Commission had given the company an accounting exemption order for the previous reporting period. The story surrounding ASIC’s relief order for Compass is yet another case of regulatory failure in the insolvency area.

ASIC issued the order contrary to its own policies in Regulatory Guide 174, because ASIC knew that the Compass administrators were ”very confident” that a company reconstruction would be effected.

The regulator issued the order subject to the condition that on or around February 8, 2010, the ASX would be notified. For reasons unknown, however, an ASX announcement for the exemption order did not appear until April 9, 2010.

The public exposure of the Compass Melbourne Cup 42-day financial report may have rallied ASIC into some rearguard action, however, to protect itself from further embarrassment.

For, on the day before Christmas Eve, there came another Compass surprise. The news this time was a replacement set of half-yearly accounts by Compass. These accounts actually covered the full six months to June 30, 2011 – a significant improvement over 42 days.

The reissued Compass accounts, unfortunately, are still wrong. They are wrong because the assets of the company are assessed on the basis of liquidation values from before January 1, 2011.

The Compass Christmas Eve half-year accounts also included another head-spinning disclosure but this time about the company’s auditors. On October 18, 2011, Martin Jones of Ferrier Hodgson in Perth advised that he had negotiated Grant Thornton to do the audit for the Compass interim report, noting that the appropriate form to have KPMG removed as auditors had been lodged with ASIC.

According to a document supplied to shareholders of Compass by Martin Jones in July 2011, the move to Grant Thornton was expected to save Compass more than $200,000 on the audits of the annual accounts for December 31, 2008, and half-year accounts for June 30, 2011.

Shareholders appear not to have been told the full story by Ferrier Hodgson on this matter, though. The claimed audit savings were based only on two old audit quotes for the annual accounts: a 2009 quote from KPMG and a 2010 quote from Grant Thornton. BusinessDay has obtained a copy of the KPMG quote. It shows that KPMG quoted a range from $138,000 to $168,000 to complete the audit for the annual accounts.

In order to save $200,000 on this basis, Grant Thornton would have to pay Compass to do the audit instead of the other way around. Perhaps Jones and his former partner Adrian Brown, who is now the senior executive leader of insolvency practitioners at ASIC, could confer about how Compass shareholders might have been better informed on this issue.

Further, and even more bizarrely, it turns out that Grant Thornton signed the audit review report on the Melbourne Cup half-year accounts while KPMG was still nominally the auditor of the company. Here we have KPMG as the incumbent auditor of the company but they do not do the review of the Melbourne Cup half-year accounts. Rather, an auditor hand-picked by Ferrier Hodgson comes in and signs off on a set of half-year accounts that conveniently ignores 139 days that Ferrier Hodgson was in charge of the company.

So the Compass Melbourne Cup half-year accounts are audited by Grant Thornton, yet – in a storyline redolent of The Twilight Zone – the auditor of the company is KPMG. The Compass Christmas Eve disclosure states that KPMG and Grant Thornton are joint auditors of the Compass Melbourne Cup half-year accounts.

The Corporations Act – memo to ASIC – does not allow two firms to be jointly appointed auditor. The act refers to the appointment of ”a firm”, one firm that is. Singular.

Michael West headshot

Michael West established Michael West Media in 2016 to focus on journalism of high public interest, particularly the rising power of corporations over democracy. West was formerly a journalist and editor with Fairfax newspapers, a columnist for News Corp and even, once, a stockbroker.

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