How ASIC went astray in the faulty Compass case

by | Jan 31, 2012 | Business

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 a BusinessDay 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 an 11.5 per cent of the year “half year” financial report. And there were no comparatives, so any interested observer could be forgiven for inquiring as to what had come before, in what turned out to be one of this country’s ugliest corporate train wrecks.

The 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 prior 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 it knew the Compass administrators were ”very confident” a company reconstruction would be effected.

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

It is not uncommon for strange events such as these to occur when listed public companies in administration are being regulated by ASIC. The first casualty of administrations is usually the transparency and accountability for company affairs set out in the law.

For their part, administrators often ignore the law and do not prepare required accounts. ASIC often helps administrators to paint over the cracks by issuing an accounting exemption order when a company is being prepared for its return to the management of directors.

Only then the accounts begin to flow again. Yet the period when the company was managed by administrators is a black hole. There is no information about the income and expenses for these periods. There is no way of knowing how the financial position of the company changed during the course of the administration. There is no way of knowing what the administrators were up to.

The public exposure of Compass’s Cup 42-day financial report may have rallied the regulator 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 – a significant improvement over 42 days.

And it was nice to finally have some meaningful disclosure about the cost of the Compass administration – a cool $771,573 for six months.

Ferrier Hodgson’s bill since Compass’s controversial collapse in 2009, and subsequent controversial restructure, remains in the dark. Nor was the insolvency firm responding to questions for this article.

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.

Liquidation values from before January 1, 2011 are not appropriate for a balance sheet at June 30, 2011, when it is known at the date the accounts are signed that the company is not being liquidated. If ASIC and Compass Resources again reissue the Compass half-year accounts for June 30, 2011, we humbly suggest Maundy Thursday as a suitable lodgment day.

The Compass Christmas Eve half-year accounts also included another head-spinning disclosure – this time about the company’s auditors.

On October 18 last year, Martin Jones of Ferrier Hodgson in Perth advised that he had negotiated with 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 Jones in July last year, the move to Grant Thornton was expected to save Compass in excess of $200,000 on the audits of the annual accounts for December 31, 2008, and half-year accounts for June 30, 2011.

It appears shareholders have not 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 between $138,000 and $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 Grant Thornton signed the audit review report on the Melbourne Cup half-year accounts while KPMG was still nominally the auditor of the company. Is this Australia’s first company with two auditors?

These irregularities can only mean further distress for Compass shareholders who lost so severely and reprehensibly in the company’s crash – and its rehabilitation which entails their assets being well and truly wrested from their hands.

Here we have KPMG as the incumbent auditor of the company but it does 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 ignore 139 days that Ferrier Hodgson was in charge of the company.

ASIC may need reminding, it seems, that its own Regulatory Guide 26 states that ”Opinion Shopping” is the practice of searching for an auditor willing to support a proposed accounting treatment. It is unlikely that a Big Four audit firm such as KPMG would associate itself with a 42-day financial report with zero comparatives.

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

If KPMG and Grant Thornton were the joint auditors for these accounts, how is it that Grant Thornton alone signed the audit review report?

Perhaps they have forgotten that a ”Member in Public Practice who is asked to replace an existing auditor or to accept nomination as a replacement auditor shall request in writing of the existing auditor all information which ought to be available to enable the member to make a decision as to whether the audit engagement or the nomination should be accepted”.

The Compass Christmas Eve disclosure notes that ASIC gave its approval for KPMG to resign as auditor on December 1 last year. This was done knowing that the shareholders of Compass had not been properly put in the picture about the company’s auditor savings at the August meeting last year.

ASIC Regulatory Guide 26 states that ASIC will not normally consent to an application that is in the nature of opinion shopping. The guide also states that ASIC will not consent to an audit resignation that does not take effect at a company’s annual meeting unless there are exceptional circumstances. Sadly, ASIC’s policies do not seem to matter when it comes down to exemptions and other favours for insolvency mates.

It is little wonder that last year’s Senate inquiry into administrators and liquidators recommended that ASIC be stripped of some its regulatory powers.

The regulator’s failure to keep records properly – as revealed last year in a story by BusinessDay about the purging of relief orders from the public database – exacerbates things to the level of a scandal. These orders issued by ASIC to insolvency practitioners – favours in layman’s language – vanished from the public database about the time of the Senate inquiry into the insolvency industry and its regulation.

ASIC’s disappearing act for accounting exemption orders includes the highly dubious exemption order it issued for Compass Resources.

Memo to Office of the Australian Information Commissioner: We still await your response on this matter of high public importance – that is, government agencies purging public information from public databases.

Michael West established to focus on journalism of high public interest, particularly the rising power of corporations over democracy. Formerly a journalist and editor at Fairfax newspapers and a columnist at News Corp, West was appointed Adjunct Associate Professor at the University of Sydney’s School of Social and Political Sciences. You can follow Michael on Twitter @MichaelWestBiz.

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