Accounting: CALDB could use some transparency

The last fistful of dirt was finally thrown onto the grave of "Compass II" - otherwise known as Southern Cross Airlines Holdings

In January when company auditor Stuart Gooley was rep-rimanded for not following audit procedures. Liquidator Richard Barber had thrown the last shovelfuls of soil on the Southern Cross coffin when he gave back to creditors 32 cents in the dollar, described in a media release dated 27 November 2000 as bringing the liquidation to a "successful conclusion".

The last fistful of dirt was finally thrown onto the grave of "Compass II" - otherwise known as Southern Cross Airlines Holdings - in January when company auditor Stuart Gooley was rep-rimanded for not following audit procedures. Liquidator Richard Barber had thrown the last shovelfuls of soil on the Southern Cross coffin when he gave back to creditors 32 cents in the dollar, described in a media release dated 27 November 2000 as bringing the liquidation to a "successful conclusion". A key player in the company's fall from the sky, former deputy chairman Doug Reid, is serving an eight-year jail term for the theft of almost $11 million, $10.5 million of which ASIC claimed should have been picked up by Arthur Andersen's Gooley and his audit team during the audit of Southern Cross in 1992. Gooley's reprimand came after he lodged an appeal with the Administrative Appeals Tribunal against an initial decision handed down by the Company Auditors and Liquidators Disciplinary Board. That initial CALDB decision found that the Andersen partner, who is also an auditing standard-setter at both domestic and international levels, failed to follow auditing standards and inadequately supervised staff undertaking the audit.

CALDB members deemed the breaches serious enough when they deliberated on the matter in 1999 to warrant a two-year suspension of Gooley's audit registration - a penalty the AAT overturned a year later. While the AAT did say the breaches were not deliberate it noted that the IAPC member's actions were found to be "wanting" when the Southern Cross circumstances were considered by the tribunal.

"The applicant [Gooley] was aware of the business operated by the company and was aware that it was a high risk venture in a very competitive industry. He was aware of the investment by those members of the public who subscribed to shares in the public float, by the company's staff and ultimately by its customers," the AAT decision says. "He was aware of the need for the company to raise sufficient share capital if it was to start operating its business at all and he was aware of the need for it to have sufficient operating capital at the outset."

Among the breaches identified in the AAT decision were the failure to seek external confirmations from banks to check whether a payment of $5 million was in fact paid to a particular entity and the inadequacy of the supervision of the audit team dealing with the Southern Cross matter.

Recent cases raise questions

This case and another involving two KPMG partners, Roger Amos and Alan Walsh, disciplined by the CALDB for not qualifying the accounts of two Seven Network companies has elevated the issue of the role of auditors in the community and whether the disciplinary structure currently in place is the best possible for the purposes of ensuring the financial markets have confidence in the auditing fraternity. Auditors have a significant role in financial markets. That is truism with which any discussion of the function of auditing and the role played by those who partake in the audit process must begin. An auditor's role in verifying the contents of financial statements is critical to providing assurance to creditors, shareholders, suppliers and others that a company's financial statements are prepared in accordance with the accounting standards promulgated by the Australian Accounting Standards Board, which are legally binding under the Corporations Law. This fact is rarely disputed; and the significance of the audit process is often highlighted in any discussion about a set of financial statements. Especially if the auditors have signed off on a set of accounts about which the regulator, the ASIC, and other parties have reservations.

The ASIC is able to refer concerns about the conduct of auditors and liquidators in relation to a particular audit to the CALDB. There are concerns raised that this process should be reformed. Some of those calls have come from the CALDB itself. CALDB chairman Philip King, in a media report published late last year, said the CALDB needed access to a wider range of penalties to better cater for the varying severity of the matters that come before them. Other calls for reform have come from the accounting profession itself and, unsurprisingly, it has often been those closest to the actions that have called for change. Senior KPMG partner Michael Coleman urged reform of the structure because the case involving his colleagues had only two, and not the customary three, CALDB members hearing the matter, due to a conflict on the part of one member of the disciplinary board. Coleman is not alone on the issue of increasing the size of the panel. Others say an increase would be useful to ensure a broad panel is available to hear matters if any of the parties have conflicts because of commercial involvements.

Some commentators will argue that a wider pool is necessary to ensure the odds of getting a full board of three to hear the cases referred by the regulator. Sometimes reforms needed for one purpose are supported because the likelihood of one party getting a better result or a more sympathetic hearing is increased by boosting the size of any pool from which a panel may be selected.

Some ambit claims

These two reforms might be ones that are needed, but the scope for reform is greater. Any close examination of the CALDB role should bring into question whether the disciplinary board's in camera meetings are appropriate in an era of transparency. What is it about auditors and liquidators that is so unique that gives them the privilege to have matters brought against them by a corporate regulator heard in private? Do they have some kind of mysticism or a unique attribute about their character that effectively means allegations of breaches of corporate law and auditing standards should be kept from the public eye? There is an absence of transparency in parts of our corporate law structure that does not enable people to better understand the problems of auditing and, when mistakes occur, how people are dealt with. Company directors having a case brought against them before a court of law can be found innocent or guilty of breaches of the corporate law. Those matters will generally be heard in public through an open court process and the judicial process is seen as having taken its natural course.

Treating auditors and liquidators as a special breed of individual for no other reason than the profession from which they hail reeks of inequity and rightfully exposes the process to a criticism that it is a closed shop except when a media release is issued by the ASIC relating to an outcome. The Commission is also frequently attacked for taking frivolous action against auditors. Opening up the process will enable individuals and organisations to better understand the reasons underlying the Commission's actions. An unfortunate absence of transparency in these affairs means either side could be right and an outsider has no way to judge the soundness of one claim or the other. Opening the process to public scrutiny will help generate greater understanding of the process. There is also the potential for appeals to go higher and there should be no special treatment at CALDB level. Another factor that would aid enormously in the understanding of the complexities of the issues involved is if the CALDB made its rulings and findings available on request. It normally issues just a brief outline of the matter for publication in a government gazette, leaving the work of disseminating the news to the corporate regulator.

This is a mistake. The board must be prepared to give unfettered access to its decisions to interested parties and not just those that are capable of telling the story with their particular spin. Board decisions should be public documents, ensuring the CALDB is not vulnerable to selective story telling by any side involved in the matter. It also lessens the likelihood of being seen to be a stooge for the regulator. How an independent board can allow other people to announce its decisions and then have to deal with perceptions of bias is a matter of immense curiosity. Courts come up with decisions and they release them.

The CALDB comes up with decisions and detailed findings, but other parties are left to flesh out the details in the public arena with all the dangers that come from the telling of stories. Members of the CALDB would help their own cause by releasing the detailed findings when a case has concluded and regardless of the potential for appeal. Auditors and liquidators should not be treated any differently from other classes of individuals within the community.

An auditor or liquidator choosing to appeal a CALDB decision has the opportunity of doing so. However, that should not change the board's powers or ruling in the first instance. There should be transparent process from the outset so the matters are not hidden from users of financial statements who depend on financial reports as a basis for their investment decisions. The matters should not just come out of the woodwork when an auditor or liquidator decides to appeal to the AAT or beyond. Or the ASIC crows about its successful regulatory outcome. That is not transparency and greater priority needs to be given to opening the process up to the broader community.

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