Revealed: Australia's most inaccurate balance sheets
February 2, 2010
Dear Mayne Reporters,
whilst many other media outlets have shut up shop for the year, we remain open for business given that the markets are still trading.
As the gloom sets in ahead of what will almost certainly be a tough 2009 with substantial employment and income reductions kicking in after the Christmas rush, attention will shift once again to those companies, governments, individuals and families that are carrying too much debt in this credit-constrained world.
The Wall Street Journal reported this morning that debt-laden real estate companies are the latest to beg the US government for a bailout and we're going to see a similar trend in Australia.
I've just spent much of the past 24 hours sifting through the hundreds of annual reports that were sent to shareholders ahead of the AGM season. Before throwing any out, I noted the audit signing partner and whether there was a disparity between claimed net assets and the prevailing market capitalisations.
This issue is going to be the single most important debate over the coming three months. Giving plunging market capitalisations, will boards and auditors take an axe to balance sheet values in the interim profit reporting season that kicks off in February?
Thanks to the Howard Government, shareholders now have the right to submit written questions to auditors which must be answered within six working days. I'm gearing up to start sending letters to auditors asking questions about these huge disparities between market and book values. Subscribers to The Mayne Report will be kept fully informed on the answers that come back.
New accounting standards boss hails from Manningham
As a member of the City of Manningham's audit committee, audit processes and outcomes are going to become a much bigger part of life in the months ahead, even though our council finances are in rude health.
Indeed, one of the other new Manningham councillors is a tenacious accounting luminary called Graeme McMillan who spent considerable time in recent years asking questions about financial management and accounting issues at Manningham. Graeme is also on the audit committee.
Whilst audit issues will be getting some fresh eyes inside the City of Manningham, one of our constituents, Park Orchards resident Kevin Stevenson, has just been appointed as the full-time chairman of the Australian Accounting Standards Board for the next five years. This is a vital position because accounting standards are fundamental to the financial accountability of all sectors in Australia. Check out Senator Nick Sherry's announcement from last week.
Kevin is a former director of the Australian Accounting Research Foundation, spent three years as the technical director of the International Accounting Standards Board (IASB) and is currently a partner at PwC.
I've also had the pleasure of meeting Merran Kelsall, the part-time chair of the Australian Auditing and Assurance Standards Board, in recent months since she joined the board of the RACV, where my wife Paula is a fellow director. Some of the sentiments in this edition have been passed on to Merran and it will be very interesting to see where both Kevin and Merran take the future debate.
As you might have worked out, I'm pretty disillusioned with the current system which sees the majority of Australian public companies produce balance sheets which have no connection to the real world and don't even offer up some sort of explanation where there is a disparity between book and market value.
Getting auditors up at AGMs to defend inaccurate accounts
This was an issue pursued with vigour over the recent AGM season and here are some of the audio examples:
Getting PwC's Marc Upcroft to defend illusory Babcock & Brown Power accounts
Getting the Macquarie Media auditor up on this missing $600m in book value
Can the Allco Equity Partners auditor explain where this missing $300m of value has gone?
BBI auditor queried on what if BNB or BBI go into receivership?
Will write-downs at BBI cause a breach of the debt covenants?
Revealing Australia's most inaccurate balance sheets
When equity markets plunge by 50% from their peaks, anyone who bought anything near the top of the boom is going to be sitting on a huge book loss now. The challenge now is for incumbent directors, managements and auditors to simply face up to reality and come clean. We hadn't really hit the worst of the crisis when the full year accounts were released in August, so this puts enormous focus on the upcoming interim results announcements.
The audit profession was largely missing in action when it came to Centro, Allco, MFS and ABC Learning, and we clearly have a case of massive fraud involving the two-bit audit firm that was complicit in Bernie Madoff's $US50 billion Ponzi scheme. Indeed, The Wall Street Journal's lead story this afternoon includes the following:
Authorities are trying to determine who helped Mr Madoff carry out what they say appears to be at least a 30-year scheme that may have caused at least $50 billion in losses. They are seeking information from the accounting firm (Friehling & Horowitz), that handled Mr Madoff's audits for decades and are examining the role of Frank DiPascali, who dealt with client accounts and worked at Mr Madoff's firm for more than 30 years, said a person familiar with the matter.
"If you wanted anything, a new account, money in, money out, you called Frank," said one Madoff investor. "Nothing moved in that office without him, operationally," this person said.
"Frank DiPascali would like to see investors get back whatever they can," said Marc Mukasey, a lawyer for Mr. DiPascali. He declined to comment further.
Whilst we're not for a moment suggesting any fraud in Australian public company accounting, here is a list of some of the companies that clearly need to take an axe to their respective balance sheets in the coming weeks:
The lonely $8 billion-plus club
Wesfarmers, $8.6bn: After paying a ridiculous debt-funded $18 billion for Coles, the market capitalisation of this once great industrial conglomerate has plunged to only $11 billion. Will Ernst & Young's signing partner Sean Van Gorp force some massive write-downs in February given that he certified the business had net assets worth $19.59 billion in August? This $8.6 billion gap is the largest in the Australian market at present and only AMP has ever been more inaccurate on the downside.
Between $2bn and $5bn over-valued
Centro Properties Group, $4bn: shopping centre write-downs sent it to a staggering net loss of $2.055 billion for the full year after notching up a $1.11 billion in loss in the first half. However, it still claims to have $20.5 billion in assets supporting its $16.4 billion in debt, giving it net assets of $4.1 billion when the market cap is just $62 million.
GPT, $4bn: only managed to come up with a loss of $68 million for the first half of 2008 which left its claimed net assets of $8.15 billion double its current market cap of $4.15 billion after the recent $1 billion-plus capital raising. The old Macquarie auditor David Armstrong from PwC signed off on this.
Macquarie Infrastructure Group, $3.1bn: claims net assets of $6.68 billion when market cap is now down near $3.6 billion. Wayne Andrews from PwC is the auditor.
Goodman Group, $2.9bn: the industrial property giant and its auditor, John Teer from KPMG, claim to have net assets of $4.7 billion when the market's current assessment is $1.85 billion.
Centro Retail, $2.76bn: declared a full year loss of $887 million after sweeping shopping centre write-downs, but still claims to have net assets of $2.89 billion when market cap is only $125 million.
Fairfax Media, $2.6bn: the media giant reckons it is worth $5 billion when the market has settled on about half that at $2.4 billion. Clearly, those $6.3 billion in intangible assets on the balance sheet should be written down. Auditor Christopher George from Ernst & Young was asked about this at the recent AGM but he wasn't allowed to answer.
Babcock & Brown, $2.44bn: after muted write-downs which prevented the declaration of a loss in the June half, Babcock & Brown is now claiming to have net assets of $2.5 billion when its market capitalisation is only $60 million.
Macquarie Airports, $2.32bn: claims net assets of $6.2 billion when market cap is $3.88 billion. EA Barron from PwC is the auditor.
Mirvac, $2.2bn: failed to report a big loss for 2007-08 but then did an emergency capital raising and now has a market cap of $2.2 billion whilst claiming to have $4.41 billion in net assets.
Between $1bn and $2bn
Paperlinx, $1.5bn: auditor Peter Jovic reckons this Amcor spin-off is worth $1.924 billion when the market rates it at just $419 million given the excessive debt on the books.
Bluescope Steel, $1.5bn: claims to have net assets of nearly $4 billion, but the market capitalisation is now down to $2.5 billion.
Babcock & Brown Power, $1.35bn: big write-downs triggered a net loss of $426 million as it seeks independence from the parent and fired both the CEO and finance director. However, auditor Marc Upcroft from PwC has somehow agreed to claims that net assets are now $1.4 billion when the market cap is down to $54 million.
Pacific Brands, $1.2bn: the board and auditor reckon the business is worth $1.33 billion but with $800 million in debt the market's assessment is down to just $161 million.
FKP, $1.15bn: auditor Grant Saxon from accounting firm PKF (that's FKP backwards) reckons this retirement village play and property developer is worth $1.34 billion when the market valuation is currently $155 million. Oh dear.
Between $400m and $1bn
QANTAS, $830m: they claim their worth is around $5.73 billion, but the reality is a market capitalisation of about $4.9 billion.
Straits Resources, $820m: claims to be worth $1.04 billion when the market reckons $220 million.
Seven Network, $800m: claim their worth is nearly $2 billion, but the reality is a market capitalisation of $1.2 billion.
Transpacific, $650m: claims to be worth $1.5 billion, but the reality is now a market capitalisation below $850 million, so maybe some of those high-priced acquisitions will have to be written down. Had a tiddler auditor in Mr R Forbes from Bentleys.
Emeco, $530m: this teetering mining equipment player claims to be worth $701 million when the market cap is down to $174 million. The auditor is Brett Fullarton from KPMG.
Challenger Infrastructure Fund, $520m: claims to be worth $1.08 billion when the market capitalisation is $562 million.
Prime Trust, $480m: this retirement village play chaired by Dr Michael Wooldridge is capitalised at just $52 million when the latest accounts claim it is worth $530 million
Externally managed funds the biggest offenders
There will doubtless be many more entries that we've missed, so please send through other suggestions to stephen@maynereport.com. I'm in the process of adding numerous other Allco, Babcock, Macquarie and Multiplex vehicles to the final list. Indeed, the common characteristic with most of the biggest debacles is external management where the huge conflict existed to maximise fees through gearing up into more and more assets.
However, you'd have to agree that we are in unprecedented territory right now. Never before have Australian balance sheets been so inaccurate and we're about to see auditors come under enormous pressure to impose write-downs.
Indeed, many of the above listed companies won't want to finish up on this list tracking the claimed net assets when companies actually collapsed. The bigger that number the more likely auditors and directors will be sued.
Where this issue gets really tricky is with the banking covenants because you don't want to be the auditor that sends a company under. All of which is food for through for Australia's top auditors as they tuck into their Christmas turkey on Thursday.
That's all for now.
Have a very merry Christmas and just keep doin' ya best,
Stephen Mayne
* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.
whilst many other media outlets have shut up shop for the year, we remain open for business given that the markets are still trading.
As the gloom sets in ahead of what will almost certainly be a tough 2009 with substantial employment and income reductions kicking in after the Christmas rush, attention will shift once again to those companies, governments, individuals and families that are carrying too much debt in this credit-constrained world.
The Wall Street Journal reported this morning that debt-laden real estate companies are the latest to beg the US government for a bailout and we're going to see a similar trend in Australia.
I've just spent much of the past 24 hours sifting through the hundreds of annual reports that were sent to shareholders ahead of the AGM season. Before throwing any out, I noted the audit signing partner and whether there was a disparity between claimed net assets and the prevailing market capitalisations.
This issue is going to be the single most important debate over the coming three months. Giving plunging market capitalisations, will boards and auditors take an axe to balance sheet values in the interim profit reporting season that kicks off in February?
Thanks to the Howard Government, shareholders now have the right to submit written questions to auditors which must be answered within six working days. I'm gearing up to start sending letters to auditors asking questions about these huge disparities between market and book values. Subscribers to The Mayne Report will be kept fully informed on the answers that come back.
New accounting standards boss hails from Manningham
As a member of the City of Manningham's audit committee, audit processes and outcomes are going to become a much bigger part of life in the months ahead, even though our council finances are in rude health.
Indeed, one of the other new Manningham councillors is a tenacious accounting luminary called Graeme McMillan who spent considerable time in recent years asking questions about financial management and accounting issues at Manningham. Graeme is also on the audit committee.
Whilst audit issues will be getting some fresh eyes inside the City of Manningham, one of our constituents, Park Orchards resident Kevin Stevenson, has just been appointed as the full-time chairman of the Australian Accounting Standards Board for the next five years. This is a vital position because accounting standards are fundamental to the financial accountability of all sectors in Australia. Check out Senator Nick Sherry's announcement from last week.
Kevin is a former director of the Australian Accounting Research Foundation, spent three years as the technical director of the International Accounting Standards Board (IASB) and is currently a partner at PwC.
I've also had the pleasure of meeting Merran Kelsall, the part-time chair of the Australian Auditing and Assurance Standards Board, in recent months since she joined the board of the RACV, where my wife Paula is a fellow director. Some of the sentiments in this edition have been passed on to Merran and it will be very interesting to see where both Kevin and Merran take the future debate.
As you might have worked out, I'm pretty disillusioned with the current system which sees the majority of Australian public companies produce balance sheets which have no connection to the real world and don't even offer up some sort of explanation where there is a disparity between book and market value.
Getting auditors up at AGMs to defend inaccurate accounts
This was an issue pursued with vigour over the recent AGM season and here are some of the audio examples:
Getting PwC's Marc Upcroft to defend illusory Babcock & Brown Power accounts
Getting the Macquarie Media auditor up on this missing $600m in book value
Can the Allco Equity Partners auditor explain where this missing $300m of value has gone?
BBI auditor queried on what if BNB or BBI go into receivership?
Will write-downs at BBI cause a breach of the debt covenants?
Revealing Australia's most inaccurate balance sheets
When equity markets plunge by 50% from their peaks, anyone who bought anything near the top of the boom is going to be sitting on a huge book loss now. The challenge now is for incumbent directors, managements and auditors to simply face up to reality and come clean. We hadn't really hit the worst of the crisis when the full year accounts were released in August, so this puts enormous focus on the upcoming interim results announcements.
The audit profession was largely missing in action when it came to Centro, Allco, MFS and ABC Learning, and we clearly have a case of massive fraud involving the two-bit audit firm that was complicit in Bernie Madoff's $US50 billion Ponzi scheme. Indeed, The Wall Street Journal's lead story this afternoon includes the following:
Authorities are trying to determine who helped Mr Madoff carry out what they say appears to be at least a 30-year scheme that may have caused at least $50 billion in losses. They are seeking information from the accounting firm (Friehling & Horowitz), that handled Mr Madoff's audits for decades and are examining the role of Frank DiPascali, who dealt with client accounts and worked at Mr Madoff's firm for more than 30 years, said a person familiar with the matter.
"If you wanted anything, a new account, money in, money out, you called Frank," said one Madoff investor. "Nothing moved in that office without him, operationally," this person said.
"Frank DiPascali would like to see investors get back whatever they can," said Marc Mukasey, a lawyer for Mr. DiPascali. He declined to comment further.
Whilst we're not for a moment suggesting any fraud in Australian public company accounting, here is a list of some of the companies that clearly need to take an axe to their respective balance sheets in the coming weeks:
The lonely $8 billion-plus club
Wesfarmers, $8.6bn: After paying a ridiculous debt-funded $18 billion for Coles, the market capitalisation of this once great industrial conglomerate has plunged to only $11 billion. Will Ernst & Young's signing partner Sean Van Gorp force some massive write-downs in February given that he certified the business had net assets worth $19.59 billion in August? This $8.6 billion gap is the largest in the Australian market at present and only AMP has ever been more inaccurate on the downside.
Between $2bn and $5bn over-valued
Centro Properties Group, $4bn: shopping centre write-downs sent it to a staggering net loss of $2.055 billion for the full year after notching up a $1.11 billion in loss in the first half. However, it still claims to have $20.5 billion in assets supporting its $16.4 billion in debt, giving it net assets of $4.1 billion when the market cap is just $62 million.
GPT, $4bn: only managed to come up with a loss of $68 million for the first half of 2008 which left its claimed net assets of $8.15 billion double its current market cap of $4.15 billion after the recent $1 billion-plus capital raising. The old Macquarie auditor David Armstrong from PwC signed off on this.
Macquarie Infrastructure Group, $3.1bn: claims net assets of $6.68 billion when market cap is now down near $3.6 billion. Wayne Andrews from PwC is the auditor.
Goodman Group, $2.9bn: the industrial property giant and its auditor, John Teer from KPMG, claim to have net assets of $4.7 billion when the market's current assessment is $1.85 billion.
Centro Retail, $2.76bn: declared a full year loss of $887 million after sweeping shopping centre write-downs, but still claims to have net assets of $2.89 billion when market cap is only $125 million.
Fairfax Media, $2.6bn: the media giant reckons it is worth $5 billion when the market has settled on about half that at $2.4 billion. Clearly, those $6.3 billion in intangible assets on the balance sheet should be written down. Auditor Christopher George from Ernst & Young was asked about this at the recent AGM but he wasn't allowed to answer.
Babcock & Brown, $2.44bn: after muted write-downs which prevented the declaration of a loss in the June half, Babcock & Brown is now claiming to have net assets of $2.5 billion when its market capitalisation is only $60 million.
Macquarie Airports, $2.32bn: claims net assets of $6.2 billion when market cap is $3.88 billion. EA Barron from PwC is the auditor.
Mirvac, $2.2bn: failed to report a big loss for 2007-08 but then did an emergency capital raising and now has a market cap of $2.2 billion whilst claiming to have $4.41 billion in net assets.
Between $1bn and $2bn
Paperlinx, $1.5bn: auditor Peter Jovic reckons this Amcor spin-off is worth $1.924 billion when the market rates it at just $419 million given the excessive debt on the books.
Bluescope Steel, $1.5bn: claims to have net assets of nearly $4 billion, but the market capitalisation is now down to $2.5 billion.
Babcock & Brown Power, $1.35bn: big write-downs triggered a net loss of $426 million as it seeks independence from the parent and fired both the CEO and finance director. However, auditor Marc Upcroft from PwC has somehow agreed to claims that net assets are now $1.4 billion when the market cap is down to $54 million.
Pacific Brands, $1.2bn: the board and auditor reckon the business is worth $1.33 billion but with $800 million in debt the market's assessment is down to just $161 million.
FKP, $1.15bn: auditor Grant Saxon from accounting firm PKF (that's FKP backwards) reckons this retirement village play and property developer is worth $1.34 billion when the market valuation is currently $155 million. Oh dear.
Between $400m and $1bn
QANTAS, $830m: they claim their worth is around $5.73 billion, but the reality is a market capitalisation of about $4.9 billion.
Straits Resources, $820m: claims to be worth $1.04 billion when the market reckons $220 million.
Seven Network, $800m: claim their worth is nearly $2 billion, but the reality is a market capitalisation of $1.2 billion.
Transpacific, $650m: claims to be worth $1.5 billion, but the reality is now a market capitalisation below $850 million, so maybe some of those high-priced acquisitions will have to be written down. Had a tiddler auditor in Mr R Forbes from Bentleys.
Emeco, $530m: this teetering mining equipment player claims to be worth $701 million when the market cap is down to $174 million. The auditor is Brett Fullarton from KPMG.
Challenger Infrastructure Fund, $520m: claims to be worth $1.08 billion when the market capitalisation is $562 million.
Prime Trust, $480m: this retirement village play chaired by Dr Michael Wooldridge is capitalised at just $52 million when the latest accounts claim it is worth $530 million
Externally managed funds the biggest offenders
There will doubtless be many more entries that we've missed, so please send through other suggestions to stephen@maynereport.com. I'm in the process of adding numerous other Allco, Babcock, Macquarie and Multiplex vehicles to the final list. Indeed, the common characteristic with most of the biggest debacles is external management where the huge conflict existed to maximise fees through gearing up into more and more assets.
However, you'd have to agree that we are in unprecedented territory right now. Never before have Australian balance sheets been so inaccurate and we're about to see auditors come under enormous pressure to impose write-downs.
Indeed, many of the above listed companies won't want to finish up on this list tracking the claimed net assets when companies actually collapsed. The bigger that number the more likely auditors and directors will be sued.
Where this issue gets really tricky is with the banking covenants because you don't want to be the auditor that sends a company under. All of which is food for through for Australia's top auditors as they tuck into their Christmas turkey on Thursday.
That's all for now.
Have a very merry Christmas and just keep doin' ya best,
Stephen Mayne
* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.