According to the Global Information, in the years from 2005 to 2014 many majors companies in the world collapsed due to frauds and material misstatements in the financial reporting. The fallback of many companies like ABC Learning Center led to Global crisis in the economy in the period of 2008 onwards. To understand this, the statement has been prepared with the title Fallback of ABC Learning Center and Key Audit Matters. The title has described the main intentions for which the statement has been prepared and presented. The fallbacks warn the authorities regulating the financial reporting and authorities has increased the role and responsibility of both the management of the company and the auditor of the company before presenting any information to any stakeholder.
The statement has been prepared with appropriate headings and subheadings which detailed the full purpose of the statement. The first section of main body describes the information about the company and its working along with the deficiencies which led to fallback of the company. The next section describes the new developments in the auditing field which enhances the quality of the reporting and what can be done in the company to prevent the fallback. The statement has ended with proper conclusion and recommendation. The statement has been prepared using the primary and secondary source of information available on reliable sources.
Information About Company
One of the biggest companies in Australia is ABC Learning Centre Limited which is engaged in providing the services related to child care facilities in Australia as well as other countries of the world. The company was incorporated in Australia in 1981 as the laws and regulations applicable in Australia and enhances its business operations in USA and New Zealand. The company is listed in ASX-Australian Securities Exchange in March, 2001 and after that the success story of the company has started which led the share price of the company to go from ground level to sky and the success story continues until 2008.
The company started its operations with providing the child care facility to children up to 5 years in age which before the start of the primary school. The company also providing the care services for child for the time after school and before going school and also in the holiday period. The companies by its teachers help the children to learn the basic education and enhance the interpersonal skills of the child. In the center, the company provides different activities and games for different age group children and helps them to understand the basic things with the help of these activities and also provide the food facility for children. After 5 years of incorporation, in 1995 the company has opened the Institute namely National Institute of Early Childhood Education to educate the trainers about the child care. This shows that the company has growth and expansion from its start only and wants to expand in different parts of the world. In 2005, the company tries to expand its operations by providing the primary school education along with child care facility in combination with Judius Propriety Limited. But unfortunately in 2008, the company has fallback and comes to end with winding up.
Causes For Fallback
The company ABC Learning Center Limited was growing at faster pace during 2000 to 2005 and has acquired more than 15% of the market capitalization in Australia (Bajada and Trayler, 2010). The following the causes for its fallback in 2008 and went into liquidation:-
Wrong Accounting Treatment– The major cause for fallback of the company is the wrong accounting treatment of different items in the financial statements of the company by its management which led to accounting frauds. The followings are the instances where the company has done wrong accounting treatment:-
The most important cause for fallback of the company is wrong accounting for intangibles which are generally represented as licenses obtained by the company for running child care facility. As per AASB 138, if any cost has been incurred by the company for acquiring any right or permission then that right is considered as intangible asset because it does not have any physical existence and will provide the economic benefit in near future. Intangibles as per AASB 138 shall be recognized in the books at cost or at revalued value. The cost should be the amount paid for acquiring the asset by the company should be recorded in the books. If the intangible has fair market value which means they can be traded in market at certain value then the intangibles should be recorded at revalued valued in the books. The company was following the wrong policy in recording the license in books at revalued value without considering the fact they are not tradable in the market and has not possessed any market value. The company and its management wrongly used the rules laid for intangible and revalued its licenses on irregular time intervals resulting in increase in Total assets of the company which comprises more than 75% value only of licenses (McRobert, 2009). Also, according to AASB 138 revaluation of intangibles can only be done if the non revaluation can hamper the financial health of the company but the company has done revaluation without considering the fact that the licenses become obsolete over a period of time. As a result, ASIC has said the ABC Learning Center Limited is indulge in false practices of accounting and the financial statements of the company contained the misstatements which the material for decision marketing (Thomson, 2008).
The wrong accounting treatment of transactions which have occurred between related party. The company and its management have siphoned off its funds in related parties by entering into transactions with related parties. The company has $ 27000000 to Austock Company as brokerage charges in which the Mr Eddy is the shareholders who is the title-holder of the company. Also, the company has paid $ 74000000 to Queensland Maintenance Services as maintenance charges in which relative of title holder is major shareholder. In this manner the funds of the company has been diverted to other entities without proper accounting about them (Sumsion, 2012).
Corporate Governance letdown – Corporate governance refers to the modes through which company and its process, actions and procedures can be measured in accordance with different policies and strategies as framed by the company and its management time to time. According to information that has been made available on secondary sources it said that the major cause for fallback of the company was its title holder Mr Eddy Grooves. Mr Grooves always take decisions about the working of the company at his own discretion without taking into account the structure and size of the company. As company expansion has happened then the decisions regarding the company’s action should be taken in consultant with board rather than taking them on discretion. The following are the flaw that shows poor Corporate Governance by the company has been followed:-
Expansion of the company has been done in exchange of the quality of services provided by the company for child care. The employees and trainers are performing as per the quality standard set for the company. The title holder has not considered the same fact before entering into any new expansion contract (Penn, 2011).
The corporate governance report of the company always states that the company had not entered into any related party transactions with any of the entity but the in actual the fact was wrong. The company had entered into numerous related party transaction and the management as well as auditor have not disclosed the same fact in annual reports of the company.
In the year 1991, the Australian government has changed its policy and allowed a grant for the entities that were in business of child care facility whether profit making and nonprofit making. The company and its management have not taken the benefit of this scheme and rather investing different company in form business combination for expansion of its operations in different areas by investing more value than their asset value.
Faults in Auditing- The auditor of the company has gave unqualified audit report for continuously year to year without taking into account the wrong accounting treatment done by the company in relation to intangibles and related party transactions. The auditor has not disclosed the facts related to factors hampering the Going Concern and Corporate Governance policies of the company. In 2008, the company has changed its auditor to Ernst and Young but they have denied in giving audit report without correcting the financial statements of the company. The previous auditor has not considered the facts that intangibles should reinstated and should be shown at correct value so that profits can be ascertained correctly and share price should be at correct value.
Unqualified Report By Auditor
Unqualified audit report means that the auditor has given opinion that the financial statements are free from any material misstatement and represent the true and fair view about the affairs of the company. In any fallback, the auditor and his reporting about the company is most important factor as it validates the information provided by the company to its stakeholders. In the fallback of ABC Learning Center Limited, the auditor has issued unqualified audit report for previous years prior to fallback which misleads the investors. The following can be considered as causes to issuing unqualified audit report by auditor:-
The auditor has considered and relied upon the accounting policies followed by the company’s management in relation of intangibles and has not considered the fact that treatment of intangibles has not done as per AASB 138
The auditor has received handsome remuneration for providing the unqualified opinion.
Full professional due and care has not been followed by auditor in reporting the affairs of the company as the auditor even has not mentioned that the licenses owned by the company contains more than 50% of the total value of the assets of the company which in reality never increase in fair value (Kachelmeier, Schmidt and Valentine, 2016).
Australian Standard On Auditing -701
Auditing has major impact in authenticating the financial reports prepared as per Corporation Act, 2001 and AASB principles and guidelines. Audited Financial reports are used by different stakeholders to form the decisions regarding the company as the auditor is considered as external independent party who has professional skills to assess the financial reports. With passage of the time, the need for new developments in audit is required and as a result ASA 701 has been introduced and become applicable from 2015 which enhances the roles and responsibilities of the auditor. The major reason for introduction of this standard in auditing guidelines to prevent the fallback of the companies due to lack of information provided by auditor in the audit report and not establishing the liability of auditor for not communicating the indicators of risk. By this standard, the auditor has to report the Key Audit Matter in his independent audit report and not doing so will enhance the chances of action against him (AASB, 2015).
Content And Conditions Of Asa 701 Applicability
The foremost objective of this standard to assess the key audit matter by auditor and after assessing the auditor should include those matters in the audit report which are the part of company’s annual report.
The auditor has to consider and identify the affairs of the company which has high degree of risk and should be communicated by the shareholders to auditor while conducting and performing the audit function of the company (McKee, 2015). For assessing key audit matter the auditor has to consider the following:-
- Highly risky areas which require attention as per Auditing Standard 315
- Areas in which the management of the company has used an accounting estimate like life of an asset
- Any matter transaction or event that has happens during the course of audit.
After considering the above, the auditor has to use his professional judgment and skill to identify which areas needs reporting in audit report to be reported as Key Audit Matter. The auditor should not provide any separate opinion on the Key Matters identified and reported rather the auditor should the degree of risk associated with Key Audit Matter for better decision making (Cordos and Fülöpa, 2015).
Communicating The Important Audit Matters
The fallback of ABC Learning Center Limited may not happen in 2008 if the Auditing Standard 701 has become applicable before 2007 and the Global crisis could be saved. The audit report of the company should include the following as per the requirement of the ASA 701 and the preventive action can be taken by investors on the information supplied by auditor:-
Treatment of Intangible Assets in Financial Statements – The independent audit report by auditors should include that the company has been following the revaluation basis for valuing the intangible assets like licenses in inappropriate manner which is the violation of the accounting treatment for intangibles suggested as per AASB 138.
Faster pace Growth – The auditor should informed in his audit report that the company is following different policies to achieve the growth at faster pace which can harm the basic assumption of Going Concern in coming period and has high chances of risk for the investment made in company by investors. (Masytoh, 2010).
Related Party Transactions – The auditor should include in his audit report about the transaction entered by company with different entities in which the title holder of the company has substantial interest. The related party transactions have high risk of manipulation of accounts and funds by the management and can mislead the investors of the company.
The financial reports and the auditor’s report are basis for company’s performance and investment in the company. From the statement, it is concluded that the Auditor has helped the management of the company to hide the facts about the company’s performance and accounting frauds which mislead the investors and share price has unexpectedly rise. Also, there is no such guidelines as well in past which can establish the liability of the auditor about reporting the misstatements. So, the fallbacks happen with the collision of management and the auditor of the company.
It is recommended from the statement that the duties of the auditor should be fulfilled in appropriate manner with full professional ethics and dedication. The auditor should disclose all information which can affect the stakeholders’ decision and company’s performance so that fallback can be prevented. Also, from the time to time the government authorities should make new rules and regulations for the benefit of the society and business entities.
AASB, (2015), “ASA 701, Communicating Key Audit Matters in the Independents Auditors report”, available on https://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf (accessed at 17/09/2017).
Bajada, C. and Trayler, R., 2010. How Australia Survived the Global Financial Crisis. The Financial and Economic Crises: An International Perspective, Edward Elgar: Cheltenham, UK and Northampton, USA, pp.139-154.
Cordos, G.S. and Fülöpa, M.T., 2015. Understanding audit reporting changes: introduction of Key Audit Matters. Accounting and Management Information Systems, 14(1), p.128.
Kachelmeier, S.J., Schmidt, J.J. and Valentine, K., 2016. The disclaimer effect of disclosing critical audit matters in the auditor’s report.
Masytoh O, (2010), “The analysis of determinants of Going Concern Audit Report”, Journal of Modern Accounting and Auditing, Vol 6(4), pp 27-36.
McRobert, A., 2009. ABC Learning Centres Limited-did the annual reports give enough warning?. JASSA, (1), p.14
McKee, D., 2015. New external audit report standards are game changing. Governance Directions, 67(4), p.222.
Penn, H., (2011), Gambling on the market: The role of for-profit provision in early childhood education and care- Journal of Early Childhood Research, 9(2), pp.150-161.
Sumsion, J., 2012. ABC Learning and Australian early education and care: a retrospective ethical audit of a radical experiment. Childcare markets local and global: can they deliver an equitable service, pp.209-225.
Thomson, J., (2008), “Five lessons from the Spectacular fall of Eddy Grooves”, available at https://www.smartcompany.com.au/finance/five-lessons-from-the-spectacular-fall-of-eddy-grroves.html accessed on 17/09/2017.