True and Fair Views of Financial Reporting - Case Study Example

Name: Student number: Name of Lecturer: Subject: TABLE OF CONTENTS 1.0 Introduction of causes of financial problems. 3 1.1 Hastie Group Ltd 3 1.2 ABC Learning Centre 4 1.3 Centro properties Ltd 5 3.0 Similarities and differences in the three cases. 7 1.0 Introduction of causes of financial problems. 1.1 Hastie Group Ltd Hastie group failed considerably due to poor management of some of its major international operations and also the claims that it’s directors would have to some extend breached their legal duty of giving true and fair view of financial statements (PPB , 2011) The decrease in the company financial performance can be attributed to poor retentions of top management and series of acquisition which was just but some of the signs of poor strategies implementation, mismanagement and poor monitoring by the board of directors. In section 438B of the Company Act, it normally requires the directors of a corporation and its administration to vanish the administrator with financial statement in a prescribed format outlining clearly the financial position of the company (PPB, 2011). This includes the company net book values and estimated realizable values for all known assets together with details of known liabilities of the company. In Hastie case, the board of directors have failed and refused to furnish the receivers with this report and this simply signifies extend through which the directors of the companies are irresponsible (PPB, 2011). In the view of the administrator, the Hastie group did take high acquisition programs after the listing of the company in the Australia Stock exchange in early 2005. Eight of the total acquisition was worth over 278 million dollars and they were made in year 2008 and financial year 2010. 154 million dollars funding were from equity while 123 million dollars were debt funding (PPB, 2011). By the financial year 2011 the company turn over was over 1.8billion, 7000 employees, constructions work in progress was over $ 2.9 billion employed asset was over 1billion dollars. The collapse of the company was also due to back firing of ambitious acquisition which the company adopted. It lost close to 26 to 68 million dollars per annum due to this plan (PPB, 2011). 1.2 ABC Learning Centre ABC learning centre which was one of the largest childcare service providers in Australia collapse under unclear circumstances in the year 2008 when it underwent voluntary receivership. This followed the appointment of administrator and the manager of the company by the corporate syndicate bank (Colin, 2009). ABC Learning centre operates children day care. This company was one of the listed companies in the Australia Stock exchange by the year 2001 and its market capitalization was approximately over $25 million. The company paid over 548,820, 427 ordinary shares which fully paid before appointment of the administrator by the year 2008. The trading of its share were suspended from the stock exchange on the request of the companies directed later the company was deregistered from the stock exchange due to insolvency (Colin, 2009).. The last financial reports of the company was given in February 2006 when the company was giving out its last financial for the half year ending 2007. At this particular point, the financial reports through the advice of auditors could explain the underlying environmental danger which includes political, social and financial disaster (FRC, 2011). It important to remember that all of those high-octane profits that supercharged the company's shares - and put Groves top of the BRW Young Rich list - began to combust in these accounts under the scrutiny of a new audit team from Ernst & Young (Colin, 2009). The company was involve in reporting high profits which was false hence could not represent true and fair view of financial statements and the financial position of the company. The company actually sought a rapid expansion in the market share and with them there was high risk involves and was not reflected in the company financial statements. This lack of reflection of true and fair view in reporting of the financial position of the company, omission of major trading activities in the financial statements, ignoring all expenses resulted into high profits from the company. This precipitated the Company fall (Colin, 2009). 1.3 Centro properties Ltd The companies Act 2001 normally requires the corporations to comply with two accounting provisions in preparation of their financial statements (Mathews, 2009). They include; i. Accounting standards which is in section 296 of the Act and ii. True and fair views provision which is in section 296 1A of the Act The Centro Company mismatched the liabilities in their classification in 30th June 2007 report of financial statements (Mathews, 2009).. Significant numbers of liabilities were being described as non current liabilities yet in the real sense they were current liabilities, this implied that the financial statements were wrongly prepared. It is under these circumstances where it was concluded that the financial statement of 30th June 2007 of the company did not represent true and fair view of the company financial position and the reflection was that the directors and the chief financial officers were not taking adequate care while they were signing those statements (Stephen and Richa, 2011). In this case, directors are not only required to give a declaration concerning the financial statements of their respective companies. In there declaration, they need declare solvency status of the company and statement showing true and fair view on the performance of the company financially and also to clearly according to the law and regulation state the financial position of the company and should not in anyway delegate this duty to the management. It is the duty of directors to read the financial statements in totality and according to their understanding according to the company trading activities and inquire from the relevant authorities about the financial position of the company (Stephen and Richa, 2011). 2.0 Disclosures issues in the financial reporting of these three companies In the Centro Company Limited case, major disclosure problems includes wrong disclosure of the company state of liabilities which the judge raised questions with. The directors were found to be not diligent in the disclosure and classification of liabilities according to section 180 of the Act. According to section 281 of the Act and international accounting standards, liabilities which their repayment period are more than one year or 12 months should be reported as long term liabilities or non current liabilities while liabilities of whose repayment period is less than one year are classified as short term liability(FRC, 2011). This was not the case with the Centro limited and in my opinion; this is one of the major disclosure problems which the Company was having. In the case of Hastie Company limited, the directors were offering securities when the disclosure documents contained misleading or deceptive statements. The irregularities in the accounting statements include overstating the company inventory value in the United Kingdom which gave untrue view of the company asset position. The company was also involved in un- procedural expansion and acquisition of shares in the market. In my opinion the poor acquisition procedures, overstating of the company asset base more so inventory are among discrepancies in the disclosure of accounting information (FRC, 2011).. In the ABC learning Centre, the Company was marked with wrong asset valuation through which they did overstated their actual asset. The disclosure of revenue was also erroneous with expenses being lowered in order to state high revenue to boost investor’s confidence in the company’s shares. This is clearly indicated with high expansion rate of ABC limited. Wrong asset valuation, poor revenue recognition method are among poor disclosure presented in this case hence the responsibility to state true and fair view of financial position was not met (FRC, 2011). 3.0 Similarities and differences in the three cases. Section 393 of the corporation Act of 2006 do requires the directors of the company not to append their signatures on the financial reports and accounts if those reports in there opinions does not give true and fair view of the company financial position. This is a fundamental requirement in both the Australia and European Union financial reporting law (FRC, 2011). In the three Companies it is quite eminent that both the directors appended their signatures to the accounts of the companies even if they were not satisfied that the accounts were not properly prepared and were not reflecting true and fair view concept (Rick, 2011). Fundamental requirements for financial reporting and accounts did not change the view to give true and fare view with the introduction of the international financial reporting standards (IFRS) in Australia. This is confirmed in the Martin Moore QC ruling in the year 2008 where he confirmed that true and fair view of reporting concept is mandatory, though the way this rule may be presented may differ slightly, it remains unchanged across the board. The three companies did ignore the basic requirement with ABC failing to follow key concept in revenue recognition concept hence were reporting high profits, and the directors failing to disclose immense political, financial and social risk which the company was facing hence failing to give true and fair view of the financial position of the company (Colin, 2009).. The Centro group of companies did fail to disclose or gave wrong classification of liabilities according to the requirements of the accounting standards which states that liabilities which their repayment period is less than one year should be current liabilities while those with more than twelve months repayment period are non current liabilities hence their reporting method failed to present true and fair view of the company financial position. While the third company which is Hastie group failed to follow proper investment criterion while seeking their increase in share market base. They failed to give true and faire view of the company trading position (PPB, 2011).. Directors of these companies are expected to meet various obligation which ranges from legal to commercial expectations of their decisions. The legal obligations in most cases outlined good corporate governance and practices and these also must be well balanced with the commercial decisions which the directors of the companies have to take. In both cases more so that of the Centro limited shows that directors cannot wholly relies on the; Chief executive officer and the chief financial officers compliance declaration according to section 295A of the Act, their declaration simply enhance accountability and transparency on their part but does not provide any defense for the directors for their negligence incase of (Colin, 2009).. Need to have a very active and serious audit committee within the company does not provide defense for directors of not executing their duties. The preliminary reports on the case of Hastie group of companies raise more questions than answers on the role of audit committee more so in the preparations of financial reports of 2008 and 2009(Mathews, 2009). This simply shows that the Directors cannot fully relies on the auditors report but they need to do their work with due diligent and be fully satisfied their the financial statements represents true and fair view of the company state of i. Assets ii. Liabilities iii. Share capital iv. Owners equity and v. Other disclosures Both the international financial reporting standards (IFRS) and international accounting standards (IAS) are applicable to some extend in all the countries and should be adopted by the companies in their reporting. The concept of true and fair view is also supported by other concept like prudency in reporting, consistency, materiality and substance over form concept in accounting. References Colin Kruger (2009) Lessons to be learnt from ABC Learning's collapse ttp://www.smh.com.au/business/lessons-to-be-learnt-from-abc-learnings-collapse- 20090101-78f8.html#ixzz2LrZMP0g2 Financial Reporting Council (FRC), 2011, True and Fair View Reporting Mathews Folbigg, 2009, Raising the bar on director’s duties - the implications of the Centro Case PPB advisory 2012 Hastie group limited and specific subsidiaries (administrators appointed) (‘Hastie group’ Rick Anthon (2011) the implications of the Centro case for directors Corporate Law Bulletin Stephen Walmsley and Richa Puri, 2011, The Centro decision ASIC v Healey & Ors [2011] FCA 717 Read More