VOLUME EIGHTEEN
EXTERNAL AUDITS OF BENEFICIAL FINANCE CORPORATION LIMITED

 

 

CHAPTER 60
THE EXTERNAL AUDITS OF BENEFICIAL FINANCE:
FINDINGS AND CONCLUSIONS

 

 

TABLE OF CONTENTS

 

60.1 PURPOSE OF CHAPTER

60.2 PLAN OF CHAPTER

60.3 REPORT IN ACCORDANCE WITH TERM OF APPOINTMENT B

60.4 OBSERVATIONS
60.4.1 OFF-BALANCE SHEET ENTITIES
60.4.2 SUBMISSIONS OF PRICE WATERHOUSE
60.4.3 SUBMISSIONS OF DIRECTORS

 

 

 

60.1 PURPOSE OF CHAPTER

 

Chapter 55 - "The External Audits of Beneficial Finance: Background Information" presented background information regarding the statutory obligations of Beneficial Finance and the auditor of Beneficial Finance respectively, in relation to the preparation and audit of the accounting records and annual accounts of Beneficial Finance, and of the Beneficial Finance Group. That Chapter also outlined, in general terms, the elements of an audit process that will characterise an appropriate and adequate audit, governed principally by standards and requirements of the Professional Accounting Bodies.

Chapters 56 - "Review of the 1985, 1986 and 1987 External Audits of Beneficial Finance" to Chapter 59 - "Review of the 1990 External Audit of Beneficial Finance" reported on matters arising from the assessment of the audit process applied by the external auditors in the audit of the accounting records and accounts of Beneficial Finance, and of the Beneficial Finance Group, for the years ended 30 June 1985 to 1990. Each Chapter sets out a conclusion as to the appropriateness and adequacy, or otherwise, of the audit process undertaken in each year.

This Chapter sets out my overall finding and conclusion on the appropriateness and adequacy of the external audits of Beneficial Finance and the Beneficial Finance Group, being a significant element in the accounts of the Bank, for the purposes of Paragraph B of my Terms of Appointment.

This Chapter also sets out my observations as to certain implications of my findings and conclusions.

The external audit in respect of the year ended 30 June 1991 is outside the scope of my Terms of Appointment.

 

60.2 PLAN OF CHAPTER

 

The Chapter comprises the following principal segments:

(a) Report in Accordance with Terms of Appointment.

(b) Observations.

 

60.3 REPORT IN ACCORDANCE WITH TERM OF APPOINTMENT B

 

In my opinion, for the reasons set out in Chapters 57 - "Review of the 1988 External Audit of Beneficial Finance" to Chapter 59 - "Review of the 1990 External Audit of Beneficial Finance", the audit opinions expressed by Price Waterhouse on the accounts of Beneficial Finance and of the Beneficial Finance Group for the years ended 30 June 1988 to 1990 inclusive were inappropriate, and the carrying out of the audit process leading to those opinions was inadequate, in the specific respects set out in the those Chapters.

In my opinion, for the reasons set out in Chapters 57 - "Review of the 1988 External Audit of Beneficial Finance" to Chapter 59 - "Review of the 1990 External Audit of Beneficial Finance", the accounts of Beneficial Finance and the Beneficial Finance Group for the years ended 30 June 1988 to 1990 inclusive failed to give a true and fair view of the results and affairs of Beneficial Finance and the Beneficial Finance Group.

The inadequacies are in summary:

(a) The failure to disclose, by way of note to the accounts in each of the years ended 30 June 1988 to 1990 inclusive, the impact of the results and affairs of the off-balance sheet entities on the results and affairs of the Beneficial Finance Group, in particular, the nature and extent of Beneficial Finance's direct property exposures through the off-balance sheet entities, and their contribution of a $7.7M loss to the Beneficial Finance Group result in 1990.

(b) The failure to disclose, in the accounts for the year ended 30 June 1988, the $8.3M profit from Blossom Park as an abnormal item.

(c) The failure to make a doubtful debt provision in the accounts for the year ended 30 June 1990 in respect of Beneficial Finance's $24.2M exposure in respect of Somerley.

Other than in the specific respects referred to above, the external audits of the accounts of Beneficial Finance and the Beneficial Finance Group for the years ended 30 June 1985 to 1990 inclusive were appropriate and adequate. Planning and execution of the audits, and preparation of working papers, was generally of a high professional standard.

In Chapter 55 - "The External Audits of Beneficial Finance: Background Information" I set out the position as I understand it governing auditors' responsibilities. In reaching the conclusion which I have stated above, I have formed the opinion that the external audit was inappropriate and inadequate by reference to the ordinary standard of skill, care and caution that a reasonably competent auditor would bring to bear. I have sought not to determine these matters with the benefit of hindsight, but to assess the audits having regard to applicable professional standards and practices, and to matters which were known, or ought reasonably to have been known, to the auditor in the years in question.

 

60.4 OBSERVATIONS

 

60.4.1 OFF-BALANCE SHEET ENTITIES

I accept the submissions that were put to me by the Bank in relation to the following matters:

(a) There was no co-ordinated approach to the creation of the off-balance sheet structure, and it largely grew in an uncontrolled fashion.()

(b) Off-balance sheet entities were not created to hide non-performing assets - the assets acquired off-balance sheet were considered to be good investments or business propositions.()

(c) However, the majority of joint ventures, many of which were entered into through off-balance sheet entities, proved to be ill founded.()

(d) The Bank's present policy is that no new joint ventures of the type undertaken by Beneficial Finance will be entered into,() and that the off-balance sheet entities will be eliminated as soon as feasible.()

(e) All controlled off-balance sheet entities have been brought onto the accounts of the Bank Group since June 1991.()

(f) Beneficial Finance lacked adequate management information systems to provide basic balance sheet and profit and loss statement information concerning the assets under the control of Beneficial Finance's management, which included off-balance sheet entities and joint ventures, and this contributed to the losses reported by Beneficial Finance.()

I am satisfied that Price Waterhouse did make efforts to ensure that management prepared useful aggregate balance sheets and profit and loss accounts, including the off-balance sheet entities, for reporting to the Beneficial Finance Board. I am also satisfied that Price Waterhouse did question the legal opinions relied upon by Beneficial Finance to exclude the off-balance sheet entities from the statutory accounts of the Beneficial Finance Group. Nevertheless, as noted in Chapters 57 - "Review of the 1988 External Audit of Beneficial Finance" to Chapter 59 - "Review of the 1990 External Audit of Beneficial Finance", it is my finding that these efforts of Price Waterhouse did not achieve appropriate disclosure .

60.4.2 SUBMISSIONS OF PRICE WATERHOUSE

Price Waterhouse have submitted that it could not be said that any inappropriateness or inadequacy in the external audit of Beneficial Finance which I might find, contrary to their submissions, could have caused a loss to the Beneficial Finance Group because the matters noted in my report above in accordance with Term of Appointment B were known to management and the Beneficial Finance Board.() In noting these submissions I am not to be taken to accept them in any way.

Price Waterhouse have submitted that the lack of any note to the accounts concerning the off-balance sheet entities could not have in any way caused surprise to management and the Beneficial Finance Board since management and the Board had before them extensive information about the nature and extent of the activities of the off-balance sheet entities.()

In relation to the failure to disclose the Blossom Park profit in the accounts for the year ended 30 June 1988, Price Waterhouse submit that the non-disclosure did not in any way affect the truth or fairness of the accounts. As noted in Chapter 57 - "Review of the 1988 External Audit of Beneficial Finance", I do not accept that view. According to Board papers, the Board was advised on 25 March 1988 that Beneficial Finance had sold the Blossom Park land at a profit of $8.47M and that the land came into Beneficial Finance's possession in 1980 after a period of some seven years as mortgagee in possession.()

In relation to the failure to provide for the doubtful debt in respect of Somerley in the accounts for the year ended 30 June 1990, Price Waterhouse have submitted that evidence before the Royal Commission makes it clear that management and the Beneficial Finance Board were aware, in February 1990, of the potential loss on Somerley.() Price Waterhouse submitted that it was given in evidence before the Royal Commission that, on 12 February 1990, the Chairman of the Board, Mr D W Simmons, told the Premier of the State that Beneficial Finance could well lose $30.0M on the Somerley project, and it was described as a "potential disaster".()

I do not consider that I am required by my Terms of Appointment to make a finding on these matters.

60.4.3 SUBMISSIONS OF DIRECTORS

As noted above, I have concluded that the accounts of Beneficial Finance and of the Beneficial Finance Group, for the years ended 30 June 1988 to 1990 (inclusive) failed to give a true and fair view of the results and affairs of Beneficial Finance and of the Beneficial Finance Group. The obligation to prepare, and to cause to be prepared, accounts of a company which give a true and fair view of the results and affairs of the company and its subsidiaries resides with management and the Board. This does not relieve the External Auditors of their obligations.

My Terms of Appointment, however, do not require me to investigate and report on whether the steps taken by management and the Board with regard to the preparation of the accounts were appropriate and adequate. I make no finding with respect to this matter.

Submissions have been made to me on behalf of certain former Non-Executive Directors of the Bank Group to the effect that, if a Board appoints a person of good repute and competence to audit the accounts, then in the absence of a real ground for suspecting that the auditor is wrong, the directors will have discharged their duty to the company.() It has been submitted to me that the directors are clearly entitled to rely on the judgement, information and advice, of the auditor with respect to a company's accounts.() It has been put to me on behalf of the former Non-Executive Directors that they were entitled to rely, and did rely, upon the External Auditors of the Bank and the Bank Group.() For the reasons set out above, I do not consider that I am required by my Terms of Appointment to make a finding upon these matters. In noting these submissions, I am not to be taken to accept them in any way.