The Rise and Rise of Accounting Irregularities

In any given scenario, the primary responsibility of a CFO is to ensure the accuracy of the Company’s financial reports, and many are generously compensated to do this.

In an article in the AFR on 25 April 2024 the 10 Highest paid CFOs are revealed, ranging from a staggering $11.13m to a low of $3.84m, with the pay-packets of the top 200 CFOs having a median remuneration of $1.58m.

I don’t believe the amount one earns is related to one’s competence: after all there are lots of CFOs who are very competent and earning significantly less than these amounts and there are companies with very well-paid CFOs, who have had significant financial irregularities.

So how does one justify such lofty pay-packets?  The pay-packets should be reflective of several factors, including competence, the complexity of the job, the size of the organisation, expertise, responsibly, risk management ……. and the list goes on.

And why are there many ASX companies presenting financial reports which are later found to be incorrect.?

In the case of Phoslock, (see previous column) I raised the issue of the dubious accounting, and the role and responsibility of the Chair of Audit, with the recently appointed new Chair of the Board.  His response was “directors are part time with the Company, while management is full time. The Chair of Audit received a clean audit opinion from one of the world’s top 4 accounting firms, including their Beijing Office on the ground in China and to expect the Chair of Audit to have second guessed the accounting firm’s Audit Team is a big ask”. So clearly, he was blaming management (and by implication the CFO) and the auditing firm which I guess is fair enough.  His reason for keeping the Chair of Audit on the board was “they were the only member of the Board and management whose corporate memory dated back more than 2 years”. I am unsure what their corporate memory pertains to other than presiding over a massive fraud of which they were totally unaware.  

Like everything else, the competence of CFOs varies from the extremely competent to the not so competent.

Large companies are not immune from the type of issues raised in Phoslock, and when they do occur, there are always excuses such as ‘the organisation is too big, too many CFOs reporting to me and they should have detected the issues etc’. All good excuses: so where does the fault lie if not with the CFO; and what is the role of ASIC and the ASX in cases like these.

Is anyone ever held responsible, or is it the poor shareholders who always bear the pain whilst overpaid CFOs and CEOs literally sail into the sunset on their yachts?

On 1 March 2021, I met with Gary Rollo and Dominic Rose, portfolio managers at Montgomery Investment Management. When I mentioned I had shares in Dubber, Gary remarked that from his analysis, the Company’s narrative behind sales did not match the pattern of working capital movement, and that the debtors were growing faster than sales.  

I acted on Gary’s critique of the financial reports and sold all my Dubber shares. Fast forward to March 2024, some 3 years later, and Dubber appears to be missing $26.6 million and the co-founder of Dubber and a solicitor may have breached the Corporations Act in a suspected misuse of term deposits. Dubber announced to shareholders that an audit review of its half-year accounts flagged that funds which were held on behalf of the company by a third-party trustee were no longer available. How did a third party (Montgomery) know there was a problem 3 years before the company?

The issues raise a number of questions: Does a CFO know where all the cash is and is it under his control? Why are there such large amounts held by this third-party trustee? Surely a CFO should have all the cash accounted for and correct internal controls in place to ensure that vast amounts of cash cannot simply go missing. And where is the Audit Committee in all of this?

In yet another case where financial statements were questionable, in an article in Smartcompany.com.au titled Unpacked: The epic rise and dramatic downfall of Fitness Chain F45 dated July 18 2023, it states:

“F45’s FY22 financial report for December 31, 2022, still hasn’t been released (it’s now four months overdue). An update to the market just last week was that the delay was because the company discovered “material weakness” over its financial controls, and that the previously issued financial statements for the year-end December 31 2021, should no longer be relied upon. Not to put too fine a point on it, but it looks like the accounts are a complete shit show, and no one has any confidence in what numbers the business is actually doing.”

There appears to be a long list of other notable companies including BWX, Freedom Foods and NXL.

In Freedom Foods according to the AFR July 26, 2022 one of the big 4 Accounting firms accused Freedom Foods Group, which is now known as Noumi, of providing financial data that did not provide “a true and fair view” of the struggling company’s performance, as part of an ongoing class action brought by investors in the company. In stating the obvious, financial data is provided by the CFO and their team.

The Freedom Foods Group shareholders say accounting errors – such as failing to write off quantities of expired or obsolete inventory – overstated the company’s financial position between 2014 and 2020. The shareholders also say that Freedom’s longstanding auditor, failed to correct these mistakes while auditing Freedom’s annual and half-yearly reports.

Now I am really confused in this blame game. It is the CFO and their team’s responsibility to ensure financial data provides a true and fair view of the company’s performance but unequivocally, it is the Auditing firms responsibility to ensure the correctness of the information provided, otherwise what is the Auditing firms role? In my day, which I admit was in the last century, we would send in a few interns or first year students to do stock checks, look at the inventory and look for obsolete stock. Perhaps auditing has changed since then.

So, what is the role of the CFO, and what is the responsibility of regulatory bodies such as the ASX or ASIC in the above, and what should be done? Should legislation be enacted that when egregious accounting errors are discovered, all those in any way responsible, whether they are still with the company or not, including the CEO and CFO, are fined with an amount commensurate with the bonuses and salary they earned during this period.

And what about the proceeds of share sales during this period? There is no doubt that in the case of Phoslock, Laurence Freedman, the Ex-Executive Chair of Phoslock, should not be allowed to keep the $25.9m he reaped from share sales and similarly, the Managing Director should not be allowed to keep the $4.3m he reaped from his share sales during Aug 2019.

Author:  Jon Brett

Jon Brett is a Non-Executive Director of Corporate Travel (CTM) and Chair of the Audit and Risk Committee. Jon is also a Non-Executive director of Raiz Invest (RZI) and the NASDAQ listed Mobilicom.

Jon is the author of the very successful podcast series “The Taking of Vocus” which chronicles the extraordinary rise of Vocus, what went wrong with the M2 merger and concludes with the privatisation of Vocus. The podcast can be found here via LinkedIn: https://www.linkedin.com/in/jon-brett-95734732/