“The second reason is this,” Ramsay says. “Just look at all the class actions based on allegations of non-compliance with continuous disclosure: Centro for $200 million, Aristocrat, and the Australian Wheat Board – I have a list. This means companies have never been more sensitive.”
And, by making the disclosure immediately, Lend Lease avoided a double blot on its copybook – of making a mistake and then covering it up – had the issues been leaked to the market or media.
Reassuring the market
Lend Lease stood down four executives of Abigroup, and put its top executives in to take over the subsidiary’s management. There is no suggestion yet that Abigroup’s leaders have done anything wrong, but the move signals that the company takes the matter seriously, Ramsay says.
“They have been proactive on this,” he says. “The fact they have had four senior executive stand down, also sends a message to the marketplace that the company views it so seriously, even though we can’t quantify it yet, that until further info is obtained the senior managers stand down. That sends an important message.”
Time to chat with external auditor
As the company goes through its investigation, it will want to “have a chat with the external auditor” says Garland McLellan.
The auditor is KPMG. The firm has held the job since 1959, which is 53 years. There is no suggestion that KPMG has done anything wrong.
Ramsay says: “We have seen a flourishing debate on the issue of overfamiliarity. The issue is whether, through an extended period of time, that familiarity may lead an external auditor to occasionally miss things or not be as rigorous. That period of time [the 53 years] is unusual at this end of town, but one can’t automatically draw a conclusion that the period of tenure has led to problems.”
Garland McLellan says KPMG would have been rotating the partner leading the audit, as is good corporate governance practice. However, all audit committees and auditors are aware of the risks of overfamiliarity. She says: “That situation would smack of an auditor that could easily get very comfortable with their role. The difficulty for auditors is that when you have got a good client and you know they are serious – their systems are good, their training is good – it is hard to look diligently at every little thing.
“Having a client you don’t know very well, changes that. Your CFO hates it because you have to train the new auditor and you have to explain why you do things this way and that way.
“It is painful getting a new auditor, but we had a new auditor at Oldfields,” says Garland McLellan. Oldfields Holdings is a paint accessories company where Garland McLellan is a director. “It has been one of our best investments; they have trained our staff and we have trained their staff.”
Follow up
A good board will follow up any investigation into financial irregularities by asking how did this happen and where are the checks and balances. Garland McLellan says: “After you say the thank-you, boards need to ask how did this happen, what was going on at the time, what we have to do to make sure it doesn’t happen again.”
To prevent a repetition, or an occurrence in the first place, a company could decide to change the structure of its audit and risk committees. If they are separated, it means the risk committee can audit the audit committee’s systems. Together, the risk committee might spend too much time focused on financial risk, and neglect other risks.
But problems might indicate the need for a change.
McLellan says: “If you have had the same auditor for a long time, I would be inclined to change the structures, and get fresh eyes looking at the problems.”
