Australian Securities & Investments Commission v Companies Auditors & Liquidators Disciplinary Board
[2002] FCA 1066
•28 AUGUST 2002
FEDERAL COURT OF AUSTRALIA
Australian Securities & Investments Commission v Companies Auditors & Liquidators Disciplinary Board [2002] FCA 1066
AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION v COMPANIES AUDITORS & LIQUIDATORS DISCIPLINARY BOARD & ANOR
N 1039 of 2001LINDEN JOHN GULSON v COMPANIES AUDITORS & LIQUIDATORS DISCIPLINARY BOARD & ANOR
N 3001 of 2001WHITLAM J
28 AUGUST 2002
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
N 1039 of 2001
BETWEEN:
AUSTRALIAN SECURITIES AND
INVESTMENTS COMMISSION
APPLICANTAND:
COMPANIES AUDITORS AND
LIQUIDATORS DISCIPLINARY BOARD
FIRST RESPONDENTLINDEN JOHN GULSON
SECOND RESPONDENTJUDGE:
WHITLAM J
DATE OF ORDER:
28 AUGUST 2002
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1. The decision of the first respondent made on 27 June 2001 is set aside.
2.The application by the applicant for the second respondent to be dealt with under s 1292 of the Corporations Act 2001 is referred to the first respondent for further consideration according to law.
3. The second respondent is to pay the applicant’s costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
N 3001 of 2001
BETWEEN:
AND:
LINDEN JOHN GULSON
APPLICANTCOMPANIES AUDITORS AND
LIQUIDATORS DISCIPLINARY BOARD
FIRST RESPONDENTAUSTRALIAN SECURITIES AND
INVESTMENTS COMMISSION
SECOND RESPONDENTJUDGE:
WHITLAM J
DATE OF ORDER:
28 AUGUST 2002
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1. The proceeding is dismissed with costs.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
N 1039 of 2001
BETWEEN:
AUSTRALIAN SECURITIES AND
INVESTMENTS COMMISSION
APPLICANTAND:
COMPANIES AUDITORS AND
LIQUIDATORS DISCIPLINARY BOARD
FIRST RESPONDENTLINDEN JOHN GULSON
SECOND RESPONDENTN 3001 of 2001
BETWEEN:
AND:
LINDEN JOHN GULSON
APPLICANTCOMPANIES AUDITORS AND
LIQUIDATORS DISCIPLINARY BOARD
FIRST RESPONDENTAUSTRALIAN SECURITIES AND
INVESTMENTS COMMISSION
SECOND RESPONDENTJUDGE:
WHITLAM J
DATE:
28 AUGUST 2002
PLACE:
SYDNEY
REASONS FOR JUDGMENT
Introduction
These two applications for an order of review under the Administrative Decisions (Judicial Review) Act 1977 have been heard together. Matter no. N 1039 of 2001 is brought by the Australian Securities and Investments Commission (“ASIC”), and matter no. N 3001 of 2001 is brought by Linden John Gulson (“Mr Gulson”). Each proceeding relates to the decision of the Companies Auditors and Liquidators Disciplinary Board (“the Board”) made on an application by ASIC for Mr Gulson to be dealt with under s 1292 of the Corporations Act 2001.
ASIC applied to the Board on 14 June 2000. It alleged that Mr Gulson failed to carry out or perform adequately the duties of a registered auditor in his review of the consolidated accounts of Holyman Limited (“Holyman”) for the half-year ended 30 June 1997. Mr Gulson signed an unqualified review report on 5 September 1997. ASIC’s case against Mr Gulson was set out in a document dated 15 December 2000 entitled amended statement of facts and contentions. Two specific contentions were made in respect of matters that allegedly ought to have caused Mr Gulson to qualify his report. A hearing before the Board was held over four days in April and May 2001. On 8 June 2001 the Board published a written “decision”. The Board was not satisfied that Mr Gulson failed to carry out his duties as alleged in ASIC’s first contention. However, it concluded that the second contention was established and that in that respect Mr Gulson failed to carry out or perform adequately and properly his duties as an auditor. The Board pronounced no orders on 8 June 2001. It received submissions and evidence on 27 June 2001. Then, instead of suspending Mr Gulson’s registration as an auditor, the Board severely reprimanded him and required him to attend advanced level courses on accounting standards. It also required him to pay 25 percent of ASIC’s costs in relation to the hearing.
Acquisition of a Subsidiary
In 1997 Holyman purchased the whole of the issued share capital of Union Shipping Group Limited (“USGL”). Certain facts concerning this transaction do not appear to have been controversial before the Board. They should be briefly outlined.
In 1995 Holyman commenced discussions with USGL’s owners about the possibility of buying the assets and undertakings of USGL. At that time USGL was owned fifty-fifty by Brierley Investments Limited (“Brierley”) and TNT Limited (“TNT”). During 1995 and 1996 there were further discussions about Holyman purchasing the business of USGL or the shares in USGL.
On 3 December 1996 TNT announced that it had reached an in principle agreement with Brierley for the sale of its shares in USGL to Brierley. In February 1997 TNT and Brierley executed an agreement for that sale, which was completed in about March 1997.
On 10 June 1997 Holyman announced that it had agreed in principle with Brierley to purchase all the shares in USGL. A sale agreement was executed on 20 June 1997. It provided for completion to take place on or before 13 August 1997. The purchase price included a component to be calculated by reference to the results of USGL’s operating subsidiaries for the half-year ended 30 June 1997. On about 7 July 1997 the completion date was extended to 3 September 1997.
On 8 July 1997 Holyman issued a prospectus relating to a fully underwritten issue of converting preference shares. On 30 July 1997 an extraordinary general meeting of Holyman’s members passed a special resolution amending its articles of association to enable the issue of those shares. On 18 August 1997 and on 22 August 1997 Holyman issued supplementary prospectuses in relation to the proposed issue.
On 3 September 1997 Holyman completed the purchase of the USGL shares by paying Brierley a total price of approximately $65.2 million. Holyman used bridging finance to make that payment.
On 10 September 1997 Holyman issued 10,915,000 converting preference shares of $1.00 each at a premium of $3.50 per share thereby raising, after expenses, $45.8 million which it used to pay out the bridging finance.
Half-Year Consolidated Accounts
The consolidated accounts of Holyman for the half-year ended 30 June 1997 were dated 5 September 1997. ASIC’s first contention concerned an amount of $204,000 disclosed in the profit and loss account as the operating profit after abnormal items and income tax attributable to members of Holyman. Its second contention concerned the amounts disclosed in the balance sheet as provisions for current liabilities and as shareholders’ equity in capital and reserves.
The accounts included the following note:
“NOTE 2
ACQUISITION OF UNION SHIPPING GROUP LIMITED (‘USG’)The Company completed the acquisition of the Australian businesses of Union Shipping Group on 3 September 1997.
The assets, liabilities and results of operations of the Australian businesses of Union Shipping Group, acquired as at 1 January 1997, have been included in the 30 June 1997 half year financial statements. To effect this acquisition in the 30 June 1997 accounts, the fully underwritten prospectus issue of converting preference shares ($10.9 million share capital and $34.9 million share premium reserve intended to be allotted on 10 September 1997) and $19.4 million of borrowings have been accrued in the half-year financial statements.”
Note 7 to the accounts showed 10,915,000 preference shares of $1.00 each fully paid as part of the issued and paid-up capital at 30 June 1997. The note stated:
“On 30 July 1997 shareholders approved at an extraordinary general meeting the amendment of the articles of association to allow for the issue of non-redeemable converting preference shares. Converting preference shares and attaching options were the subject of a prospectus dated 8 July 1997. The company intends to allot 10,915,000 converting preferences shares and options on 10 September 1997.”
Note 11 to the accounts stated:
“NOTE 11
CONTROL GAINED OVER ENTITIES
Control Gained Name Date Control Gained Contribution Consolidated Profit After Abnormal Items and Tax Union Shipping Group Limited 1 January 1997 $2,051,000”
The directors’ report stated under the heading “Results” that the consolidated profit after tax for the half-year attributable to members of Holyman was $204,000. In their review of operations, they said that the Australian shipping businesses of Union Shipping Group were “acquired with effect from 1 January 1997”. Under the heading “State of Affairs”, the directors reported:
“On 30 July 1997 shareholders approved at an extraordinary general meeting the amendment of the articles of association to allow for the issue of non-redeemable converting preference shares. The company issued a prospectus dated 8 July 1997, a supplementary prospectus dated 18 August 1997 and a second supplementary prospectus dated 22 August 1997 for a non-renouncable issue of converting preferences shares and options. The purpose of the issue was to fund in part the acquisition of the Australian businesses of Union Shipping Group from Brierley Investments Limited, which was completed on 3 September 1997. The company intends to allot 10,915,000 converting preference shares and options on 10 September 1997.”
Review of Half-Year Accounts
Mr Gulson described the consolidated accounts of Holyman for the half-year ended 30 June 1997 as those “of the economic entity comprising the company and the entities it controlled at the end of the half-year or from time to time during the half-year.” In his report he described the scope of his review as follows:
“We have performed the review of the half-year consolidated financial statements in order to enable us to state whether, on the basis of procedures which do not provide all the evidence that would be required in an audit, anything has come to our attention that causes us to believe that the half-year consolidated financial statements are not presented fairly in accordance with Accounting Standard AASB 1029 ‘Half-Year Accounts and Consolidated Accounts’ and other mandatory professional reporting requirements (Urgent Issues Group Consensus Views) and statutory requirements.
Our view has been conducted in accordance with Statement of Auditing Practice/Related Services AUP/RS1 ‘Review Engagements’. A review is limited primarily to inquiries of company personnel and analytical procedures applied to the financial data. Our review has not involved a study and evaluation of internal accounting controls, tests of accounting records or tests of responses to inquiries by obtaining corroborative evidence from inspection, observation or confirmation. The procedures conducted do not provide all the evidence that would be required in an audit, thus the level of assurance provided is less than given in an audit. We have not performed an audit and, accordingly, we do not express an audit opinion.”
Mr Gulson expressed his so-called “negative assurance” in these terms:
“Based on our review, which is not an audit, nothing has come to our attention that causes us to believe that the consolidated financial statements of Holyman Limited for the half-year ended 30 June 1997 are not properly drawn up:
(a)so as to give a true and fair view of:
i)the state of affairs of the economic entity at 30 June 1997, and the results and cash flows of the economic entity for the half-year ended on that date; and
ii)the other matters required by Divisions 4, 4A and 4B of Part 3.6 of the Corporations Law to be dealt with in the half-year consolidated financial statements;
(b)in accordance with the provisions of the Corporations Law; and
(c)in accordance with Accounting Standard AASB 1029 ‘Half-Year Accounts and Consolidated Accounts’ and other mandatory professional reporting requirements.”
ASIC’s Contentions and Board’s Findings
ASIC’s contentions before the Board were:
“Contention No. 1
ASIC contends that on completion of the review of Holyman’s Accounts
(a)the Auditor ought to have formed the belief that the Accounts did not comply with AASB1024 because
(i)the profit in the Accounts was calculated on the basis that Holyman obtained control of, and acquired the shares in, USGL on 1 January 1997 whereas it was not reasonable to conclude that either or both of those events occurred any earlier than 20 June 1997 (or, alternatively, 21 May 1997); and
(ii)there was a material difference between the profit in the Accounts and the loss that would result using 20 June 1997 (or, alternatively, 21 May 1997), as the date when either or both those events occurred; and
(b)the Auditor ought to have prepared the review report accordingly.
…
Contention No. 2
ASIC contends that, on completion of the review of Holyman’s Accounts
(a)the Auditor ought to have formed the belief that the Accounts were not drawn up in accordance with AASB1002 in that
(i)an amount of $10.9m, representing the par value of 10.9 million Converting Preference Shares, and an amount of $34.9m, representing the premium, after expenses, in relation to those shares, were included in the share capital and reserves in the balance sheet at 30 June 1997 whereas those shares were not issued by Holyman until 10 September 1997, and
(ii)the liability that Holyman had to Brierley at 30 June 1997, in respect of the purchase price payable by Holyman to Brierley for the USGL shares was (approx) $65.2m, being a current liability of Holyman, whereas the balance sheet included only $19.4m as the liability of Holyman to Brierley in relation to that matter; and
(b) the Auditor ought to have prepared the review report accordingly.”
The accounting standards referred to are AASB 1024: Consolidated Accounts and AASB 1002: Events Occurring After Balance Date as in force at the time of Mr Gulson’s review.
ASIC’s case on Contention No. 1 was that the whole of USGL’s profit for the half-year was reflected in the profit figure of $204,000 because the consolidated accounts had been prepared on the basis (1) that Holyman obtained control of USGL on 1 January 1997 and (2) that there were no outside equity interests in USGL at any time during the next succeeding six months. The second of those premises would have required Holyman to have acquired the shares in USGL on or before 1 January 1997. Accordingly ASIC challenged the adoption of 1 January 1997 as the date on which Holyman both obtained control and acquired the shares.
In its decision of 8 June 2001 the Board accepted ([12]) that the consolidated accounts included the profit of USGL and its subsidiaries for the whole of the half-year. However, it rejected ([17.1]) ASIC’s submission that the date of acquisition of the USGL shares by Holyman was relevant to this aspect of Mr Gulson’s review. After referring to s 295A of the Corporations Law and to what it described as the “governing principle” of control in AASB 1024, the Board said:
“The Board’s view is that the date on which a parent obtains control of a subsidiary is the date that is relevant to the preparation of consolidated accounts and not the later of that date and the acquisition date as contended by ASIC.”
The Board then referred to the evidence before it touching on Mr Gulson’s review. It was not satisfied, on the “critical question” of the control date, that Mr Gulson failed to carry out his review in accordance with Auditing Standard AUS 902: Review of Financial Reports and with AASB 1024.
The Board accepted Contention No. 2. It noted particularly that the commentary at the end of AASB 1002 gave the raising of additional share capital after balance date as an example of an event the financial effect of which was not required to be included in the accounts for the half-year ended on the balance date. The Board concluded (at [31]):
“The question for Mr Gulson in conducting his review of the Holyman’s Accounts was whether the treatment of the liability and the share issue in Holyman’s Accounts caused or should have caused him to believe that the financial report was not prepared in accordance with the identified financial reporting framework. In the Board’s opinion for the reasons given above, that treatment of the liability and the share issue should have caused him to question the treatment and to qualify his report.”
Recognition of Ownership Interests
ASIC submits that the Board misconstrued AASB 1024. I accept that submission. In its decision (at [11]) the Board reproduced from AASB 1024 the definitions of “capacity” and “control” in paragraph 9, part of the commentary on paragraph 7 and part of the commentary on the definition of “control”. The Board appears to have overlooked paragraph 7 itself, which provided:
“The purpose of this Standard is to:
(a)identify for financial reporting purposes parent entities and subsidiaries; and
(b)prescribe the circumstances in which consolidated accounts are to be prepared and the financial information to be included in those accounts;
so that the consolidated accounts reflect the performance, financial position and financing and investing of a group of related entities as a single economic entity.” (Emphasis supplied.)
The adoption in AASB 1024 of control as the criterion for determining a parent entity/subsidiary relationship enabled identification of the economic entity for which consolidated accounts must be prepared. Control, rather than ownership interest, was the consolidation criterion in AASB 1024. But the extent of the parent company’s ownership interest in a “subsidiary” remained important. That is why paragraph 9 also contained a definition of “outside equity interest”. The commentary on “control” in paragraph (xvii) acknowledged that it might be possible to control another entity without holding any ownership interest in that entity. AASB 1024 required consolidated accounts to disclose the extent to which the equity of the economic entity was attributable to the ownership group of the parent entity and to outside equity interests. It made elaborate provisions for consolidation adjustments relating to the holding of investments by a parent entity in its subsidiaries and to changes in the composition of the economic entity. Paragraph 34 of AASB 1024 required disclosure of any portion of the operating profit attributable to outside equity interests.
The Board said ([17.1]) that paragraph 34 appeared to be satisfied in Holyman’s consolidated accounts for the half-year. However, since the Board made no finding about when Holyman acquired the shares in USGL, it is apparent that it has failed to deal with ASIC’s Contention No. 1. The Board has accordingly fallen into error.
Mr Gulson submits that the expression “acquisition date” is not to be found in AASB 1024. That is not to the point. As I have mentioned, the standard makes it perfectly plain that consolidation adjustments are to be made to reflect acquisitions of ownership interests by the parent entity. In the alternative, Mr Gulson submits that any error on the part of the Board was induced by the way ASIC put its case to it. I reject that submission. There is in evidence before me the parties’ written submissions in the proceedings before the Board and a transcript of the hearing. In fact, that material shows a reluctance on the part of Mr Gulson to come to grips with the issue of the acquisition date. If the gaze of the Board was fixed too narrowly on the issue of control, that was certainly through no fault of ASIC. (See transcript of the Board hearing, 11 May 2001, p 314.)
The Board’s misconstruction of the accounting standard involved an error of law. This meant that ASIC’s Contention No. 1 (or, as counsel for Mr Gulson described it, the first disciplinary “charge”) was not properly addressed by the Board. Its decision of 27 June 2001 was based on this error and must be set aside. I do not think that the Board’s “decision” of 8 June 2001 requires any order under s 16 of the Administrative Decisions (Judicial Review) Act. It was not, in my view, relevantly a “decision” under the Corporations Act, but merely a statement of the Board’s reasons for its satisfaction or otherwise in respect of ASIC’s contentions or “charges”. Counsel for Mr Gulson submit that it would be futile to refer the matter back to the Board, but what the Board said in its “decision” of 8 June 2001 ([17.8]) does not suggest that this would be so.
Events After Balance Date
Mr Gulson challenges the Board’s conclusion that ASIC’s Contention No. 2 was established on two grounds. First, it is said that the Board erred in finding that ASIC has discharged the required standard of proof. There is no substance in this point. The Board had earlier (at [17.19]) reminded itself that it must apply “a high standard of proof” in view of the seriousness of the allegations and the possible impact on Mr Gulson. Secondly, it is submitted that the Board erred in regarding any failure to apply AASB 1002 as material. In support of this ground Mr Gulson relies on Accounting Standard AASB 1031: Materiality, but his submissions do not raise an error of law for consideration. Assessing materiality is a matter of evaluation of which the Board is the judge. Whilst it is not a matter for me, I may say that in this case I agree with the Board that here the particular items and amounts were plainly material.
The Board’s satisfaction as to the matters specified in s 1292(1)(d) of the Corporations Act is also said not to follow from the conclusion that ASIC’s Contention No. 2 was established. So far as it goes, that may be accepted. It is sought to characterize as an error of judgment Mr Gulson’s failure to qualify his review report. Again, however, the assessment of Mr Gulson’s performance of his duties as an auditor is committed by the Corporations Act to the Board. The way in which it expressed its satisfaction in respect of the conduct engaged in by Mr Gulson betrays no error of law. The Board did not simply conclude that Mr Gulson should have qualified his report. It said that his failure to do so satisfied it of matters specified in s 1292(1)(d). The Board instructed itself at the outset of its reasons of the principles and procedures in AUS 902. Its conclusion is hardly surprising where Mr Gulson failed to qualify his review of accounts which recognised an event that had not yet even taken place. This ground of review is also not made out.
Mr Gulson also attacked the Board’s decision to deal with him under s 1292(9) and to require him to pay part of ASIC’s costs of the hearing. However, as the Board’s decision must be set aside for other reasons, it is unnecessary to deal with these points. His application will be dismissed with costs.
I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Whitlam.
Associate:
Dated: 28 August 2002
Matter No. N 1039 of 2001
Counsel for the applicant:
F P Carnovale
Solicitor for the applicant:
Michael Burnett
Solicitor for the first respondent:
Australian Government Solicitor
Counsel for the second respondent:
R S McColl SC with P J Brereton
Solicitors for the second respondent:
Allens Arthur Robinson
Matter No. N 3001 of 2001
Counsel for the applicant:
R S McColl SC with P J Brereton
Solicitors for the applicant:
Allens Arthur Robinson
Solicitor for the first respondent:
Australian Government Solicitor
Counsel for the second respondent:
F P Carnovale
Solicitor for the second respondent:
Michael Burnett
Dates of hearing:
30 and 31 October 2001
Date of judgment:
28 August 2002
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