Bogan v The Estate of Peter John Smedley, Deceased

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT
GROUP PROCEEDINGS LIST

S ECI 2020 03281

BETWEEN:

ANTHONY BOGAN & ANOR (according to the attached Schedule)	Plaintiffs
v
THE ESTATE OF PETER JOHN SMEDLEY, DECEASED & ORS (according to the attached Schedule)	Defendants

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JUDGE:	Steffensen AsJ
WHERE HELD:	Melbourne
DATE OF HEARING:	29 March 2022
DATE OF RULING:	28 October 2022
CASE MAY BE CITED AS:	Bogan & Anor v The Estate of Peter John Smedley, Deceased & Ors
MEDIUM NEUTRAL CITATION:	[2022] VSC 645

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PRACTICE AND PROCEDURE – Group proceeding – Discovery of documents – Discovery categories – Discovery of documents directly relevant to the issues on the pleadings – Carrying value of assets – Recoverable amount of assets – Impairment of assets – Accounting Standard AASB 136 Impairment of Assets.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	W A D Edwards with E J Batrouney	Banton Group
For the Fifth Defendant	E A Bennett SC with C Trahanas	Ashurst Australia

Contents

A.. Introduction

B... Principles

C.. The Issues in Dispute

D.. Categories 4 and 5 – Documents and Correspondence

E... Category 11 – KPMG’s Audit File Index

E.1          Evidence
E.2          Plaintiffs’ Submissions
E.3          KPMG’s Submissions
E.4          Ruling
E.4.1        Audit Topic 1 – Going concern
E.4.2        Audit Topic 2 – Litigation, claims and assessment
E.4.3        Audit Topic 3 – Provisions
E.4.4        Audit Topic 4 - Inventory
E.4.5        Audit Topic 5 - Restructuring provision
E.4.6        Audit Topic 6 - Journal entries
E.4.7        Audit Topic 7 – Internal audit
E.4.8        Audit Topic 8 – External experts
E.4.9        Audit Topic 9 – Derivative financial assets
E.4.10      Audit Topic 10 - Sales
E.4.11       Audit Topic 11 – Disposal groups and assets held for sale
E.4.12       Audit Topic 12 – Carrying value of investment in subsidiaries
E.4.13       Audit Topic 13 – Tax
E.4.14       Audit Topic 14 – Files for business components of Arrium
E.4.15       Audit Topic 15 – Permanent folder containing miscellaneous current agreements

F... Orders

HER HONOUR:

A Introduction

This is the plaintiffs’ application for discovery made by Summons filed on 30 November 2021 insofar as it relates to the discovery to be made by the fifth defendant, KPMG (a firm). I facilitated a discovery conference between the parties on 14 December 2021, following which, the issues between the parties narrowed.
At a hearing on 4 February 2022, I delivered a ruling which:
(a)dismissed the plaintiffs’ application for KPMG to make discovery of its audit files in their entirety on the grounds that the pleaded case against KPMG was limited to the issues regarding alleged impairment of the carrying value of certain assets; and
(b)determined that the audit files ought to be produced in their native form. I granted KPMG liberty to apply in the event that partial production of the audit file in native form is difficult and burdensome.[1]
[1]Transcript of Proceedings, Bogan, Anthony vs The Estate of Peter John Smedley, Deceased, (Supreme Court of Victoria, S ECI 2020 03281, Steffensen JR, 4 February 2022).
The plaintiffs and KPMG were directed to confer and seek to agree upon categories for discovery which accord with the ruling. The parties have agreed categories 1 to 3, and 6 to 10. Categories 4, 5 and 11 remain in dispute and are addressed in this ruling.
The plaintiffs rely upon three affidavits of their solicitor, Elliott Darryl Williams Smith, affirmed on 29 November 2021, 25 January 2022 (‘Smith 2’), and 3 February 2022 (‘Smith 3’).[2] They also rely upon outlines of submissions filed on 30 November 2021 and 25 January 2022 that were prepared for the hearing on 4 February 2022, and two further outlines dated 1 March 2022 and 11 March 2022.[3]
[2]Smith 3 was filed on 26 October 2022.
[3]The 11 March 2022 submissions were filed on 26 October 2022.
KPMG relies upon the affidavits of its solicitor, Tess Martha Grieve, filed on 31 January 2022 (‘Grieve 1’), 1 March 2022, and 21 March 2022. It also relies upon outlines of submissions filed on 31 January 2022 that were prepared for the hearing on 4 February 2022, and further outlines filed on 1 March 2022 and 21 March 2022.

B Principles

The principles with respect to discovery are clear. Discovery is to be made of documents which are directly relevant to matters in issue in the proceedings, and that is determined by reference to the pleadings.
Section 55(1) of the Civil Procedure Act 2010 (Vic) gives the court an overriding discretion to ‘make any order or give any directions in relation to discovery that it considers necessary or appropriate.’ As set out in Volunteer Fire Brigades Victoria Inc v Country Fire Authority:
… demands for discovery of documents which are peripheral to the central issues cannot be entertained. The Court is obliged to focus on the central issues as best it can be determined at this point in the litigation.[4]
[4][2016] VSC 573, [34] (J Forrest J).
Discovery orders should be directed to finding the most efficient, effective and economical management of the discovery exercise, bearing in mind the nature and complexity of the trial.[5]
[5]Liesfield v SPI Electricity Pty Ltd (Ruling No 1) (2013) 43 VR 493, 500 [25] (J Forrest J).

C The Issues in Dispute

The parties are in agreement that the case against KPMG concerns its conduct of the audit of Arrium Corporation Limited (‘Arrium’) insofar as it relates to the carrying value and impairment of Arrium’s assets. However, the parties are in disagreement as to the precise scope of the allegations against KPMG.
KPMG submits that the case against it is confined, in that the asset impairment is pleaded to have been caused by specific impairment indicators. KPMG seeks its discovery be confined accordingly.[6] The plaintiffs argue that the case is broader, in that the reasons for impairment are not limited to the impairment indicators, giving rise to greater breadth of discovery.
[6]Transcript of Proceedings, Bogan, Anthony vs The Estate of Peter John Smedley, Deceased (Supreme Court of Victoria, S ECI 2020 03281, Steffensen JR, 29 March 2022) 55-56 (‘Transcript’); KPMG, ‘Submissions of the Fifth Defendant in Relation to Discovery’, 1 March 2022, [25] (‘KPMG’s 1 March 2022 Submissions’); KPMG, ‘Submissions of the Fifth Defendant in Relation to Discovery’, 21 March 2022, [14] (‘KPMG’s 21 March 2022 Submissions’).
It is therefore necessary to consider the pleading in some detail for the purpose of ascertaining the issues in dispute in this proceeding. This analysis will enable the discovery orders to be fashioned appropriately.
The pleadings follow a similar structure for each of the audits and reviews which are the subject of the plaintiffs’ claim. I will summarise the claim pleaded in the Statement of Claim filed on 14 August 2020 (‘SOC’), and KPMG’s Defence filed on 31 March 2021 (‘KPMG’s Defence’) by reference to the claim in respect of the 2014 financial year (‘FY14’).
The plaintiffs’ claim centres around the carrying value of Arrium’s assets, defined in FY14 to be the FY14 Arrium Assets, Mining Assets, Mining Consumables Assets, Steel Assets, and Recycling Assets (collectively, the ‘FY14 Assets’), and whether the carrying value of the FY14 Assets exceeded their recoverable amount, giving rise to impairment. Impairment of Assets is governed by Accounting Standard AASB 136 ‑ Impairment of Assets (‘AASB 136’).
The pleadings and the parties’ arguments have addressed the requirements of AASB 136 in some detail. The following critical terms used in the SOC are defined in paragraph 6 of AASB 136:
(a)an asset is defined to be impaired when ‘its carrying amount exceeds its recoverable amount’;
(b)the ‘carrying amount’ is the ‘amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon’;
(c)the ‘recoverable amount’ of an asset or cash-generating unit is ‘the higher of its fair value less costs of disposal and its value in use’; and
(d)the ‘value in use’ is the ‘present value of the future cash flows expected to be derived from an asset or cash-generating unit’.
AASB 136 provides for the means by which impairment is to be considered. It provides that an entity should consider external and internal indications as to whether an asset may be impaired, including evidence of obsolescence, and evidence from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.[7] If impairment indicators are present, an entity is required to estimate the recoverable amount of the asset or cash generating unit.[8]
[7]AASB 136, [12]-[14].
[8]Ibid [9].
Paragraphs [18]–[57] of AASB 136 set out the requirements for measuring the recoverable amount of an asset or cash generating unit. Paragraph [30] and following are most relevant, as they deal with value in use. Relevantly, they provide that:
(a)the calculation of an asset’s value in use shall reflect, inter alia, an estimate of the future cash flows the entity expects to derive from the asset, and expectations about possible variations in the amount or timing of those future cash flows;[9]
(b)estimates of future cash flows shall be based on reasonable and supportable assumptions that represent management’s best estimate of the range of economic conditions that will exist over the remaining useful life of the asset;[10]
(c)an assessment of reasonableness is to be done by examining the causes of differences between past cash flow projections and actual cash flows, to ensure that cash flow projections are consistent with past actual outcomes;[11]
(d)management’s estimates of future cash flows are to be based on the most recent budgets/forecasts;[12]
(e)estimates of future cash flows shall exclude future cash inflows or outflows expected to arise from restructurings or improvements to the asset’s performance,[13] financing activities,[14] and income tax receipts or payments;[15] and
(f)discount rates shall be pre-tax rates that reflect the current market assessments of the time value of money and the risks specific to the assets for which the future cash flow estimates have not been adjusted.[16]
[9]Ibid [30(a)-(b)].
[10]Ibid [33(a)].
[11]Ibid [34].
[12]Ibid [35].
[13]Ibid [44(a)-(b)].
[14]Ibid [50(a)].
[15]Ibid [50(b)].
[16]Ibid [55].
The plaintiffs allege three matters were indicators of impairment of the FY14 Assets, which required Arrium to estimate their recoverable amount pursuant to paragraph [9] of AASB 136.[17] The pleaded impairment indicators are the Market Capitalisation Information, the Market Decline Information, and the SI Mine Low Net Cash Proceeds Information.[18] These terms are defined and particularised at paragraphs [31]–[39] of the SOC.
[17]SOC, [41]-[42].
[18]Ibid [41].
KPMG admits that the Market Capitalisation Information was an impairment indicator, and that therefore Arrium was required to estimate the recoverable amount of the FY14 Assets. KPMG denies that the Market Decline Information or the SI Mine Low Net Cash Proceeds Information were impairment indicators.[19]
[19]KPMG’s Defence, [41]-[42].
The plaintiffs allege at paragraph [43] of the SOC that the carrying amount of the FY14 Assets as at 30 June 2014 significantly exceeded their recoverable amount. In respect of each of the assets as at 30 June 2014, particulars are provided of the carrying amount, and the alleged recoverable amount of these assets.[20] KPMG denies this allegation.[21]
[20]SOC, [43].
[21]KPMG’s Defence, [43].
On 21 April 2021, Nichols J ordered that the plaintiffs provide particulars of their calculations of the pleaded recoverable amount of Arrium’s assets. In response to this, the plaintiffs provided discounted cash flow valuations for each of the assets which correspond to the asserted recoverable amounts.
As a consequence of the carrying value exceeding the recoverable amount of the assets, the plaintiffs allege that:
(a)the FY14 Assets were impaired for the purpose of AASB 136, and that Arrium was required to recognise an impairment loss under AASB 136 (SOC, [44]);
(b)the FY14 financial report did not impair the value of the FY14 Assets, or recognise the expense arising from their impairment (SOC, [45]);
(c)therefore, the FY14 financial report materially overstated the value of the FY14 Assets and the associated operating profit and earnings (SOC, [46]);
(d)there was no reasonable basis for Arrium not to raise an impairment charge against the carrying value of the FY14 Assets (SOC, [47]); and
(e)the FY14 financial report was not prepared in accordance with Australian Accounting Standards, and did not give a true and fair view of Arrium’s financial position and performance (SOC, [48]).
KPMG denies these allegations.[22]
[22]Ibid [44]-[48].
At paragraph [171] of the SOC, the plaintiffs allege that KPMG’s audit opinions were ‘not the product of an exercise of reasonable skill and care by reason of the matters pleaded in paragraphs 44 to 48 above.’ KPMG denies this allegation.[23]
[23]Ibid [171].
The particulars of paragraph [171] repeat the particulars of paragraphs [44]–[48], and give further particulars concerning KPMG’s conduct of the audit in breach of certain Australian Auditing Standards. The plaintiffs allege that KPMG:
(a)failed to ascertain that the FY14 Assets, and associated profit and earnings were materially misstated and thereby breached Australian Auditing Standards ASA200, ASA220, ASA240, ASA260, ASA300, ASA315, ASA330, ASA450, ASA500, ASA540, ASA560, ASA570, ASA700, ASA701, ASA705 and ASA706;
(b)failed to design or perform audit procedures so as to obtain sufficient appropriate audit evidence upon which to justify the value of the FY14 Assets and thereby breached Australian Auditing Standards ASA300, ASA315, ASA330, ASA450, ASA500, and ASA540;
(c)failed to obtain sufficient appropriate audit evidence upon which to justify the value of the FY14 Assets and thereby breached Australian Auditing Standards ASA500 and ASA540;
(d)failed to conduct the audit of the financial report in relation to the valuation of the FY14 Assets with sufficient ‘professional scepticism’, recognising that circumstances may exist that cause the financial report to be materially misstated and thereby breached Australian Auditing Standard ASA200; and
(e)issued an incorrect audit opinion and thereby breached Australian Auditing Standards ASA200, ASA700, ASA701, and ASA705.
As can be seen from the above analysis, the key issues between the parties are:
(a)whether the Market Decline Information and SI Mine Low Net Cash Proceeds Information were impairment indicators;
(b)the value of the FY14 Assets, and more specifically, whether the carrying value exceeded their recoverable amount within the meaning of those terms in AASB 136, such that an impairment loss ought to have been recognised; and
(c)the conduct by KPMG of the audit of the financial statements, insofar as it relates to the value of the FY14 Assets, and whether they were impaired within the meaning of AASB 136.
Accordingly, KPMG’s discovery should be focussed upon documents which are directly relevant to these issues.
I disagree with KPMG’s submission that the plaintiffs have limited the causes of impairment to the impairment indicators. Paragraph [43] of the SOC simply pleads that the carrying amount of the FY14 Assets exceeded their recoverable amount. There is no allegation that the impairment indicators, or any failure to properly account for them, gave rise to the carrying value exceeding the recoverable amount of the FY14 Assets. There is no allegation anywhere in the SOC that the existence of the impairment indicators drove the recoverable amount of the assets to be lower than the carrying value. Rather, the existence of the impairment indicators is pleaded to give rise to Arrium’s obligation to estimate the recoverable amount of the FY14 Assets (SOC, [42]), in the manner contemplated by paragraph [9] of AASB 136. The impairment indicators are not otherwise pleaded to have any connection with or impact upon the calculation of the recoverable amount of the FY14 Assets.
With the benefit of the above analysis of the issues in dispute, I will now consider each of the disputed categories.

D Categories 4 and 5 – Documents and Correspondence

Category 4 seeks ‘all documents’ which refer to, or relate to, a list of matters labelled 4(a) to (l). These 12 matters are terms defined in the SOC, and the parties are in agreement as to their definitions.
Category 5 has a similar formula, save that it seeks ‘all correspondence’ between KPMG on the one hand and Arrium on the other, ‘which refer or relate to or touch on’ a list of 10 issues labelled (a) to (j). Again, these issues are terms defined in the SOC, and the parties are in agreement as to their definitions.
The parties are largely in agreement with respect to the proposed wording of categories 4 and 5. The parties’ respective proposals are set out in the plaintiffs’ draft minute of order.[24]
[24]Annexure A to the ‘Plaintiffs’ Outline of Submissions: Outstanding Discovery Issues’, 1 March 2022, (‘Plaintiffs’ 1 March 2022 Submissions’).
The key difference between the parties is that KPMG seeks to limit both categories 4 and 5 by including the phrase ‘concerning the impairment of Assets’, such that for each category, the documents must first ‘concern the impairment of Assets’, and secondly, they must also relate to the defined matters in category 4, or the defined issues in category 5.[25]
[25]Ibid.
The plaintiffs say that the additional limitation of ‘concerning the impairment of Assets’ is unnecessary, because the matters and issues listed in categories 4 and 5 are each defined in the SOC, and thereby are directly linked to relevant facts in issue.
KPMG argues that absent its proposed limitation, it will be required to make discovery of documents which are not relevant to the pleaded issues. KPMG submits that its proposed limitation is appropriate and consistent with the 4 February 2022 ruling, and avoids KPMG being subjected to an unjustified discovery burden.
KPMG gave three examples of how the plaintiffs’ formulation of categories 4 and 5 will capture documents which are not relevant on the pleadings, being categories 4(f), 4(g), and 5(e).
The plaintiffs’ proposed category 4(f) calls for all documents that refer or relate to the ‘SI Mining Operation’, which is defined in the SOC as the ‘Southern Iron mining operation’ being one of ‘two major iron ore mining operations’ of Arrium, and part of Arrium’s iron ore mining segment. The other major iron ore mining operation is pleaded to be the Middleback Ranges mining operation (‘MBR Mining Operation’).[26]
[26]SOC, [11(c)].
The SI Mining Operation is relevant to the disputed allegation that the ‘Low Net Cash Proceeds Information’ was an impairment indicator with respect to Arrium’s Mining Assets, and thus the impairment of Arrium’s Mining Assets.
Using the FY14 pleading as an example, the plaintiffs plead that:
(a)as at 30 June 2014 the cost per metric tonne of extracting ore in the SI Mining Operation was greater than the cost per metric tonne of extracting iron ore in the MBR Mining Operation;[27] and
(b)the maximum net cash proceeds that could be generated from the SI Mining Operation over the remaining life of the operation was less than the carrying value of the SI Mining Operation.[28] This is defined as the ‘Low Net Cash Proceeds Information’, which is one of the pleaded impairment indicators with respect to the FY14 Mining Assets.[29]
[27]Ibid [34].
[28]Ibid [36]-[38].
[29]Ibid [41]. See also above at [17].

KPMG argues that category 4(f) requires refinement, as all documents relating to the SI Mining Operation are not relevant, as only those which relate to impairment are. A similar argument was made with respect to 4(g), which concerns the MBR Mining Operation.
The plaintiffs’ proposed category 5(e) calls for correspondence passing between KPMG and Arrium that ‘refer or relate to or touch on… the FY14 Financial Results Announcement’. KPMG is concerned that without further refinement by reference to impairment, this category would capture all documents relating to, or touching upon, any account balance or other matter referred to in Arrium’s financial statements, which is beyond the scope of the pleaded case. Categories 5(g) and (i) are similarly framed with respect to the financial results announcements in relation to HY15 and FY15.
KPMG submitted that without appropriately framing categories 4 and 5 to the impairment issues in this proceeding, the discovery task would be unduly onerous, as it would be necessary to review workspaces beyond the 18 KPMG personnel who worked on the valuation and impairment of the Assets in the relevant audits.[30]
[30]KPMG’s 1 March 2022 Submissions, [37]; KPMG’s 21 March 2022 Submissions, [29].
In support of this submission, KPMG referred to correspondence from its solicitors dated 21 January 2022,[31] and 31 January 2022.[32] At the time that this correspondence was sent, the plaintiffs were seeking discovery of KPMG’s audit and review files in their entirety. In that context, KPMG’s solicitors identified what they say to be the unnecessary burden that would arise should discovery be ordered of the audit files in their entirety. The 21 January 2022 letter identifies that the scope of discovery sought by the plaintiffs would encompass approximately 11,900 audit/review files for the relevant periods, and extend to topics within those files which KPMG consider to be irrelevant, such as IT controls and cash issues. Further, it states that the audit was conducted by KPMG teams in Chile, Canada, and Sydney, and that over 30 individuals were involved.[33] The 31 January 2022 letter states that 140 KPMG personnel worked on the relevant audits and reviews of Arrium, but only 18 of them worked on valuation and impairment.[34]
[31]Ashurst letter dated 21 January 2022, [10]–[13]; Exhibit EDS-2 to Smith 2, 117-118.
[32]Ashurst letter dated 31 January 2022, [3]–[5]; Exhibit TMG-2 to Grieve 1, 1-2.
[33]Ashurst letter dated 21 January 2022, [12]-[13]; Exhibit EDS-2 to Smith 2, 118.
[34]Ashurst letter dated 31 January 2022, [3]; Exhibit TMG-2 to Grieve 1, 2.
These letters were sent prior to the ruling delivered on 4 February 2022, where I dismissed the plaintiffs’ application for KPMG to discover its audit files in their entirety. Categories 4 and 5 have been drafted and narrowed having regard to that ruling. KPMG has not adduced any evidence which specifically identifies the impact or burden the present formulation of categories 4 and 5 may have upon KPMG’s discovery obligations.
In my view, category 4 as drafted by the plaintiffs is largely appropriate.
The category 4 topics are mostly defined by reference to value, impairment, carrying amount of the Assets, or the pleaded impairment indicators. The only exception to this is subparagraphs (f) and (g) which I address below, and subparagraph (l), which seeks ‘Planning and Budget Material’. Having regard to the requirements of AASB 136 to consider past performance of an asset as against budget when determining its recoverable amount,[35] I accept that Planning and Budget Material is relevant.
[35]AASB 136, [35].
Further refinement may lead to category 4 becoming meaningless. For example, category 4(a) is ‘the impairment of the Assets’. Adding a further refinement of ‘concerning the impairment of Assets’ would be nonsensical. Under KPMG’s proposal, category 4(b) would require discovery of documents ‘concerning the impairment of Assets’ which refer to or relate to ‘the carrying amount of the net Assets’. In the context of the impairment assessment set out in AASB 136, and its focus upon carrying value, it is difficult to understand what would be the meaning of the category as drafted by KPMG.
I agree with KPMG’s submission that sub-categories 4(f) and (g) may require refinement. The categories call for ‘all Documents in the Relevant Period which refer or relate to … (f) the SI Mining Operation; (g) the MBR Mining Operation’. At first blush, these sub-categories appear to be impermissibly broad, as not all documents relating to these two mining operations will be relevant to the valuation and impairment issues pleaded by the plaintiffs. However, given KPMG’s role as auditor of the financial statements, it may be that all documents in KPMG’s possession, custody, or power do have sufficient connection to the carrying value and recoverable amount of the Assets in the relevant financial years.
KPMG’s proposed refinement of ‘concerning the impairment of Assets’ takes the refinement too far, or at least may lead to further confusion. Although the phrase ‘impairment of Assets’ is used elsewhere in the agreed portions of the proposed discovery categories, it is not defined, and its meaning is the subject of much contention as between the parties.
The above analysis demonstrates that the plaintiffs’ formulation of categories 4(f) and (g) may extend discovery beyond that which is relevant on the pleadings. However, on the evidence adduced by the parties, it is not possible to quantify the extent to which irrelevant material may be required to be discovered. Further, no evidence has been adduced which specifically addresses the increased burden that might arise from the plaintiffs’ formulation of these categories. The facts referred to in KPMG’s solicitors’ letters of 21 January 2022 and 31 January 2022 relate to the plaintiffs’ application for discovery of the entire audit file, and do not specifically address the categories the subject of this dispute.
I therefore consider it appropriate in this case for category 4 to be drafted in the manner proposed by the plaintiffs, without the additional limitation proposed by KPMG.
In respect of category 5, I similarly consider that it is not necessary to include the limitation of ‘concerning the impairment of Assets’. The correspondence topics set out in subparagraphs 5(a), (d), (f), (h) and (j) are all relevant to matters in issue on the pleadings. They include the impairment indicators and the impairment of the Assets. For the reasons addressed in respect of category 4, I do not consider further refinement is required by reference to ‘concerning the impairment of Assets’ as proposed by KPMG. It would only serve to create confusion.
I agree with KPMG that further refinement of the subcategories that seek correspondence relating to the financial result announcements is required (subcategories 5(e), (g), and (i)). In order for correspondence relating to the financial result announcements to be relevant, it is necessary that the correspondence relates to the impairment issues the subject of this proceeding.
For the reasons stated above, the refinement proposed by KPMG is not appropriate. Given the parties’ dispute as to the meaning of impairment, I consider that categories 5(e), (g), and (i) should be further limited by the phrase ‘provided that it concerns the carrying amount of the Assets, the recoverable amount of the Assets (as those terms are defined and employed in AASB 136 ), or KPMG’s conduct of the audit of the value of the Assets’.
Lastly, in respect of category 5, the parties agree that correspondence which refers or relates to the issues should be discovered. The plaintiffs seek that the category be extended to all correspondence which refer or relate, ‘or touch on’ the 10 issues in 5(a) to (j). KPMG does not agree to this proposed extension.
In my view, extending the category to correspondence which may ‘touch on’ the defined issues is not appropriate. If correspondence refers to or relates to the defined topics, it will be sufficiently relevant. Inclusion of the phrase ‘or touch on’ has the potential to unnecessarily extend the discovery beyond that which is relevant on the pleadings.

E Category 11 – KPMG’s Audit File Index

Category 11 concerns the extent to which documents listed on KPMG’s index of its Audit Files (‘Audit File Index’) should be discovered.[36]
[36]A copy of the Audit File Index is at pages 1 to 638 of Exhibit EDS-3 to Smith 3.
The Audit File Index is divided into 11 sections across the relevant periods, being:
(a)two head office files (FY14 and FY15), which record the audit work undertaken by the Sydney head office team which managed the Arrium group audit;[37] and
(b)nine separate files for each of Arrium’s business components, being the Arrium Manufacturing File (FY14), the Arrium Steel File (FY14 and FY15),[38] the Arrium Recycling File (FY14 and FY15), the Arrium Treasury File (FY14), the Arrium Mining file (FY14 and FY15) and the Arrium Subsidiary Audits File (FY15).[39]
[37]KPMG’s 1 March 2022 Submissions, [7].
[38]FY15 also included Arrium’s manufacturing segment.
[39]KPMG’s 1 March 2022 Submissions, [8].
Annexure C to the Plaintiffs’ 1 March 2022 Submissions is a copy of the Audit File Index in excel format, with:
(a)two additional columns, being ‘KPMG Comments’ and the ‘Audit Expert Comments’; and
(b)updated colour highlights indicating the plaintiffs’ auditing expert’s opinion as to the relevance of the documents to the preparation of an expert audit opinion in respect of the issues that arise in the SOC. Documents highlighted in red are those documents which the expert considers are ‘absolutely critical’. Amber highlights are those documents which are ‘probably relevant’. Green highlights are those documents which are ‘possibly relevant’.[40]
[40]See Smith 3, [14].
The plaintiffs seek ‘in the first instance’ discovery of all ‘critical’ documents highlighted in red on the Audit File Index. This would see discovery of 6,163 documents.[41]
[41]Plaintiffs’ 1 March 2022 Submissions, [11].
Initially the plaintiffs also sought discovery of the documents identified by its expert as ‘probably’ and ‘possibly’ relevant (highlighted on the Audit File Index in amber and green, respectively). Presumably recognising that discovery in modern commercial litigation does not extend to documents which are only possibly or probably relevant, the plaintiffs now only seek discovery of the documents their expert has identified as ‘critical’.
KPMG seeks an order requiring it to discover those documents which it has agreed to discover, being those that it considers are directly relevant to the matters in issue in the proceedings, or those that it is prepared to produce to avoid further dispute. This is 253 of the 6,163 document sought by the plaintiffs, leaving around 5,910 documents the subject of dispute.[42]
[42]Ibid, subject to subsequent agreement between the parties with respect to certain of the documents.

E.1 Evidence

In seeking discovery of each of the ‘critical’ documents, the plaintiffs rely upon the evidence of Mr Smith that:
(a)the auditing expert has over 30 years’ experience as an auditor and has provided an expert audit opinion with respect to over 20 audits;[43]
(b)he has provided the plaintiffs’ proposed auditing expert with a copy of the SOC;[44] and
(c)he believes that the task required of an expert who is asked to opine on the issues which arise in the SOC is apparent to the expert on the basis of the SOC.[45]
[43]Smith 3, [8].
[44]Ibid [9].
[45]Ibid.
Mr Smith says:
I have highlighted in red those documents that the Auditing Expert has informed me that the Auditing Expert considers are absolutely critical to the preparation of an expert audit report in respect of the issues that arise on the Statement of Claim.[46]
[46]Ibid [14(a)].
KPMG has not filed any evidence which directly responds to Mr Smith’s evidence sourced from the plaintiffs’ expert. Rather, KPMG’s affidavit evidence simply exhibits correspondence exchanged between the parties.
As part of the correspondence exchanged, KPMG has provided comments recorded in the Audit File Index which set out its position with respect to the ‘critical’ documents in the head office sections of the audit files. KPMG says that the head office files comprise work undertaken by the Sydney head office team and are the only sections relevant to impairment. KPMG does not provide any commentary in relation to the documents sought by the plaintiffs in the remaining nine sections of the Audit File Index. KPMG says that these remining nine sections address the audit of Arrium’s business components, and that the auditors of Arrium’s business components did not review the impairment of Arrium’s assets.[47]
[47]KPMG’s 1 March 2022 Submissions, [8]-[9].
Instead of responding to each document on the Audit File Index sought by the plaintiffs, KPMG has identified 15 audit topics which it says are not relevant to matters in issue in the proceedings.[48] The parties have exchanged correspondence debating the relevance of the 15 audit topics by reference to the applicable accounting and auditing standards, and the audit evidence that might relate to each topic. The parties’ positions are summarised in Annexure 1 to KPMG’s 21 March 2022 Submissions (‘Audit Topic Summary’). KPMG does not identify which documents in the Audit File Index relate to any of the 15 audit topics.
[48]1: Going concern. 2: Litigation, claims and assessment. 3: Provisions. 4: Inventory. 5: Restructuring provision. 6: Journal entries. 7: Internal audit. 8: External experts. 9: Derivative financial assets. 10: Sales. 11: Disposal groups and assets liabilities held for sale. 12: Carrying value of investment in subsidiaries. 13: Tax. 14: Files for business components of Arrium. 15: Permanent folder containing miscellaneous current agreements.

E.2 Plaintiffs’ Submissions

The plaintiffs argue that the evidence adduced in Smith 3 as to the audit expert’s opinion is sufficient to justify discovery of all ‘critical’ documents. The plaintiffs argue that the disagreement between the parties concerning the relevance of the 15 contested audit topics delves into the debate that would ultimately be had at trial as to whether a document is appropriate audit evidence.[49] The plaintiffs also criticise KPMG for not supporting its position with expert evidence.
[49]Transcript, 16.
The plaintiffs argue that in seeking to confine the case to impairment issues, KPMG mischaracterises the nature of the claim against it, and takes an unduly narrow view of the issues raised on the pleadings.
By way of example, the plaintiffs point to paragraph [171] of the SOC for FY14, where they allege that KPMG’s audit opinions were ‘not the product of an exercise of reasonable skill and care’ by reason of the matters pleaded earlier in the SOC at [44]‑[48]. These earlier paragraphs address the asserted failure to recognise the assets were impaired. The particulars of paragraph [171] focus upon asserted failures by KPMG in the conduct of its audit of the value of the Assets, in breach of various Australian Auditing Standards.[50]
[50]See paragraph [24] above for a summary of these particulars pleaded in the SOC, [171].
The plaintiffs assert that the relevant inquiry extends beyond the parts of the audit file addressing impairment testing. The plaintiffs say that discovery ought to extend to documents contained in other sections of the audit file that are relevant to the value of the Assets which may contradict or be consistent with the audit evidence relied upon by KPMG when it reviewed impairment. In support of this argument, the plaintiffs refer to the analysis required to be undertaken when testing impairment, as set out in AASB 136 and summarised above at [14]-[16].
In particular, the plaintiffs point to the obligation to assess the reasonableness of the assumptions underlying the cash flow forecasts used in impairment testing. This submission is detailed further in relation to the 15 audit topics as set out in the Audit Topic Summary. In respect of the 15 audit topics, the plaintiffs identify how the topic interrelates with impairment testing. In each case, the plaintiffs submit that the audit topics provide direct evidence as to the reliability and supportability of the cash flows predicted in the impairment model and KPMG’s audit of that model.
The plaintiffs are concerned that confinement of KPMG’s discovery to the impairment testing sections of the audit files fails to take an appropriately nuanced approach to the operation of the accounting standards. It was submitted that it is not the case that a document is relevant only to one accounting standard and no other. The standards, and the work undertaken to comply with them, are interrelated.[51]
[51]Transcript, 76-77.
The plaintiffs submit that having regard to the above analysis, and the evidence from their expert, it is unnecessary to delve into the 15 audit topics. Given that these audit topics do not readily relate to particular documents listed on the Audit File Index, the plaintiffs expressed concern that determination of the matter by reference to the audit topics may lead to further dispute between the parties as to the particular documents required to be discovered.
The plaintiffs also point out that the documents sought are readily identified on the Audit File Index, and discovery would not be unduly burdensome upon KPMG. The plaintiffs argue that these factors favour an order for discovery in the terms they seek.

E.3 KPMG’s Submissions

As referred to above at [10], KPMG’s counsel submitted that properly understood, the pleaded impairment indicators are the cause for which the Assets are said to be impaired. On this basis, KPMG argued that the documents identified by the plaintiffs’ expert arise from hypothetical issues that might arise when considering impairment, rather than the particular impairment issues pleaded in this case. KPMG submitted that the pleaded case does not justify broader discovery, and that the particulars of paragraph [171] of the SOC cannot be the mechanism which widens the scope of discovery.
KPMG says that it has discovered, or has undertaken to discover, all of the parts of its audit files that are relevant to impairment, being the relevant impairment testing conducted by the Sydney office and contained in the head office sections of the audit files.[52] KPMG says that its discovery has been made by reference to the requirements of AASB 136. Further, KPMG argues that the discovery made by it in June 2021 was verified on affidavit, and asserts that there is no basis to go behind that affidavit.
[52]KPMG’s 1 March 2022 Submissions, [32].
KPMG does not argue that the discovery sought by the plaintiffs would be burdensome in terms of the time or cost that would be incurred in making discovery. Rather, KPMG submits that the discovery sought is oppressive due to it being an exercise in fishing, as all the plaintiffs are doing is ‘trying to get hold of the documents to see whether they may assist [them] in [their] case’.[53] KPMG says that seeking further discovery in order to identify whether contrary audit evidence exists is the very definition of fishing.
[53]Shaw v Yarranova Pty Ltd [2011] VSCA 55, [26] (Redlich and Mandie JJA) (citations omitted).
In respect of the documents in the Audit File Index to which KPMG has provided responding documents, KPMG submits, in short form, the nature of the document, and why it considers it to be irrelevant. For some documents, KPMG says they are irrelevant, but indicates that it is willing to discover them in an effort to minimise dispute.

KPMG submits that a detailed analysis of the 15 audit topics, and their relevant accounting standards, demonstrates that they are unrelated to the work that was done by KPMG under AASB 136, and the criticisms made of KPMG’s conduct set out in the SOC. In respect to the majority of the audit topics, KPMG submits that they relate to different auditing work, undertaken under different accounting standards, for different purposes.[54] Further, KPMG argues that there is no pleading which specifically addresses deficiencies in the impairment testing which relate to the 15 audit topics.
[54]This submission was made with respect to topics 1 (Going Concern), 3 (Provisions), 4 (Inventory), 5 (Restructuring provision), 9 (Derivative financial assets), 10 (Sales), 11 (Disposal groups and assets liabilities held for sale), 12 (Carrying value of investment in subsidiaries), and 13 (Tax).
By way of example, I will address KPMG’s arguments with respect to the audit topic of ‘going concern’, being topic 1 on the Audit Topic Summary. The plaintiffs seek documents relevant to the audit work regarding going concern on the basis that impairment and going concern are based upon future cash flow predictions, and are therefore interrelated. The plaintiffs submit that the going concern information goes to the sufficiency and reliability of the audit evidence with respect to the cash flows applied on the impairment testing. For example, if the going concern cash flow forecasts contradicted the recoverable amount cash flows prepared for impairment testing, then this would be relevant to the pleaded allegations that KPMG failed to comply with its obligations to obtain sufficient and appropriate audit evidence.[55]
[55]SOC, [171].
In response, KPMG identifies that going concern and impairment are different accounting and audit areas which are governed by different accounting and auditing standards, which require different approaches. Going concern is governed by AASB 101 and tests whether a company can pay its debts when they fall due, whereas impairment is governed by AASB 136 and tests whether an asset is carried at no more than its recoverable amount. KPMG argues that despite the underlying source material for impairment and going concern testing being similar, going concern documents are not discoverable as they are created and analysed using the different approach taken under the going concern accounting standard.
KPMG argues that the SOC does not plead that KPMG’s impairment testing was inadequate because of inconsistent treatment of cash flow assumptions used in the going concern analysis and the impairment analysis. Thus, KPMG argues the going concern cash flows are not discoverable. KPMG submits that seeking the going concern cash flows for the purpose of ascertaining whether they contain audit evidence which contradicts the cash flows prepared for impairment testing is fishing.

E.4 Ruling

As addressed earlier, KPMG’s discovery should be focused upon documents relating to the disputed impairment indicators, the value of the assets, and KPMG’s audit of Arrium’s financial statements insofar as it relates to impairment of the assets. These are the key issues on the pleading as addressed in Part C above.
Despite the lengthy submissions provided to the Court, identifying the documents in the Audit File Index that are relevant to the matters in issue remains a challenge.
KPMG’s approach to discovery has been based upon what I consider to be a misunderstanding of the plaintiffs’ case. For the reasons addressed in Part C, the causes of impairment are not limited to the pleaded impairment indicators. I therefore consider KPMG’s approach to discovery to be too narrow. This gives rise to a basis to go behind KPMG’s affidavit of documents.
The fact that the pleading does not particularise the reasons that caused the carrying value of the assets to be less than their recoverable amount gives rise to a difficulty in assessing the appropriate scope of discovery. KPMG points to many examples of there being no pleaded case that ties particular audit topics to the alleged impairment. I have some sympathy for this submission, and the oppression that arises from the plaintiffs obtaining access to parts of the audit files which are not the subject of a specific pleading which easily demonstrates their relevance. Discovery needs to be appropriately restricted to the matters in issue, and the plaintiffs should not be permitted to fish.
However, I agree with the plaintiffs’ submissions that accounting standards are not hermetically sealed boxes, such that a document relevant to one standard cannot be relevant to another standard, in the manner that KPMG submits with respect to the 15 audit topics.
It is apparent that documents which are relevant to the carrying value and recoverable amount of the assets are contained in parts of the audit file which do not concern impairment testing. This is acknowledged by KPMG, who says that the underlying source material providing the auditor with evidence for assessing going concern and impairment are similar.[56] In my opinion, these materials are relevant and discoverable, regardless of whether they were prepared or reviewed during the course of going concern audit testing as opposed to impairment testing.
[56]Annexure 1 to KPMG’s 21 March 2022 Submissions, Topic 1: Going Concern.
Accordingly, I consider KPMG’s approach of limiting discovery to the parts of the audit file addressing impairment testing is too narrow. To the extent that KPMG’s submissions on the 15 audit topics are based upon a strict delineation between materials relevant to particular accounting standards being irrelevant to impairment and AASB 136, they have not assisted me in determining whether a document or class of documents relates to the value of the assets.
Other than the evidence of Mr Smith regarding matters of which he has been informed by the proposed audit expert, and the articulation of the expert’s comments in the Audit File Index and in the Audit Topic Summary, no other evidence has been adduced by the plaintiffs which support their arguments as to relevance of particular documents or audit topics. Notably, the plaintiffs have not adduced evidence by reference to the documents already discovered by KPMG. The plaintiffs have not identified particular gaps in the discovery made to date, or used the discovered documents to give further weight or explanation as to why certain documents or categories of documents are relevant.
For example, submissions were made by the plaintiffs that the audit of inventories is relevant to predicted future margins, which in turn are relevant to predicted cash flows that form the basis of the impairment testing. The plaintiffs have had access to the cash flows used for impairment testing since June 2021. Presumably, if there was a concern regarding the predicted future margin of inventories as depicted on those cash flows, they would be in a position to articulate this by reference to KPMG’s discovery to give weight to their submissions as to relevance.
The Audit File Index is voluminous and contains references in excess of 11,000 documents. The plaintiffs’ evidence of their expert’s views as to relevance of the documents contained in this index is of some assistance in determining the scope of the discovery. However, at times, the comments are in shorthand and do not contain sufficient explanation as to their meaning. This reduces their utility.
Further, a cursory review of individual comments indicates that a broad approach to ‘critical’ relevance has been taken.
For example, the plaintiffs seek discovery of ‘1.3.3.0010 Arrium HO 16’ which KPMG says is an internal budgeting tool used by KPMG, which it says is irrelevant. The plaintiffs’ expert comments in response that it is relevant to ‘[w]hether KPMG complied with ASA 330, and had sufficient time to perform impairment testing’.
The plaintiffs plead references to KPMG’s breaches of auditing standard ASA 330 as particulars of its allegation that KPMG’s audit opinion was not the product of due care and skill.[57] The plaintiffs allege that KPMG breached ASA 330 by failing to ascertain the value of the assets,[58] and by failing to ‘design or perform audit procedures so as to obtain sufficient appropriate audit evidence upon which to justify the value of the [Assets]’.[59]
[57]SOC, [171].
[58]Ibid [171](ii).
[59]Ibid [171](iii).
The plaintiffs do not allege that KPMG’s opinion was not the product of due care and skill by reason of it not budgeting sufficient time for impairment testing, or that the failure to appropriately budget was a failure of audit design. It is difficult to see how an allegation of this nature, if particularised, would in any event be at the heart of the issues in dispute between the parties. In my view, there is insufficient basis for this document, and documents like it, to be discovered. For the same reasons, on the basis of the information before me, I consider documents recording KPMG’s audit fees to be irrelevant.[60]
[60]See for example, ‘1.3.3.0020 Copy of Consol billing schedule’ and ‘1.3.3.0050 Arrium 2015 Fee Proposal’, also asserted to be relevant by reference to whether KPMG complied with ASA 330.
The plaintiffs seek documents relating to fraud inquiries on the basis that ‘ASA 240 management bias re estimates is fraud relates to impairment’.[61] This comment from the plaintiffs’ expert is difficult to understand. Breach of ASA 240 is alleged in the particulars at paragraph [171(ii)] of the SOC with respect to the asserted failure to ascertain the value of the assets, but no specific allegation is made with respect to fraud. Without more, it appears that these documents are not directly relevant to the question of the value of the assets.
[61]See for example, ‘2.5.2.0010 AltaSteel Fraud Inquiries’ and the documents referred to at rows 169 to 208 of ‘Head Office – 2014 – 263584’ of the Audit File Index.
Given the volume of documents in the Audit File Index, it is not feasible for the Court to review each document that the plaintiffs seek and rule as to whether it ought to be discovered. For that reason, I am grateful to KPMG for seeking to divide the audit file into topics. However, this approach has also been problematic due to KPMG’s analysis and approach being infected by what I consider to be a misunderstanding of the pleadings. Further, KPMG’s submissions are not expressly supported by evidence, expert or otherwise. Although, I do not doubt that the submissions have been made and correspondence exchanged with the benefit of instructions from the auditing firm.
This leaves the Court in an invidious position, where it is apparent that the discovery sought by the plaintiffs is too broad, and that KPMG’s proposal is far too narrow. The parties’ materials do not provide a ready means for efficiently determining the dispute in a manner which gives precise clarity as to the scope of discovery.
In my view, despite the concerns I have raised above concerning the plaintiffs’ evidence and the approach taken to identifying particular documents as ‘critical’, the evidence adduced by the plaintiffs provides a basis for ordering discovery of those documents highlighted in red on the Audit File Index. Whilst I consider the plaintiffs’ approach to be overly broad, in large part, it reflects the matters in issue in this proceeding.
Discovery by reference to the ‘critical’ documents provides an attractive means for resolving the dispute, as the precise documents sought are identified on the Audit File Index. This avoids further dispute as to which documents ought to be discovered and allows KPMG to make its discovery quickly and efficiently.
However, given my concerns as to the overly broad approach taken by the plaintiffs as addressed above, and the parties’ evidence and submissions with respect to the 15 audit topics, I do not consider that it is appropriate for category 11 to be framed in the manner proposed by the plaintiffs. Further refinement to exclude certain audit topics is required.
The Audit Topic Summary sets out 15 audit topics, 14 of which remain in dispute.[62] In light of the above reasons, I will briefly address the disputed audit topics in turn.
[62]Audit Topic 8: External Experts, was not pressed by the plaintiffs (Transcript, 38, lines 26-29).

E.4.1 Audit Topic 1 – Going concern

For the reasons articulated above at paragraphs [80]-[82] and [88], I consider documents relating to the audit topic of going concern are directly relevant and discoverable.

E.4.2 Audit Topic 2 – Litigation, claims and assessment

The plaintiffs seek documents relating to litigation, claims and assessment on the grounds that they are ‘linked to potential future cash flows. Potential future cash flows are directly linked to impairment’. The plaintiffs also identify that the subject matter of potential claims may affect the ongoing ability of Arrium to generate cash. The SOC does not include any allegation regarding a failure to adequately account for litigation, and the plaintiffs’ evidence does not articulate any claim or potential claim that could or should have had an impact on impairment. Having regard to the publicly available information regarding pending litigation, Arrium’s market disclosure obligations, and the disclosure made to the plaintiffs to date, the material before the Court does not provide a foundation for litigation, claims and assessment material to be discovered.

E.4.3 Audit Topic 3 – Provisions

The plaintiffs seek documents relating to provisions on the ground that they represent the costs Arrium incurred up to the reporting date. The plaintiffs say that KPMG was required to obtain evidence that the forecast cash outflows in the impairment model appropriately included costs that were the subject of provisions. The plaintiffs gave the example of an environmental provision which indicates that a producing asset may become non-viable or less profitable, and the need for this to be accounted for when considering impairment. The plaintiffs say that the sections addressing provisions are directly relevant to the reliability and supportability of the cash flows predicted in the impairment model, and KPMG’s audit of it.
KPMG agrees that unrecognised provisions may have an impact on predicted future cash outflows, but says that recognised provisions are excluded from cash flows prepared for impairment testing under AASB 136. KPMG submits (without evidence) that any unrecognised provision would only have a direct impact upon future cash flows if it posed an existential risk to business viability, and that any risk of this nature would be required to be disclosed to the market. KPMG points to the fact that there is no allegation in the SOC that provisions were not properly accounted for in the impairment testing. Further, KPMG points to provisions being governed by a different accounting standard (AASB 137) and thus is subject to different requirements to the assessment of impairment under AASB 136.
The parties are in agreement that provisions do impact impairment testing, but disagree as to whether particular provisions have relevance in this case. In light of this, in my view the plaintiffs have demonstrated the material in the audit files addressing provisions is directly relevant to the impairment issues the subject of this proceeding, and ought to be discovered.

E.4.4 Audit Topic 4 - Inventory

The plaintiffs seek documents relating to inventory on the grounds that it provides evidence of the projected margins in the impairment cash flow model, and gives information of areas where Arrium was selling inventory below cost. KPMG argues that inventory value is governed by a different accounting standard (AASB 102) with a different approach to that which is taken in impairment testing. KPMG also submitted (without evidence) that the audit evidence supporting the actual and projected margins in the impairment models was directly sourced from Arrium’s primary financial information for each business segment.
The parties are in agreement that projected margins are a component in the cash flows prepared for impairment testing. KPMG does not appear to submit that the inventory documents will not address margin, but rather, that the accounting standard for inventory testing takes a different approach to valuing inventory, which is focused on a sample group of individual assets over a short timeframe. Whereas impairment testing relates to overall margin for each cash generating unit over its useful life. In my view, the plaintiffs have demonstrated that inventory audit material is relevant to the value of the assets alleged to be impaired in this proceeding. Inventory material should be disclosed.

E.4.5 Audit Topic 5 - Restructuring provision

The plaintiffs seek documents regarding restructuring provision on the grounds that impairment testing can only include cash flows from restructuring to which Arrium is committed. KPMG argues that restructuring provision and impairment are different accounting and audit areas, governed by different standards. Further, it says that it has disclosed documents concerning restructuring provisions to the extent that they are relevant to impairment testing. KPMG submitted (without evidence) that it has not discovered documents such as ‘management’s estimate of restructuring’ on the grounds that ‘[t]hey do not contain any information related to specific restructuring provisions recognised by Arrium’. As this analysis demonstrates, the parties are in agreement that restructuring provision documents are relevant to impairment testing, and the issues in dispute in this action. These materials have been discovered in part by KPMG. In my view it is appropriate that they be discovered in their entirety.

E.4.6 Audit Topic 6 - Journal entries

The plaintiffs seek documents relevant to journal entries on the grounds that they are relevant ‘to see whether there were any non-cash entries to improve the reported performance of Arrium in FY14, considering that the base of the impairment tests in AASB136(33)(b) is that cash flows need to be consistent with results in FY14’. The plaintiffs say that the journal entries represent audit evidence as to Arrium’s application of the requirements in AASB 136 for measuring the recoverable amount of the cash generating units, as set out at [16] above.[63]
[63]In particular, the plaintiffs referred to the requirements set out in AASB 136, [33(a)-(b)], [34] and [44].
KPMG’s response asserts (without evidence) that documents concerning journal entries in the Audit File Index are concerned with control testing on a random basis of journal entries and not with the financial information created by the journal entries. KPMG also asserts that the audit evidence as to Arrium’s actual performance is directly sourced from Arrium’s primary financial information contained in the impairment section of KPMG’s audit files.
On the material before the Court, the plaintiffs have failed to identify a link of direct relevance between the audit testing of journal entries and the value of the assets. The particular paragraphs of AASB 136 which the plaintiffs point to for the purpose of identifying the relevance of the journal entry sections of the audit file do not readily identify their relevance, and little further explanation has been given to justify the relevance in light of KPMG’s submissions. I do not consider that the journal entry material ought to be discovered.

E.4.7 Audit Topic 7 – Internal audit

The plaintiffs seek internal audit documents on the grounds that they may provide contradictory audit evidence as to the reliability of forecasting budgets or control over capital expenditure and may assist in the identification of slow moving inventory or underutilised assets, all of which they say are relevant to impairment. The plaintiffs say that to the extent that internal audit performed any work on nine specific topics,[64] that material will be relevant to the impairment issues the subject of this proceeding. KPMG has confirmed that no internal auditing work was undertaken in relation to the nine topics identified by the plaintiffs.
[64]Budgetary process, sales budgetary process, timing of completing revenue generating assets, identification of sole moving inventory, NRV issues Arrium’s budgetary process, identification of impaired assets, identification of delays or cost overruns in completing major capital projects, managing liquidity, and managing environmental risk.

Given that there are no internal audit materials going to the topics identified by the plaintiffs to be relevant, I agree with KPMG’s submissions that internal audit materials should not be the subject of discovery in this proceeding.

E.4.8 Audit Topic 8 – External experts

Audit topic 8 was not pressed by the plaintiffs.[65]
[65]Transcript, 38, lines 26-29.

E.4.9 Audit Topic 9 – Derivative financial assets

The plaintiffs seek the materials regarding derivative financial assets on the basis that they are relevant to future predictions of foreign currency, steel prices, iron ore prices, and ability to finance future operations, all of which they say are relevant to impairment. The plaintiffs say that the estimates of commodity prices and demand for Arrium’s product are directly relevant to the application of AASB 136, and the reliability and supportability of the predicted cash inflows. KPMG argues that derivative financial assets are excluded from impairment testing pursuant to AASB 136 paragraph [2(e)], such that audit evidence in these sections of the audit file will be irrelevant.
KPMG accepts that the derivative financial assets section contains valuations in respect of the derivative assets, but says that these are done on different cash flow timeframes and were tested on a sample group basis. This submission does not address the likelihood, as postulated by the plaintiffs, that regardless of the different audit testing conducted with respect to derivative financial assets, that the underlying material is relevant to the value of the assets the subject of this proceeding. In my view, the plaintiffs have demonstrated that the material addressed in the audit of derivative financial assets is directly relevant to the value of the assets alleged to be impaired in this proceeding. This material should be discovered.

E.4.10 Audit Topic 10 - Sales

The plaintiffs seek discovery of sales documents on the basis that cash inflow from sales is critical to predictions of future cash flows when considering impairment. The plaintiffs point to the requirements in AASB 136 for the impairment model to be consistent with the actual results Arrium had achieved.[66] KPMG opposes discovery on the grounds that all evidence regarding Arrium’s predicted cash flows are contained in the impairment section of the audit files which has already been discovered. KPMG also submits that the examples of sales documents identified by the plaintiffs relate to accounting controls for the recording of sales and sample testing which is not representative. KPMG’s submissions do not address the issue that actual sales data is relevant to the impairment cash flow modelling. I agree with the plaintiffs that sales data is relevant to the assessment of the reasonableness of the cash flows prepared for impairment purposes, and ought to be discovered.
[66]AASB 136, [33(b)], [34].

E.4.11 Audit Topic 11 – Disposal groups and assets held for sale

The plaintiffs seek discovery of documents on the grounds that the impairment model is required to exclude cash flows from assets disposed of or which Arrium planned to dispose. The plaintiffs submit that these sections of the audit files are relevant to the question of whether KPMG had sufficient and appropriate audit evidence in respect of the cash flows that ought to be excluded from the impairment model, and thereby, the reliability of Arrium’s impairment model.
KPMG argues that impairment of non‑current assets (or disposal groups) are classified as held for sale in accordance with a different accounting standard (AASB 5), and are specifically excluded from the impairment testing pursuant to AASB 136.[67] On this basis, KPMG says that they are irrelevant to the impairment issues in this proceeding. KPMG appears to accept that disposal groups and assets held for sale are relevant to the impairment testing cash flows, but only to the extent that the material is maintained in the impairment testing section of the audit file (which material has already been discovered). For the same reasons identified with respect to restructuring documents (see above at [111]), I consider that the parts of the audit file addressing disposal groups and assets held for sale are relevant and ought to be discovered.
[67]See AASB 136, [2(i)].

E.4.12 Audit Topic 12 – Carrying value of investment in subsidiaries

Carrying value of investment in subsidiaries is governed by international accounting standard IAS 28. The plaintiffs submit that documents relating to the carrying value of investments in subsidiaries relate to the potential impairment and underperformance of the asset, such that any carrying value or impairment identified by applying IAS 28 is directly relevant to the application of AASB 136 to goodwill associated with those entities.[68] The plaintiffs point to the requirements of IAS 28,[69] to consider objective evidence of impairment of an investment in a subsidiary, and say that these documents will provide either corroborative or contradictory evidence of the impairment of the cash generating unit to which the subsidiary relates.
[68]Topic 12 in the Audit Topic Summary refers to AASB 126 in the column marked ‘Plaintiffs’ position (28/2/22)’. The Court has proceeded on the basis that this is a typographical error, and was intended to be a reference to AASB 136.
[69]Topic 12 in the Audit Topic Summary refers to paragraph 41C of AASB 128 in the column marked ‘Plaintiffs’ response (11/3/22)’. The Court has proceeded on the basis that this is a typographical error, and was intended to be a reference to IAS 28.
KPMG submits (without evidence) that the particular documents sought by the plaintiffs in the Audit File Index will not provide any corroborative or contradictory audit evidence in respect of the relevant cash generating units, as Arrium did not prepare a separate valuation model to determine the carrying value of investments in subsidiaries separate to the cash generating impairment model (which has already been discovered).
Despite these submissions, KPMG has identified that it is prepared to disclose at least some documents relevant to carrying value in investments in subsidiaries contained in the 2014 Head Office files, in an effort to minimise the issues in dispute.[70] It is not clear to what extent, if any, these documents are interconnected with other parts of KPMG’s audit files. It is also not apparent whether a similar concession has been made in respect of the 2015 Head Office files.[71] In light of this concession, and the information from KPMG as to how Arrium determined the carrying value of investments in subsidiaries, discovery ought to be made of those documents that KPMG has agreed to discover in the 2014 Head Office files, together with any other documents referred to therein. Documents of a similar nature contained in the files relating to the subsequent half year review and 2015 audit should also be discovered.
[70]See ‘6 Carrying value of investment in subsidiaries’ and related documents in the ‘Arrium Limited 247167’ worksheet at rows 1378–1383.
[71]The document ‘2200 Note 22 – Int in Subs and JV’ and related documents in the ‘Head Office – 2014 – 263584’ worksheet relating to the FY15 at rows 2416 to 2424 appear to relate to investments in subsidiaries, but KPMG does not propose to make discovery of these documents.

E.4.13 Audit Topic 13 – Tax

The plaintiffs seek discovery of the tax documents on the basis that AASB 112 (Income Tax) provides that deferred tax assets in respect of carried forward tax losses can only be recognised if it is probable that the entity will generate future taxable profits. The plaintiffs submit that therefore, the audit work on recognition of tax losses involves analysis of Arrium’s future profitability, and consequently it is relevant to KPMG’s assessment of Arrium’s impairment model. KPMG says that the material is irrelevant, as impairment is tested on a pre-tax basis. KPMG submits that there are technical differences between assessing the recoverability of deferred tax assets under AASB 112 and impairment testing under AASB 136. I am satisfied that the tax documents are relevant to the value of the assets for the reasons articulated by the plaintiffs, and they ought to be discovered.

E.4.14 Audit Topic 14 – Files for business components of Arrium

The plaintiffs say that all audit evidence that the head office obtained to opine on impairment was produced by the component auditor. The plaintiffs’ therefore seek discovery of ‘all instructions to the component auditor, all correspondence with the component auditor and all reporting from the component auditor’. KPMG says that these documents are stored in the head office files relating to impairment and that it has discovered all that is relevant. KPMG says that the balance of the material is not directly relevant to the reliability of Arrium’s impairment model.
The parties agree that documents relating to the component auditor are relevant and discoverable, but the dispute is as to whether documents that KPMG has assessed as irrelevant ought to be discovered. In my view, for the reasons advanced by the plaintiffs, and my concerns as to KPMG’s misunderstanding of the case against it as pleaded in the SOC, the remaining material ought to be discovered.

E.4.15 Audit Topic 15 – Permanent folder containing miscellaneous current agreements

The plaintiffs seek discovery of Arrium’s contractual agreements stored on the permanent folder on the basis that these agreements will identify quantities, prices and cancellation clauses that directly impact the cash flows the subject of impairment testing. KPMG says that the contracts contained on the permanent folder do not relate to impairment or predicted cash flows adopted in the impairment testing model, due to them covering topics which are specifically excluded from the impairment testing model under AASB 136. On the basis of the information provided by KPMG as to the topics of the agreements in the permanent file, I am satisfied that they are not relevant to the impairment issues the subject of this proceeding.

F Orders

I will therefore make orders with the effect that:
(a)discovery category 4 be as proposed by the plaintiffs;
(b)discovery category 5 be as proposed by the plaintiffs, save with the exclusion of the phrase ‘or touch on’. Categories 5(e), (g), and (i), shall be further limited by the phrase ‘provided that it concerns the carrying amount of the Assets, the recoverable amount of the Assets (as those terms are defined and employed in AASB 136), or KPMG’s conduct of the audit of the value of the Assets’;
(c)discovery category 11 be as proposed by the plaintiffs, save with the exclusion of the documents addressing the following topics:
(i)KPMG’s internal budgeting tools, such as ‘1.3.3.0010 Arrium HO 16’;
(ii)KPMG’s audit fees, such as ‘1.3.3.0020 Copy of Consol billing schedule’ and ‘1.3.3.0050 Arrium 2015 Fee Proposal’;
(iii)fraud inquiries, such as ‘2.5.2.0010 AltaSteel Fraud Inquiries’ and the documents referred to at rows 169 to 208 of ‘Head Office – 2014 – 263584’ of the Audit File Index;
(iv)litigation, claims and assessment;
(v)journal entries;
(vi)internal audit; and
(vii)the permanent folder containing miscellaneous current agreements.
I direct that the parties confer as to the appropriate form of order, including as to costs of the plaintiffs’ Summons filed on 30 November 2021, and provide their respective proposals (if the order is not agreed) to my Chambers within 14 days, together with submissions of no more than five pages, so that any outstanding issues may be determined on the papers.

SCHEDULE OF PARTIES

S ECI 2020 03281
BETWEEN:
ANTHONY BOGAN	First Plaintiff
MICHAEL THOMAS WALTON	Second Plaintiff
- v -
THE ESTATE OF PETER JOHN SMEDLEY, DECEASED	First Defendant
ANDREW GERARD ROBERTS	Second Defendant
PETER GRAEME NANKERVIS	Third Defendant
JEREMY CHARLES ROY MAYCOCK	Fourth Defendant
KPMG (A FIRM) (ABN 51 194 660 183)	Fifth Defendant

[2022] VSC 645

28 October 2022