Red ink flows from Serco’s detention centres

Christmas Island immigration detention centre. Photo: Getty

Times are tough in the detention centre business. Despite its $3 billion government contract to run Christmas Island and another seven onshore detention centres, Serco Group in Australia is technically insolvent.

Serco has just handed down a $395 million loss on $1.1 billion in revenue for the year to December 2014. It is cash-flow negative to the tune of $22.5 million.

The main reason for the red ink was a $250 million onerous contract provision for a Royal Australian Navy maintenance deal involving Armidale-class patrol boats – ironically, the ones that were hammered chasing illegal boat arrivals, which were responsible for their lucrative contracts with the Department of Immigration and Citizenship.  There was another $140 million in losses arising from goodwill and intangible-asset write-downs. Even putting these two aside, they still struggled to make a profit.

Times are never tough in the audit business though. Rain, hail or shine, the big four audit firms get paid too much for doing too little, and doing a shoddy job of it to boot.

Deloitte is the culprit de jour. Although it picked up $1.4 million in fees it still couldn’t manage to get its client to comply with the law.

Accounting Standard AASB 120 requires companies to disclose government contracts. The standard is black and white. Deloitte and Serco failed to follow it. Then there is AASB 124, which requires that a company “shall” disclose related-party transactions. Again, black and white.

Paragraph 18: “If an entity has had related party transactions during the periods covered by the financial statements, it shall disclose the nature of the related party relationship as well as information about those transactions and outstanding balances, including commitments, necessary for users to understand the potential effect of the relationship on the financial statements. At a minimum, disclosures shall include:

  1. the amount of the transactions;
  2. the amount of outstanding balances, including commitments, and: (i) their terms and conditions, including whether they are secured, and the nature of the consideration to be provided in settlement; and (ii) details of any guarantees given or received” etc.

Perhaps Deloitte has misread it and adopted the interpretation that its client “shan’t” disclose related-party transactions.

University of NSW accounting expert Jeff Knapp describes the Serco accounts as “a joke”. In its “audit opinion” Deloitte says: “The audit report complies with Australian accounting standards.” Knapp says, “No it doesn’t.”

Breaking out the fees to Deloitte, it was paid $622,000 for its third-rate “audit services”, and $788,000 for “non-audit services” that were not specified. So sloppy is this audit that Note 18 to the accounts even says “The immediate parent and ultimate controlling party respectively of the company are Serco Group Pty Ltd and Serco Plc. Que?  Serco Group is its own parent? Parent and child in one? Has Deloitte branched out into corporate genetic engineering?

A couple of useful points can be made about all this. One, what is the point of auditors any way? Two, the big four are so big, and get it wrong so often, nobody cares because they are above-the-law, beyond-the-law, unaccountable accountants.

It is worth a reminder that the Australian Tax Office is running a pilot scheme called ECAP (External Compliance Assurance Process) whereby it has effectively outsourced tax compliance to the audit firms. So the auditors of multinational companies are also now doing their clients’ tax compliance. The foxes have been put in charge of the hen house. The Tax Office justifies this by arguing that auditors are professionals with integrity who can be trusted.

Last month’s Senate inquiry into corporate tax avoidance demonstrated they cannot be trusted; they are predatory and cost this country billions of dollars in tax revenues year in, year out.

If a company does not comply with accounting standards it is in breach of the law. The Corporations Act requires that corporations follow accounting standards. All this might sound pernickety but the gross failure of the professions to abide by the law means things that should be disclosed are not being disclosed and therefore the likes of the Tax Office cannot see what should be taxed.

Back to the Serco accounts, although the parent company injected an additional $100 million of equity late last year, Serco Australia reported net assets of  only $32 million at year end.

Its parent, Serco Group Pty Ltd, reported an even worse result with a net loss of $490 million on revenues of $1.2 billion.  Despite the injection of equity, Serco Group reported negative net assets of $43 million at the end of 2014. This means the Serco Group in Australia is technically insolvent as its liabilities exceed its assets by $43 million.

Notwithstanding this result and the distress of negative net assets, Deloitte has not  qualified the accounts or challenged management’s assertion that the company’s accounts are appropriately prepared on a going-concern basis.  Their local clients such as Department of Immigration and the governments of Queensland and Victoria probably won’t worry too much because there are guarantees from the Serco parent.

The consolidated parent, Serco Group Limited, which is listed on the London Stock Exchange, has recently raised £550 million in an emergency rights issue that should ensure the group’s survival.  They are, however, awaiting approval by their banks and a waiver of debt covenants based on a new test at the end of May post-rights issue.