The raw speed of a Ford or Holden V8 roaring down Conrod Straight at Mount Panorama is something to behold. The Ford and Holden factory teams work overtime in search of the ultimate prize in motor sport.
Back at the corporate offices of Ford and Holden however there is another sort of race taking place. This is the race to achieve as little disclosure as is humanly possible in the auto-makers’ annual financial reports – the Race to the Bottom of the Mountain if you like.
Start your engines, get a Big Four audit firm as your co-driver, pick out the gaps in the regulatory road, take the short cuts, and go the wrong way if you must. The prize here is doing away with those irritating disclosures about financial risk management, key management personnel remuneration, and the audit firm payoffs.
Yes, there is a disturbing smell which exudes from the financial reporting cabins of our two best-known motor vehicle manufacturers. It’s time to break out the standards manual, lift the hood and consult the experts.
In pole position
Pole position goes to the Ford Motor Company of Australia Limited and its annual financial report for December 31, 2011, audited by PricewaterhouseCoopers.
Note 1 of Significant Accounting Policies, states “These general purpose financial statements have been prepared in accordance with Australian Accounting Standards – Reduced Disclosure Requirements”. Ford has made a very quick start here indeed, says University of NSW disclosure expert Jeffrey Knapp, who is also incidentally a Ford V8 driver himself.
The accounting standard introducing reduced disclosure requirements, AASB 1053, doesn’t officially commence until years beginning July 1, 2013, observes Knapp. But don’t call in the stewards yet as Ford can apply an accounting standard early. The key point is that Ford is only allowed to apply reduced disclosure requirements if it does not have “public accountability”, he says.
“Ford seems to be gunning past the safety car here. Ford Motor Company of Australia Limited is a large public company with annual revenues of $2.8 billion and assets of $1.5 billion at last count. It is also an economically significant company to the Geelong region of Victoria. It receives public money in the form of government grants and assistance. It employs many members of the Australian public and has many Australian creditors.”
In light of its economic significance and broad stakeholders, it would be a long stretch to insist that Ford did not have public accountability. Our expert at the UNSW Australian School of Business says it fits “squarely within the definition of an entity that has public accountability because it is accountable to wide range of existing and potential resource providers such as employees and creditors”.
Ford also has broader accountability to the taxpaying public in light of the government assistance it receives. Knapp describes the Ford and PWC approach of reduced disclosures based on zero public accountability as “an unfortunate precedent for Australian financial reporting”.
But exactly what disclosures has Ford been reducing after claiming no public accountability? A comparison of its accounts for 2009 with those of 2011 provides an answer. The 2009 accounts included five pages of disclosure on financial risk management but that’s now vanished in a puff of smoke around the bend. “I believe that the employees and creditors of Ford are entitled to information about how the company is managing financial risks, especially given the current economic environment,” says Jeff Knapp.
Two other disclosures that have dematerialised are the details of the employment benefits of key management personnel including share-based payments and the details of the remuneration of auditors for audit and other services.
“It’s not a good look when the management and auditor of a public company and publicly funded company decide that removing disclosure of their remuneration is the way to go,” says Knapp. PWC’s unqualified audit opinion reeks of a conflict of interest because it agrees that the fees received by the firm should not be disclosed. Poor work from Ford’s co-driver.
But the strangest change of all between the 2009 and 2011 accounts of Ford is how a maximum becomes a minimum. In 2009, Ford complies with all the requirements of the Australian equivalents to international financial reporting standards. In 2011, according to Ford and PWC, Ford has no public accountability and is avidly dodging the disclosure requirements in the standards.
“I do not understand how a public company complying with all accounting standards overnight becomes an entity with no public accountability reducing its disclosures,” says Knapp.
Back to Holden
Making our way back to the grid positions we found GM Holden’s annual financial report for December 31, 2011, audited by Deloitte. Note 1 refers to the early adoption of the reduced disclosure regime. Again, information on remuneration of key management personnel and remuneration of auditors had also been “reduced”.
If we can do one more lap of the course then; Ford and Holden are recipients of significant public grants. This should ensure a maximum of disclosures not the minimum. PWC and Deloitte are market-leading accounting firms which set the tone for the rest of the accounting profession. PWC and Deloitte appear to have twisted the knife into the public accountability definition of AASB 1053 instead of showing leadership on how financial reporting disclosures should be made by large public companies in receipt of public money.
According to Knapp, Ford may have also omitted disclosures for government grants that it is required to make even if it has no public accountability. AASB 1020 requires disclosure of any unfulfilled conditions and other contingencies attaching to government assistance that has been recognised. “I can’t find that required disclosure” says Knapp “but I’m happy to be corrected”.
Surely it is time to call in the stewards. Take a good long hard look down Conrod Straight. . Can anyone see the Australian Securities and Investments Commission or the Institute of Chartered Accountants in their Morris Minors putting along?
The smoke is billowing and they are being lapped … but … what’s that … is that a battered old hubcap rolling careering off the side of the track?