In this case, Johnson & Johnson’s auditor PwC, which failed to ensure its client made adequate disclosures about its financial affairs, thereby putting creditors at risk.
As reported here, the big pharma group allowed its Deed of Cross Guarantee to lapse over seven companies, effectively reducing the pool of assets which creditors could access in a legal claim such as the class action lawsuit over the vaginal mesh implants which Johnson & Johnson has just lost.
The Australian entity Johnson & Johnson Medical Pty Ltd, one of the three defendants, was also among seven companies exposed to the lapsed Deed of Guarantee. The other two are foreign companies.
A search of Johnson and Johnson’s 2018 financial statements appears to show that the guarantee has been reinstated, that Johnson & Johnson Medical therefore now enjoys a cross guarantee. Yet a slew of disclosures has been lobbed with the Australian Securities & Investments Commission in recent weeks, suggesting a rush by Johnson & Johnson and its auditors and lawyers to get their houses in order.
In the Federal Court victory for more than 1,350 women who suffered terrible side effects from a pelvic mesh implant, the Judge Anna Katzmann found the evidence was overwhelming and the creators of the devices were negligent.
From a broader public policy perspective, the financial behaviour of the US multinational is indicative of the negligence of the corporate sector and its advisors such as the Big Four accounting firms, PwC, EY, Deloitte and KPMG.
The Committee on Corporations and Financial Services kicked off its Regulation of Audit Inquiry at hearings on Tuesday this week. ASIC was first up.
In their testimony, ASIC commissioners agreed the state of big company audits – following inspections which showed one quarter of financial reports carried “material misstatements” – was not adequate.
“Audit quality needs to approve,” said Commissioner John Price. “I think they (audit inspection results) are very disappointing … I think audit quality needs to improve,” said the head of the regulators audit division Doug Niven.
It is interesting that just this month, 14 documents have been lodged with the regulator which are to do with Johnson & Johnson Medical, the company at the centre of the landmark court case.
Johnson & Johnson is one of many multinationals which, with the connivance of their auditors, quietly switched to a lower form of transparency and reporting.
Without any explanation by its directors or by its auditor PwC, Johnson and Johnson changed from lodging General Purpose financial statements to the inadequate and skimpy Special Purpose variety in 2009.
This trend towards less disclosure – a lower standard of financial reporting – was raised by Senator Peter Whish-Wilson at the Tuesday hearing.
Whish-Wilson asked ASIC how companies such as News Corp and Glencore could claim (which is the claim made by companies lodging Special Purpose reports) that there was no public interest in their accounts. The only parties which were interested were the parent companies of Grencore and News Corp overseas.
ASIC was unable to explain, in light of its investigation into the financial reports of “public interest entities”, what public interest was, and whether public interest suggested that there should be more than one or two parties (thousands of creditors for instance) interested in seeing the financial reports of large corporations.
Should the regulators and the audit profession recognise the obvious, that large corporations have many stakeholders and that it is in the interests of the public and these stakeholders that they file General Purpose accounts, disclosure and transparency might increase substantially.
The other point to be made from the Johnson & Johnson reporting – as with many other multinationals – is that they don’t appear to have been fined for their myriad failures to lodge things on time, or to comply with other regulations.
Any powerless individual, rather than powerful corporation, will find themselves in receipt of a large penalty for minor breaches. The double standard is telling.
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