Governance: KPMG partners banned in Aus over Westpoint

Brett Charles Fullarton, Robert Charles Kelly and Jonathan Grant Robinson were all involved in some part of the work relating to the audit of Westpoint which collapsed in 2006 with large debts.

The agreement is in the form of Enforceable Undertakings which provide that the three will not practice as registered auditors for:

• Mr Fullarton – two years; Mr Kelly – eighteen months; Mr Robinson – nine months

In addition, the three must:

• participate in an additional ten hours of continuing professional education on audit-related matters during these periods;
• have their next three audits following these respective periods reviewed by KPMG’s Partner in Charge, Department of Professional Practice- Audit; and
• pay ASIC’s investigation and legal costs.

The following is provided by ASIC:

DETAILS OF THE AUDIT CONDUCT

Details of ASIC’s concerns in relation to the audits that were performed by the KPMG partners are set out below. The KPMG partners have acknowledged these concerns but do not accept them.

Mr Fullarton

Mr Fullarton signed unqualified audit opinions in connection with various entities within the Westpoint Group for the financial years ended 30 June 2002, 2003 and 2004.As a result of its investigations, ASIC formed a view that the audits of the entities conducted by Mr Fullarton were inadequate and failed to comply with Australian Auditing Standards. ASIC’s concerns in relation to the audits included:

• • failure to adequately consider the appropriateness of the recognition of profit earned on each such project as at the balance date;
  • failure to adequately consider the appropriateness of the calculation and recording of procurement and management fee revenue;
  • failure to obtain sufficient appropriate audit evidence in connection with cash flow forecasts and carrying value and classification of receivables, being audit evidence on which the going concern assumption was based;
  • failure to consider the importance of the effect of continued fund raising through promissory notes subsequent to balance date and up to date of signing of the audit report that were in excess of the amount specified in the relevant information memoranda;
  • failure to obtain sufficient appropriate audit evidence in connection with: actual costs to date and estimated cost to complete, revenue and profit of development projects being undertaken;
  • failure to obtain sufficient appropriate audit evidence in connection with valuation and disclosure of receivables and disclosure of loans to and from related parties; and
  • failure to qualify an audit opinion on the basis of inappropriate use of financial reporting and presentation standards applicable to non reporting entities in relation to non-compliance with financial reporting presentation and Australian Accounting Standards.

Mr Kelly

Mr Kelly signed unqualified audit opinions in connection with various entities within the Westpoint Group for the financial year ended 30 June 2004.As a result of its investigations, ASIC formed a view that the audits of the entities conducted by Mr Kelly were inadequate and failed to comply with Australian Auditing Standards. ASIC’s concerns in relation to the audits included:

• • failure to obtain sufficient appropriate audit evidence in connection with cash flow forecasts and carrying value and classification of receivables, being audit evidence on which the going concern assumption was based;
  • failure to consider the importance of the effect of continued fund raising through promissory notes subsequent to balance date and up to date of signing of the audit report that were in excess of the amount specified in the relevant information memoranda; and
  • failure to obtain sufficient appropriate audit evidence in connection with actual costs to date and estimated cost to complete, revenue and profit with respect to a development project.

Mr Robinson

Mr Robinson was engaged by Westpoint Management Limited to audit compliance with the compliance plans of three managed investment schemes, for which it was the Responsible Entity, for the financial year ended 30 June 2004.

Mr Robinson issued unqualified audit opinions in respect of the compliance plans for each of those schemes for that financial year.

ASIC’s primary concerns in respect of the audits of the compliance plans, were that Mr Robinson failed to comply with Australian Auditing Standards and that Mr Robinson should have identified that there were material breaches of the compliance plans, and on that basis included an ‘except for’ opinion in the audit report.

The most significant of the breaches contended by ASIC to be material were:

(a) late payment of distributions to members;

(b) late lodgement of financial statements and auditors’ reports; and

(c) failure of the Compliance Officer to produce requested and necessary information to the Compliance Committee to enable issues of compliance to be properly considered.

Further, ASIC was concerned that there were a number of respects in which Mr Robinson failed to obtain sufficient appropriate audit evidence of matters and failed to properly document his audit work.

BACKGROUND INFORMATION

The Westpoint Group collapsed in January 2006 with losses of more than AUD300 million.

The Group promoted investments in a number of property development projects, including 10 projects using unsecured mezzanine finance (a form of fund raising that covers the difference between available bank finance and the cost of the project).

It created mezzanine companies for each of these projects and raised funds for the projects through the issue of mezzanine investment products such as promissory notes.

The investors in Westpoint-related financial products had an outstanding total capital invested of AUD393 million when the Group collapsed. Liquidators and administrators of the various entities have estimated total amounts available for distribution to investors in respect of a limited number of the entities of AUD64 million.

ASIC has taken various steps to recover funds for the benefit of Westpoint investors.