ACC302 Auditing and Assurance

Introduction

The rationale behind preparing this report is to research and review the operations of ABC Learning centres and interpret the major causes and drivers leading to its downfall in the financial year of 2008. This report will also look into the business model, the main business concerning the company and certain inherent business risks as a result of which the company suffered. Additionally, this report will also analyse the different accounting issues involved and the capacity of the auditor in detecting the issues at an earlier date in order to prevent the outbreak of the scandal. Lastly, the report will also discuss the prevailing regulatory and statutory framework at the time that can be linked to have contributed to the fall of the business.

Discussion

Business Overview and Risk Identification

ABC Learning Centres commenced its operations in Brisbane in the year of 1988 and was recognized as one of the largest childcare organizations around the globe. It did not take much time for the company to grow quickly by opening a total of 43 centres in Australia (Smh.com.au, 2021). It is to be noted that in Australia, child care services mostly comprised of subsidies owing to the fact that such companies were under the foresight of the government. The business model of ABC was to expand along the lines of setting up a chain of private childcare centres in Australia. This was also accelerated by the fact that several opportunities came by when the government provided subsidies to parents directly for their children. However, during the Global Financial Crisis, the issues of liquidity started to arise which resulted in the company filing for bankruptcy (Governance For Stakeholders, 2021).

There were two business risks which lead to the downfall and were most prominent among others. Firstly, as discussed above, the global financial crisis was one of the most important reasons that affected the operations of the company which is because the outbreak resulted in a significant decline in the liquidity position of the business as a result of which the company did not have enough liquidity to cover for working capital requirements and financing their operations that affected the going concern. Lastly, a high proportion of debts that adversely affected the capital structure of the company aggravating the risk of default that was also affected by the liquidity issue as the company did not generate much for servicing debts (SBS News, 2021).

In addition to the business risks that are discussed above, the operations were also exposed to certain inherent risks. Firstly, childcare licenses were an important part of the assets and liabilities of the company which were valued by directors and based o accounting assumptions and judgements. This flawed the accounting principles as the balance sheet was misstated because of an attempt to inflate the assets of the company. Lastly, childcare services in the country are an expensive affair and without the support of government subsidies, provision of proper services is not possible. In order to obtain funding from government, the company had to accumulate all information concerning children which then had to be submitted to the government resulting in high compliance costs. A high possibility of misstatement of the income statement with respect to profits could prevail.

Accounting Issues in the case of ABC Learning Centre

There were several accounting issues involved in the case with the most important being inappropriate recognition and measurement of assets. The business model of the company aimed towards expanding through acquisitions where assets were incorrectly valued and inflated. According to the annual report in FY2007, 70 percent of the total assets were mostly acquired intangible assets that were valued incorrectly (Theaustralian.com.au, 2021). These consisted of goodwill and childcare licenses that were valued incorrectly by directors. Goodwill was valued at $271 million and the licenses were valued at $2.4 billion resulting in asset overvaluation also resulting in doubts concerning reported profits and overall accuracy of the reports. Furthermore, the annual report in year 2005 and 2006 reflects upon the fact that debt was continuously increasing with the debt in 2006 reported worth $ 234,888,000 also casting doubts concerning the undervaluation of debts. Likewise, the annual report of 2006 presented the value of childcare license worth $1,343,423,000 which was the highest asset figure in the balance sheet of the company that was potentially misstated.

Auditor Report Analysis

Pitcher Partners were the auditors of the company since they were appointed in the year of 2003. The auditors provided the company with unqualified report each year providing assurance to investors concerning the accuracy of financial statements which meant the same to reflect upon a true and fair view. According to the auditors, the financial statements complied with accounting standards and Corporation Act 2001. In 2007, the auditors resigned while Ernst and Young got appointed that had a different perception of profits that further brought KPMG for a second opinion. Both firms opinionated the financial statements to not present a true and fair view which renders the incompetency of Pitcher Partners in conducting their responsibilities diligently due to their inability of detecting misrepresentation (NewsComAu, 2021).

The auditor’s role in the fall of ABC Learning Centre

Pitcher Partners the auditors of the company were not able to identify the misstatement in the financial statements of the company. The auditors did not value the intangible assets reported by the company correctly. The auditors relied upon the existing audit evidences for reporting an audit opinion and did not look for any corroborative evidences which would have otherwise revealed the scandal earlier. Hence, the auditors did not apply their skills during the process of audit and thus a lack of initiative and responsibility on the part of the auditor can also be blamed for the fall of the company. The primary responsibility of the auditor is to confirm that the financial statements comply with the accounting standards or not. KPMG who were brought it later were of the opinion stated that accounting treatment and provisions as dictated in the accounting standards are open to an acceptable level of interpretation which should not hold auditors responsible (McGrathNicol, 2021).

Consequences for Pitcher Partners

Pitcher Partners were of the opinion that the accounting standards were open to interpretation and there are no restrictions that are placed upon by the standard which was adhered to by ABC Learning Centres. However, the partners involved in auditing the business were held liable personally for all losses and as a result the auditor Pitcher Partners broke from the national body of Queensland. Apart from this there were no such liabilities that were imposed upon the audit firm and their arguments got considered by all regulatory authorities.

Regulatory and Legislative Reforms

The events following the fall of the company resulted in policy changes among businesses for preventing the culture of greed in essential services ensuring appropriate regulation of the sector so as to prevent from such a scandal to take place again. There were also updates and changes done in the accounting standards for preventing manipulations in the books so as to communicate an accurate financial state of affairs. The government was proactive to respond ensuring appropriate changes in regulatory framework concerning the sector of childcare services for fostering competition and reducing prices for services.

Conclusion

Based on the discussions presented in this report, a thorough comprehensive analysis has been made into the scandal concerning the fall of ABC Learning Centre which reflects upon the inability of the auditors in applying due diligence during their scope of audit for detecting fraud and error in financial reporting practices of the company. This report also looks into the consequences faced by the auditor and discusses the concluding reforms as a result.

References

Governance For Stakeholders. (2021). The ABC of a corporate collapse | Governance For Stakeholders. Retrieved 29 September 2021, from https://governanceforstakeholders.com/2012/12/28/the-abc-of-a-corporate-collapse/

McGrathNicol. (2021). ABC Learning – 10 years on - McGrathNicol. Retrieved 29 September 2021, from https://www.mcgrathnicol.com/insight/abc-learning-10-years/

NewsComAu. (2021). The scandal in childcare. Retrieved 29 September 2021, from https://amp.news.com.au/news/the-scandal-in-childcare/news-story/328ff7ca48d9f3501f9e93e477965fc2

SBS News. (2021). ASIC closes file on ABC Learning collapse. Retrieved 29 September 2021, from https://www.sbs.com.au/news/asic-closes-file-on-abc-learning-collapse

Smh.com.au. (2021). Lessons to be learnt from ABC Learning's collapse. Retrieved 29 September 2021, from https://www.smh.com.au/business/lessons-to-be-learnt-from-abc-learnings-collapse-20090101-78f8.html

Theaustralian.com.au. (2021). The ABC of policy failure. Retrieved 29 September 2021, from https://www.theaustralian.com.au/business/business-spectator/news-story/the-abc-of-policy-failure/e5f9cb130150525aba97487de2a91c9d

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