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Tuesday, 7 June 1994
Page: 1427

Senator MICHAEL BAUME (7.11 p.m.) —In a recent estimates committee the inadequate capacity of the Australian Securities Commission to ensure the accuracy of its records relating to proprietary companies was revealed by the admission that the ASC basically relies on the honesty of directors in completing their returns. The inadequacy of this approach is evident from the experience of the ASC with the false returns belatedly filed by the formerly half-owned piggery company group of the Prime Minister (Mr Keating) during the almost three years of his ownership.

  Firstly, in breach of the law, there were no returns filed for most of the group companies since their formation in 1988 until my protests about this failure from around about the middle of 1992. Secondly, in breach of the law, the returns were in the form of proprietary company returns revealing only key financial data instead of the public company returns which were required by law. Thirdly, in breach of the law, a series of full returns were submitted that were not audited. Finally, years late, audited accounts were filed that involved corrections of multimillions of dollars in the previously filed false returns.

  When these audited accounts required by law were eventually filed they demonstrated that the unaudited accounts were full of errors, all of which not surprisingly favoured the piggery group, making the companies appear stronger than they really were. Even the audited accounts were also subject to errors with at least one serious breach of proper accounting standards relating to the fiddled treatment of a debt to Mr John Brown which has magically transformed itself into shareholders' funds, instead of being a liability, even though Mr Brown has never been a shareholder of the Brown and Hatton Group Pty Ltd and redeemed his 100 redeemable preference shares in Euphron Pty Ltd in August 1991.

  So apart from direct breaches of the corporations law by most group companies failing to report at all until I made a political issue of it in the Senate, and then providing inadequate exempt proprietary returns showing only inaccurate key financial data, and only finally filing audited accounts up to three years late, this piggery group clearly set out on a policy of deception by the overstatement of profits, understatement of losses and the conversion of deficits in shareholders' equity into false positive equity as revealed by the belated audits.

  Among the errors in these false returns is the fact that Rincraft Pty Ltd, as the key borrowing company through which the group's massive debt to the Commonwealth Bank is held, is still in breach of the corporations law for having filed no annual returns for 1989 and 1990. The 1991 return it did file is clearly false in claiming a profit of $1,521,585 to offset the group's unaudited consolidated loss of $1,518,847. While the remarkable and continuing failure of the Securities Commission to ensure that this group abides by the corporations law is bad enough, the Prime Minister's failure to require his partner to meet the law on behalf of his half-owned piggery companies was a disgrace.

  Rincraft's returns do not have to be audited because they are not part of the Brown and Hatton Group public company structure, being owned directly by Euphron Pty Ltd, but it still is required by law to submit unaudited annual returns. The Commonwealth Bank does, however, require audited accounts from Rincraft in its mortgage documents, but this requirement appears never to have been enforced by the bank, at least up to the time in August 1992 when the Commonwealth Bank had to make a provision of $4.5 million for loss against its accumulated loans at that time of almost $20 million. The credit committee of the bank attributed this loss to `failure to investigate adequately the financial position of the operation'.

  Rincraft's unaudited 1993 accounts show a $4.45 million increase in liabilities from $19.1 million to $23.7 million indicating either that the Commonwealth Bank is allowing the group to capitalise the interest owing rather than paying it or that another entity is lending it the money to do so. A note in the audited 1991 group accounts for the Brown and Hatton group shows interest capitalised of $2 million following $1.76 million capitalised in 1990 and $1.65 million capitalised in 1989.

  Capitalising so much interest would be a remarkable action by the bank to the benefit of the then Treasurer and now Prime Minister. Farmers being thrown off their land would have welcomed the same treatment instead of foreclosure. It is also remarkable that the bank registered its latest secured charge over Rincraft's assets the day after Mr Keating became Prime Minister, and only eight months before it had to write $4.5 million off this loan as a bad debt.

  Rincraft's 1991 unaudited return is clearly false in showing a positive shareholders' equity of $4.9 million, which is impossible as it would mean that the 1992 accounts represented an inexplicable reversal to a negative equity of $1.27 million rising to 1993's negative equity of $1.39 million. The 1990 Olympia Refrigeration (Sales) Pty Ltd accounts reveal a loan of $1,412,000 owed to Exhibit Resources Pty Ltd which remained outstanding in the accounts to 30 June 1991. This group was placed in the hands of a liquidator on 23 May 1991 but he has no knowledge of such a debt.

  The total assets of the Brown and Hatton Group Pty Ltd of $19.8 million were wrongly described as net tangible assets in 1990 in the annual return dated 30 December 1991, but that return was rejected by the ASC as inadequate. The company's 1990 profit shown in the version filed on 10 July 1992 of $842,999 was really a loss of $1 million, and the profit of $470,824 for 1989 was really a loss of $1.5 million when the audited accounts were eventually filed.

  No depreciation was charged in these 1990 unaudited accounts against the buildings, plant and equipment, although the annual return says assets are `depreciated over their estimated useful lives from the date of acquisition.' In accounts filed in December 1992, five months later, a consolidated depreciation charge of $103,000 was eventually shown. The company wrongly described as long-term loans owing to its associated company Rincraft Pty Ltd what, in fact, were short-term borrowings by Rincraft from the bank that had been on-lent. The audited accounts corrected this false impression that the liabilities were long term by converting them into current liabilities.

  The 1990 profit and shareholders' equity of Brown and Hatton Rural Pty Ltd were overstated by the failure to deduct $45,000 in provision for annual leave. The unaudited 1990 accounts for Jensay Pty Ltd understated its loss and overstated its assets by the $730,432 that auditors later required to be written off as a bad debt from Olympia Refrigeration (Sales) Pty Ltd. Its liabilities were understated by $412,000 additional borrowing required from the parent to balance its books. These are all group companies under the same ownership and the same directors. Jensay's 1991 accounts were false for similar reasons with a further $412,000 write-off lifting the deficit on shareholders' funds from the $21,202 claimed in the unaudited annual return to the audited figure of $1.16 million—which by 1993 had reached $2.14 million with liabilities about double the company's assets.

  Olympia Refrigeration (Sales) Pty Ltd originally reported an unaudited loss of $141,143, which the audited accounts corrected to a loss of $800,258, as its assets were shown to have been overstated by $159,513, its liabilities understated by $473,460, and its shareholders' equity falsely claimed to have been in credit by $167,582 when the audited accounts reveal they were negative by $800,256. They were its 1990 accounts. The company's 1991 accounts were also wrong on all these scores with the deficit in shareholders' equity being understated by $180,863 when it should have been $1.16 million; by last June it had reached $2.8 million.

  The two other Olympia group companies both managed `typographical mistakes' in their 1990 accounts with negative shareholders' equity of $454,429 and $125,858 falsely shown as positives. I will continue to outline these mistakes—these major corrections—that the ASC has no capacity to deal with on a subsequent occasion as I appear now to have run out of time.