THE Australian Securities and Investments Commission was warned more than two years ago that questionable accounting practices at ABC Learning Centres may overstate the value of the company and mislead potential investors, but the regulator declined to take action.
In May 2006 a letter of complaint was mailed to ASIC questioning the value of child-care licences on ABC's balance sheet - which effectively accounts for the majority of the book value ascribed to the embattled child-care operator.
The complainant - who wishes to remain anonymous - questioned ABC's practice of establishing child-care licences as a class of asset and "creating apparent shareholder value" by revaluing these licences which do not have any intrinsic value. It was estimated that between 2001 and 2005, ABC "created" $390 million of shareholder value through this valuation process.
The complainant said: "It's suggested that the methods of financial reporting being employed here are designed to artificially create apparent shareholder value, when, in fact, that shareholder value associated with the child-care licences (91 per cent of net assets) - is based entirely on the future net cash flows of the company, which may or may not be realised. It's also suggested that this may be misleading to potential investors in the company".
An ASIC official replied to the complainant in September 2006 stating it had "made a number of inquiries into the issues" raised. "However, after carefully considering the results of these inquiries, ASIC will not be taking any further action in relation to the issues you have raised at this time," he wrote.
ASIC said its decision not to take action was based on its consideration of a number of factors. "In this case, ASIC notes that the amount of increase in valuation of child-care licences is not material in relation to the net assets of the company as at June 30 2006".
ASIC declined to comment when contacted by the Herald yesterday.
The apparent strength of its balance sheet played a major role in ABC's subsequent expansion.
In ABC's annual report, released just before the ASIC complaint, the company said: "The balance sheet allows ABC to grow even further as our net assets are well above expectations at $845 million. This is due to the revaluation of all of our child-care licenses."
In 2006 the balance sheet helped fund ABC's expansion into the United States and Britain. Its borrowings blew out over the following year from $380 million to $1.8 billion. The strategy played a leading role in ABC's subsequent downfall.
ABC shares have been suspended from trading for three weeks after the company failed to lodge its full-year results and amid battles with its auditor over the restatement of prior year earnings and asset write-downs.
