Executives are running for cover after the child-care operator's failure, but they are not the only ones in the firing line, reports Colin Kruger.
THE ABC Learning child-care nightmare has now been put to bed for the majority of parents whose children attend its centres and the Government is addressing the policy blunders that allowed ABC to get too big to fail.
But amid the heartfelt pleas of embattled parents, reports of Eddy Groves and his gilded lifestyle and a blizzard of law suits waiting to be unleashed, the fate of the company's accounts - and the role of the corporate bodies responsible for policing them - has been pushed into the background.
That will soon change.
The last detailed financial statements from the failed child-care operator were delivered on February 19 last year when ABC Learning made available its accounts for the half year ending December 31, 2007.
This statement would, for the first time, lift the lid on the social, political and financial disaster that was to come.
It pays to remember that all of those high-octane profits that supercharged the company's shares - and put Groves top of the BRW Young Rich list - began to combust in these accounts under the scrutiny of a new audit team from Ernst & Young.
Statements from ABC Learning just before it finally collapsed in November indicated losses for the year ending June 30 would easily wipe out any profits the company ever made.
In simple terms, ABC Learning has wiped out its dubious claim to having ever made a profit.
When it came to the treatment of revenues and earnings in those fateful half-year accounts, Ernst & Young's Brian Long took a very different view from ABC's previous auditors from Pitcher Partners - who were happy to endorse the interpretation provided by the company's management.
Payments from developers that subsidised loss-making centres - and hid the fact that ultimately a quarter of them were losing money hand over fist - were included as normal revenue, hiding the fact that the Government's child-care largesse was no El Dorado for ABC Learning shareholders.
This got the OK from Pitcher Partners along with valuations on billions of dollars worth of now discredited intangible assets that made up most of ABC's balance sheet.
Dr Philip Ross, the head of the school of accounting at the University of Western Sydney, describes it as a "failure of regulatory and accounting processes" and says that despite changes to corporations law and accounting standards ABC Learning's situation is not that different to the One.Tel and HIH collapses.
"All three sought rapid expansion of market share which carried significant risks clearly not reflected in [their] financial statements," he says.
He notes that ABC Learning's profits increased rapidly through acquisitions, which should have raised questions about the underlying valuation of assets it acquired - especially given that 70 per cent of its assets were intangibles.
"The inherent risk associated with the valuation of the assets was enormous and should have been a red flag," Dr Ross says.
Embarrassingly for the Australian Securities and Investments Commission, this issue was pointed out to it in 2006, but the regulator could find no fault with ABC Learning's massive intangible assets, which would go on to play a crucial role in the expansion that brought the company undone.
The ASIC 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." Continued…
