Commentary 7:52 AM, 22 Oct 2009 David Llewellyn-Smith THE DISTILLERY: Don't mention the Four TOP News Wesfarmers shares jump 6.5% on Coles first quarter food and liquor sales 12:10 PM Woodside third quarter output drops 5% yr-on-yr 12:07 PM Telcos push for Telstra break-up laws 1:54 PM Myer share offer to close today 12:16 PM China exports to resume yr/yr growth in Q4: researcher 1:42 PM
The Spectators Bartholomeusz: A win for Wesfarmers DEALS TV: Insuring for change Gottliebsen, Bartholomeusz: KGB TV: Scott Powers Kohler: Oracles of the economy THE DISTILLERY: The Don of commentary
Centro is the thorn in the paw today with Bryan Frith of The Australian offering his technical breakdown of what is at stake in the ASIC action against eight former executives. According to Frith, “At issue is whether the directors and officers breached their fiduciary duties by signing off the 2007 accounts of Centro Properties and Centro Retail Trust as being prepared in accordance with the accounting standards and presenting a true and fair view when, according to ASIC, they were materially incorrect, in that they recorded $1.5 billion of debt as current liabilities rather than non-current liabilities." Frith quotes former chairman Brian Healey, “we never expected nor could reasonably anticipate the sources of funding that have historically been available to us and many other companies would shut for business’" and concludes “That smacks of the board chancing its arm and getting it wrong.”
Frith’s interpretation is further finessed by Stephen Bartholomeusz of Business Spectator who opines that “There is no suggestion at this stage that the Centro directors knew of the misclassification when they approved the accounts, which means that the core question for the court is whether they should have known.” The Australian Financial Review’s Chanticleer agrees: “...at issue in this matter is the extent to which a board can rely on the information provided to it by management and advisors.”
Two pieces are also available at The Sydney Morning Herald. Paddy Manning offers a biography of Centro that retells how the company grew from being a conservative owner/operator of quiet regional malls in Australia to the fifth largest mall owner in the US and financial engineer extraordinaire. Ian Verrender draws a moral from the tale – that the auditors are serial ‘yes men’, incapable of resisting corporate chicanery because auditing is a loss leader that gets “a foot in the door so they can sell other, far more profitable services”. Verrender sees similar forces at work in the cases of Allco, City Pacific, OZ Minerals, Sons of Gwalia and Multiplex. Matthew Stevens of The Australian agrees with the fact “that PwC was missing from yesterday's list of ASIC targets seems just a little odd given the circumstances” but he concludes “it would seem clear that ASIC is trying to tell us that directors might need to be much more cautious about accepting at face value either data presented by management or by independent auditors.”
This column has just one question for all these huffing and puffing columnists. If Centro’s mismanagement of its liabilities was so egregious, then why has not one of them aimed the same criticism at the big four banks, whose principle difference from Centro was an eleventh-hour government guarantee on their liabilities. Where is the inquiry into the banks’ mismanagement of liabilities? Where are the questions about their market disclosure? Where is the outrage at their special treatment? Where is the investigation of why and how such an outcome was possible and what it means for market functions in the future?
Instead we get more bank exceptionalism from Alan Wood at The Australian, addressing criticisms made by Professor Ross Garnaut and this columnist that Australia’s “banks were potentially insolvent in the crisis because of their dependence on overseas wholesale funding and had to be rescued by a government guarantee”. According to Wood, “It was in fact more of a liquidity than a solvency problem, triggered by the Irish guaranteeing their ill-run and ill-supervised banking system, which was on the point of collapse.”
Nobody is defending Centro on the basis that the meltdown in CMBS was unknowable. That’s because the source of the funding disruption is irrelevant. Companies are only responsible for their liability management.
This column’s advice (and more to the point, that of the government, regulators and media) to any would-be Australian executive who wishes to borrow excessively to fund overvalued assets, pump up their bonus, and take no responsibility for any of it, is join a bank, preferably a large one.
CNP Price at posting:
34.0¢ Sentiment: Hold Disclosure: Held
