Clive Palmer may be busy shaping the laws of the nation, but when it comes to obeying them, his flagship company is sadly lacking. An analysis of the accounts for Mineralogy Pty Ltd has identified a slew of irregularities. Some are technical, and are laid out in detail below.
Questions were put to Palmer and Mineralogy's auditors, Ernst & Young. Both declined to provide a meaningful response.
E&Y was appointed auditor of Mineralogy on June 30, 2009. There is no auditor previously mentioned in the filings with the Australian Securities and Investments Commission.
Nevertheless, the Mineralogy accounts for 2008 mysteriously claim that E&Y earned $49,500 a year before it was appointed to audit the company's accounts.
Accounting and disclosure expert at University of NSW, Jeff Knapp, who reviewed the filings for Fairfax Media, said: ''The claim that audit fees were earned during the 2007 and 2008 years is plainly wrong given Ernst & Young was appointed on 30 June, 2009.''
Knapp also points to the 2007 tax disclosures. According to the income statement there is an income tax expense of $79 million for 2007, mainly relating to a large capital gain. Yet there is no evidence in the 2007 balance sheet for a significant tax liability.
The accounts show the company paid income tax of $68 million for 2007. As anybody who has filed a tax return will know, however, you pay your tax in the year after you make a capital gain, not in the same year.
''The income tax information relating to 2007 does not add up and suggests that transactions and events from previous accounting periods may have been lumped into 2007,'' says Knapp. The rub is that there is no record in the ASIC database of any Mineralogy accounts for 2006 or earlier years.
Knapp also questioned the E&Y audit report for 2008. ''It is unusual for an auditor to give a clean opinion when they have only been appointed 12 months after the relevant year end.''
The key to the mystery of the lackadaisical auditing may lie in the financial statements for the following year, when audit fees jumped to $295,000 and there was also a fee of $848,500 paid to E&Y for ''IPO-related services''.
These presumably relate to Clive Palmer's efforts to float his ResourceHouse group on the Hong Kong stock exchange. E&Y seems to have gone out of its way to show why auditors should be prohibited from offering other services to audit clients.
Even on the most basic appraisal of compliance, Mineralogy and E&Y have failed to adhere to the Corporations Law. It was not until an expose´ in Fairfax Media in 2012 that the company's accounts for 2008, 2009, 2010 and 2011 were suddenly filed. There are penalties for late filing and failure to file, though there is no evidence that Clive Palmer's companies have been penalised.
The failure of Mineralogy and its auditors Ernst & Young to comply with the law should be viewed against the backdrop of a broader breakdown in enforcing accounting standards by the big audit firms.
In The Australian Financial Review on Monday, Su-Lin Tan describes how the accounting standards setter, the Australian Accounting Standards Board, found that more than a quarter of large private companies in Australia did not apply the accounting rules required by ASIC when preparing financial statements.
This widespread failure even encompasses multinationals operating in this country thanks to a government mandate: the likes of detention centre operators Serco and G4S. So Clive Palmer, Mineralogy and Ernst & Young are not alone.
Corporations Law requires that companies follow accounting standards in the preparation of their financial statements. But Mineralogy has given short shrift to this requirement in recent years.
The financial report for 2013 excludes a gain on the forgiveness of a $72 million related-party loan from the profit or loss statement. The financial reports for 2010 to 2012 opt out of required disclosures when this is simply not permitted.
''First-year accounting students understand that if a company like Mineralogy derecognises a liability for no consideration, then a gain must be recognised in the profit or loss,'' says Jeff Knapp.
''If big four accounting firms are not going to maintain standards in the private company space, then they may as well not get paid for doing the audits.''
Questions and answers
BusinessDay put the following questions to both Clive Palmer's spokesman from Crook Media and to Ernst & Young:
1. The Mineralogy Pty Limited annual financial report for June 30, 2013 was not filed with ASIC until December 23, 2013. Your audit report was signed on December 20, 2013. Did you report the company to ASIC for being so late?
2. There are pen marks on pages 3, 10, 11 and 33 where the date is changed from December 23, 2013 to December 20, 2013. Did you change the information on these pages or was it the director or company secretary who did the backdating?
3. The Statement of Changes in Equity of Mineralogy for June 30, 2013 on pages 7 and 8 discloses a related party loan payable that has been written off resulting in a gain of $72 million being recognised directly in reserves. This accounting treatment is not in accordance with accounting standards (refer AASB 101 paragraph 106). Do you agree that a loan forgiveness which gives rise to a gain must be recognised in the profit or loss for the period? On what grounds have you allowed recognising this gain directly to reserves without qualifying the audit report? Please quote any appropriate authority on whom you rely.
4. I refer you to page 16 and the following explanation: "Gains and losses are recognised in the income statement when liabilities are derecognised as well as through the amortisation process". Do you agree that the company's designated accounting policy has not been followed in relation to the related party payable of $72 million that has been written off directly against reserves? SAC 4 also defines: "Equity is increased by contributions by owners and excesses of revenues over expenses resulting from the operations of the entity". The forgiveness of related party loans does not fit this recognition ...
5. In light of questions 3 and 4 above, would you please confirm that the financial report of Mineralogy Pty Ltd for June 30, 2013 is materially misstated? Do you agree that that the financial report should be corrected and reissued as soon as possible.
6. Please explain how the gain on disposal of tenement and mining rights of $35 million was derived. The movement in mining tenements and rights opening balances and cash receipts does not contribute to the size of this gain.
7. Please explain how investments were accounted for in deriving the gain on disposal of investments of $2.3 million.
RESPONSE FROM CROOK MEDIA, CLIVE PALMER'S SPOKESMAN
Mineralogy 2013 accounts were signed off by E&Y.
Appropriate lodgement fees were paid.
RESPONSE FROM E&Y
Thank you for your email and for your call this morning.
Confirming per our conversation that EY does not comment on client related matters.