Lessons from Abigroup: How to know if your company has a numbers problem

It is a major red-face moment for the board and senior management of Lend Lease: yesterday, the company announced to the ASX that it was investigating accounting irregularities, as reported by LeadingCompany.

What’s worse is that the announcement comes less than two weeks after the company issued its fully-audited year-end financial reports on August 30.

The problem relates to two projects under the control of Abigroup, a subsidiary of Lend Lease. In one case, it appears the profits were understated; in another, the losses appear to be understated, the company said in its announcement.

The two problems, if substantiated, effectively cancel each other out, the company said to reassure the market, based on “current information”.

The market was not reassured: the share price fell 6.6% yesterday to $7.88.

Four leaders of Abigroup have been stood down pending the company’s investigation into the problems, and Lend Lease’s executives have taken control of the subsidiary. It’s all very disruptive.

Against a checklist of Lend Lease’s problems and responses, how does your company measure up?

Fostering an open culture

The errors were identified by an internal auditor (whose job is keep constant watch for financial irregularities), who alerted senior management and the board, according to newspaper reports.

To this extent, Lend Lease offers a good role model, says corporate governance expert, Julie Garland McLellan. “It is good to have an internal auditor,” she says. “Not every company can afford one. If you have one, then normally they will speak up as that is their job.”

But even with a paid “whistle blower” (such as an internal auditor), it must be assured that bad news is welcomed and will be acted upon, and that can be difficult, according to professor Ian Ramsay, director of Melbourne University’s Centre for Corporate Law and Securities Regulation.

Ramsay says: “Many companies have struggled to create the right culture whereby negative information can flow readily up the chain of command and, as appropriate, end up in the CEO’s office.”

Leaders must temper their initial response to bad news, says McLellan. “The first thing you would want to say is how the f**k did this happen, but that is the one thing you cannot say,” she says. “The first thing you say is ‘I am really glad you told me this. Thank you.’ You have to prevent yourself saying what you really want to say.”

Hair-trigger continuous disclosure

It must have been a tough decision to make a market announcement. As usual in matters of continuous disclosure, it is not black and white.

Understating both a profit and a loss potentially means that the two matters cancel each other out, financially. The company has stated that it does not believe the matters will have a “material impact” on the group’s 2012 financial year results.

So why should the market know? The answer is two-fold, Ramsay says. The regulator, the Australian Securities and Investments Commission, has issued seven continuous disclosure infringement notices since June last year, compared to a total of 14 between when the laws were introduced in 2004 and June last year.


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