The Fall-Out From a Scandal Down-Under
There is something incurably Australian about Australian financial scandals. They are not like their US counterparts, where executives help themselves through accounting sleight of hand, only to be found out later by gaping holes in the audits. Aussies seem to be more openly brazen, sharing the spoils with their mates, and everybody who knows anybody gets in on the act.
The HIH Insurance scam seemed to read as a who’s who list of Australia’s corporate, political and entertainment world. So too does the latest scandal over Offset Alpine, a little known printing company which has fingered prominent personalities from all walks of life.
When celebrity stockbroker Rene Rivkin addressed shareholders of the company in 1994 he had some good news and some bad news. Bad news was the printing press, which had struggled to make a profit, had burned down. Good news was the insurance had paid up to the tune of $A53 million, one of the largest pay-outs Sydney has ever seen. This would definitely cover the $3m value of the presses and the loss of trade while the new plant was installed.
And here we go. Rene Rivkin’s fellow director, Bruce Corlett, sat on the board of FAI Insurance (also involved in the HIH debacle), which was the underwriter that had to pay up. Amazingly, FAI was also the happy owner of 9% of the shares of Offset Alpine. Kerry Packer, head honcho at Australian Consolidated Press (and Australia’s richest man) had sold Rivkin the press. His sole remark was “it had been a very good fire”. Good for Rivkin, good for FAI and good for all their mates.
The amazing thing is that this hitherto unknown printing plant had enriched shareholders from the State and Federal Labour party including former minister Graham Richardson, and the Packer-connected businessman, Trevor Kennedy. Even a day-time show host, Ray Martin had shares, as did the former governor general, Bill Hayden.
Richardson is at the centre of most of the activity – he was once a chauffer to former prime minister Bob Hawke and rose to become state secretary and a federal cabinet minister. He has latterly become a political consultant to Packer.
Why has it come back to haunt them? In late October, there were revelations about the ownership of a mysterious block of shares obscured behind an Israeli-government controlled Swiss Bank – Bank Leumi le-Israel. Later it was revealed that Swiss investigators had gained admissions from Rivkin that he, Richardson and Kennedy, were behind the shares. Rivkin is also reported to have admitted that he traded shares anonymously through Swiss accounts for the others.
Details only became public as Rivkin was caught up in a bank fraud – ironically because of the loss of his own money.
The end result is that the Australian tax authorities and the Australian Securities Commission were stopped from knowing who was trading in the company’s shares and who should have been paying tax on the resulting profits.
This is the type of scandal which should not blow over, but then again, worse scandals in this country have been resigned to the dustbin of history. HIH has yet to make a conviction and Offset Alpine has been less prolific and hurt less people.
One of the most interesting studies of risk is the Banana Skins survey, run by the Centre for the Study of Financial Innovation, based in the City of London. It is not a survey that claims great science, but is based purely on perception. It simply asks bankers, regulators and financial analysts what they perceive to be the biggest financial risks.
Not surprisingly the respondents have voted credit derivatives as one of the least understood and most feared risks, but perhaps more surprisingly, regulation itself – or perhaps more accurately – over regulation – was high up on the list.
This is a touch paradoxical, given that regulation is supposed to minimise risk, not create it, but in the past two years it has made it to the top 10. David Lascelles, a co-director of the Centre, says that this may be perfectly obvious – more than half the respondents are bankers who might well feel ill disposed towards regulation.
“But since responses are broken down by type of respondent, it is plain that non-bankers and analysts have similar perceptions,” he says.
Given the talk in this and many other columns about the onerous responsibilities laid on the financial sector in such areas as money laundering and the Basel II directives, the results of the survey seem to strike a chord.
Businesses, both big and small have had to contend with weak markets, corporate scandals, terrorist attacks and so on; the demands come not just from domestic regulators, but also from international initiatives such as the Basel and various EU directives.
“The costs in terms of compliance, management time and general dulling of entrepreneurial spirit are evident: banks, insurance companies and fund managers have all had to crank up their internal staffs and procedures for an effort that yields no obvious return,” Lascelles says.
It may seem like a world away to most, but one need look no further than the Bank of India which this month admitted it was selling off parts of its international business to avoid compliance with the Basel II Accord. If a bank has less than 20% of its business overseas, it will not have to implement the Accord until well after the official target of 2006. It has sold investments in French Telecom, JP Morgan, Chase Manhattan, Citibank and Ford. It has sold over Rs 600 crore worth of its low-yielding international assets in order not to be deemed “international” by Basel standards.
As one of the Banana Skin survey respondents said of Basel II: “It will affect 30,000 banks and cost $15,000 billion to implement. At what point does regulation become cost-effective?”
Banks which are bit-part global players such as the Bank of India, have made a decision to get smaller, believing quite rightly that only mega-institutions can handle mega-regulation. As the burden falls disproportionately on the shoulders of smaller banks, regulation could drive them out of business and force even more consolidation on a sector already dominated by giants.
It may be just an isolated example, but PwC in the US recently told lawmakers how it had recently stopped around 20% of the tax work it carried out for its audit clients over concerns the work may jeopardise the integrity and independence of audited financial statements.
The reasons are not just ethical but economic – according to Sam diPiazza, the firm’s head, there is now a general perception that doing tax and audit work for one client is tantamount to a conflict of interest. “Practice protection” costs are now the second largest cost of doing business, he says “second only to the compensation provided by its people”. These costs include insurance, legal settlements and litigation, reflecting lawyers’ newly discovered focus on failed audits and corporate statements.
What this means is that PwC has decided to shed some of its “higher risk” clients to minimise the growing legal risks of simply having them on the books. In the US, PwC actually reviewed 842 pubic and non-public clients and got rid of 159 of them.
PwC’s actions must be one of the few publicised cases where a company has actually got rid of questionable or difficult clients as the risks they invoke outweigh their potential profitability. Perhaps there is integrity in accounting, after all.