Basis for Adverse Opinion
Emphasis of matter
Audit report of adverse opinion
Key Audit Matter
Audit procedures carried out to resolve the above Key Matter
As per the findings of our research that was carried out to ascertain the truth behind the allegations made on the company and its directors and senior officials in relation to mismanagement of the affairs of the company, failure to act reasonably and take the required measures for dealing in asbestos (which is a dangerous product causing severe health conditions), intentional avoidance by the company of payment of compensation to the aggrieved customers and most importantly the failure to provide accurate information to the Australian Stock Exchange and making a misleading announcement to the Stock Exchange, it was concluded by us that all the allegations made against the company are true.
The directors of the company have violated the provisions of sections 180 and 181 of the Corporations Act, as they had been negligent and reckless in carrying out their duties as the directors. The non-executive directors of the company have been proved as guilty of approving the misleading announcement made by the company to the Australian Stock Exchange in relation to the separate compensation fund that was formed by the company for the payment of compensation funds to the claimants. The said ASX announcement was misleading because the compensation fund later ran short of funds and was not able to make compensation payments to the claimants. The non-executive directors of the company are as much guilty as executive directors as they did nothing to question and challenge the inputs and assumptions that were made by the CFO in relation to the formation of the separate trust fund. It has been proved before us that the directors and senior officials of the company had made the said restructuring arrangement, whereby a separate fund (Medical Research and Compensation Foundation Ltd) was created for the payment of compensation to victims, mainly to prevent and avoid the payment of compensation to the victims.
The company had transferred all its liabilities to the fund and misused the structure of separate legal entities to get rid of its asbestos liabilities and to escape from paying the required compensation, both at the same time. Apart from the failure on part of executive and non-executive directors of the company, the Chief Financial Officer, Company Secretary and General Counsel of the company and many other senior officials of the company had failed in the performance of their duties and had failed to exercise the level of care and diligence that was expected to be exercised by them in respect of decisions taken by them for the company. Further, the restructuring was done by the company mainly to escape from recognizing its asbestos liabilities in its financial statements and to avoid payment of compensation to the victims, but this accounting treatment was not according to the treatment prescribed by Australian Accounting Standard AASB 137 Provisions, Contingent Liabilities, and Contingent Assets.
There were certain instances of fraud and irregularities in the books of accounts of the company and attempts made by the company's officials to indulge in tax evasion. The company had entered into "Tax Avoidance Agreements" which are prohibited by Part IVA of the Income Tax Assessment Act. The company made attempts to transfer its assets to its subsidiary companies, made payment of millions of dollars to its subsidiaries which it quoted as payment of dividends and involved in the reduction of capital.
The financial statements of the company for the year ended 30th June 2019 that have been accompanied by this auditor's report have been prepared on the assumption that James Hardie Industries Limited will be to continue itself as a going concern entity in the future. However, in our opinion, the going concern assumption is not appropriate for James Hardie Industries Limited in consideration of the matters that have been stated by us in the "Basis for adverse opinion" section of our auditor's report. We believe that owing to the seriousness of instances of failure of corporate governance that were identified by us and other instances (as described in the Basis for adverse opinion" section and note 2 of the financial statements) that point out towards the mismanagement that prevailed at the company in the last few years, in terms of failure on part of the directors and senior officials of the company to carry out their responsibilities in the proper manner and violation of provisions of section 180 and 181 of the Corporations Act, a major doubt is cast upon the ability of the company to continue as a going concern.
We have evidence that poor corporate governance prevails at the company and have concluded that in light of the existing circumstances that indicate utter mismanagement, fraud, accounting irregularities and tax evasion by the company, it would be unreasonable to assume that company would be able to continue as a going concern in the future years. All these circumstances indicate corporate failure of the company that may take place in the near future. The management of the company has prepared certain plans intending to improve corporate governance and prevent the mismanagement at the company. However, in our opinion, the actions taken by the management and existing Board to achieve better corporate governance do not seem very effective in curbing the level of mismanagement and would not be able to prevent its corporate failure, which is quite foreseeable at present. The existing financial statements of the company have not been adjusted to reflect the financial results and financial position of the company in the situation that there is the failure of the company to carry on its activities as a going concern entity. As our opinion is in contrast to the going concern assumption that is taken by management in the preparation of these financial statements of James Hardie Industries Limited for the year ended 30th June 2019, we have issued an adverse audit opinion in relation to this matter.
We have carried out the audit of financial statements of James Hardie Industries Limited (the Company) and its subsidiaries (the James Hardie Group) which consist of the Consolidated Statement of Financial Position of the company as on 30th June 2019, the Consolidated Statement of Profit or Loss, the Consolidated Statement of Other Comprehensive Income, the Consolidated Statement of Changes in Equity and the Consolidated statement of cash flows for the year ended in that date. We have also audited the notes accompanying the financial statements and the brief of major accounting policies followed by the company and the declaration made by the directors. This audit was carried out by us as per the procedures prescribed in the Australian Accounting Standards. We have formed our opinion on the basis of reasons that are explained by us in the Basis of Adverse opinion section of our audit report.
We have described our responsibilities under the Australian Accounting Standards in the section on “Auditor’s Responsibilities for the Audit of the Financial Report” that accompanies our report. We hold the required level of auditor’s independence which is supposed to be held by an auditor under the provisions of Corporations Act 2001 and as per the APES 110 which provides the code of ethics for professional accountants that are applicable to our audit of financial statements in Australia. We have duly complied with our ethical responsibilities placed by the Code of Ethics for professional accountants. We assure that the independence declaration that is required to be provided by the auditor to the directors of the Company has been provided and holds the same effect as if it would have held if provided at the time of issuing this audit report. We are of the belief that audit evidence collected by us is enough and relevant so as to provide us a foundation for forming our opinion on the financial statements.
(a)The financial statements of James Hardie Industries Limited for the year ended 30th June 2019 are not according to the requirements of Corporations Act and do not provide a true and fair view of financial position as at 30th June 2019 and its financial performance for the year ended on that date.
(b) As the company has not accounted for its asbestos liabilities according to the requirements prescribed by AAS 137 Provisions, Contingent liabilities and Contingent Assets, the financial statements of the company have not been prepared as per the Australian Accounting Standards (which includes the interpretations issued on those standards).
(c ) The financial statements of the company are not in compliance with the International Financial Reporting Standards.
The following matter was determined by us as a key audit matter for James Hardie Industries Limited while performing our audit on the financial statements of the company for the year ended 30th June 2019:
There were a number of lawsuits filed against James Hardie Industries Limited which related to the presence of asbestos in the products sold by the company. The company had been using asbestos in its products for many years and had not issued any warning or taken any steps to make the public aware of the consequences of coming in contact with asbestos and handling guidelines. Asbestos is known to be highly dangerous and can lead to serious health disorders. Since the company was held as guilty in the various lawsuits that were filed by various parties who had developed health disorders due to exposure to the company's products, the company is supposed to pay compensation to those parties, based on orders of the court. Ideally, in this situation, it is required that the company should make a provision for all the asbestos liabilities in its books of accounts and should ascertain the sources from which it intends to pay these liabilities. However, the company has not presented these asbestos liabilities in its financial statements but transferred this to a separate compensation fund that has been formed by the company for the purpose of paying the claims made by various claimants.
The reason why this matter has been regarded by us as a key audit matter is that the "compensation fund" that has been formed by the company for the purpose of making compensation payments does not hold enough funds to pay off all the asbestos liabilities. It was stated by the company in an announcement made to the Australian Stock Exchange that compensation fund was completely funded; however, it was later revealed that the said announcement was false and the compensation fund did not possess sufficient funds to make payments of compensation. The transfer by the company of its liabilities to a separate company limited by guarantee is a key audit matter as we are not convinced that the above said restructuring carried out by the company is valid, legal and would lead to accurate financial representation. It was also a matter of concern for us that whether the quantum of liabilities recognized by the company and the method used for determination of the number of asbestos liabilities was correct. The nature of these transfers of liabilities and restructuring arrangement does not appear to be in accordance with the Australian Accounting Standard AASB 137 Provisions, Contingent Liabilities, and Contingent Assets.
We carried out the audit procedures described below to address the matter which was identified by us as a key audit matter.
1. Review of minutes of meetings
A detailed study of the minutes of meetings of the board of directors was carried out by us. The purpose of this study of minutes of meetings was to verify that whether the restructuring made by the company by transferring its asbestos liabilities to a separate fund that was formed for the purpose of making compensation payments to the claimants was approved by the board of directors or not and whether the said decision was backed by proper logic.
2. Checking of calculations made by the company in relation to funds to be transferred to the "compensation fund"
We performed a detailed review of the memos, workings, and other documents that were used by the CFO and the directors while taking decision as to how much funds had to be transferred to the compensation fund for settlement of liabilities. We checked the arithmetical accuracy of the reports that were relied upon by the directors to estimate the quantum of money that would be sufficient to pay off the asbestos liabilities of the fund. We also challenged the inputs and assumptions that were used for the purpose of forming these estimates.
3. Review of the method used for determination of asbestos liabilities
We had discussions with the Chief Financial Officer and other senior personnel of the finance department of the company to understand the method and procedure used by the company to determine the timing and amount of compensation claims that were to be recognized in the financial statements of the company. We tested whether the criteria used by the company for recognition and measurement of liabilities are according to requirements of AAS 137.
4. Review of calculations and assumptions made for asbestos liabilities
We picked up a few samples that comprised 40 percent of the total population and performed a detailed review of the assumptions made by the management in the determination of those liabilities. We also went through a copy of the decision provided by the court for a few select cases and made an assessment that whether the company had followed appropriate steps for recognition of their asbestos liabilities.
5. Interview with the Board of directors and senior officials
We interviewed the board of directors and other senior officials to understand from them their perspective in relation to the sufficiency of asbestos liabilities recognized by the company. We questioned them that whether there exists a reason that would cause them to believe that asbestos liabilities recorded by the company are not sufficient and the factors which led to a shortage of funds for making compensation payouts payable by the company.
AASB. (2017). Provisions, Contingent Liabilities and Contingent Assets. Retrieved from https://www.aasb.gov.au/admin/file/content105/c9/AASB137_07-04_COMPapr07_07-07.pdf
CPA Australia. (2019). A Guide to Understanding Auditing and Assurance. Retrieved from https://www.cpaaustralia.com.au/~/media/Corporate/AllFiles/Document/professional-resources/auditing-assurance/guide-understanding-audit-assurance.pdf
CPA Australia. Auditor’s Report In Australia: 2005 to 2015. Retrieved from https://www.cpaaustralia.com.au/-/media/intheblack/allfiles/document/pdf-documents/cpah_2476_going_concern_research_report.pdf?la=en&rev=2831d73777744a64adfe65e90c7adcd8
Gay, G., & Simnett, R. (2018). Auditing and assurance services in Australia. McGraw-Hill Education Australia.
Money matters. (n.d.). Audit of Provisions | Duties of Auditor. Retrieved from https://accountlearning.com/audit-of-provisions-duties-of-auditor/
Woolworths group. (2019). 2019 Annual Report. Retrieved from https://www.woolworthsgroup.com.au/icms_docs/195582_annual-report-2019.pdf
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