Almost four years after its inglorious financial collapse, ASIC has finally claimed a scalp from the charred wreckage of ABC Learning Centres. But despite presiding over the loss of more than $1.6 billion of shareholder and lender funds, no executive or director of ABC Learning has had to face civil or criminal sanction. Instead ASIC has proudly enforced a sanction on a relatively junior auditor.
Last week, ASIC announced that the ABC’s former auditor Simon Green, a Brisbane-based audit partner with Pitcher Partners, had accepted a five-year ban for inadequately performing his duties. ASIC’s hard-hitting chair Greg Medcraft (who was appointed well after the group’s collapse) claimed that "auditors and important gatekeepers who are relied on to provide assurance and market confidence in the quality of financial reports".
While ABC shareholders and lenders would no doubt be relieved to see someone finally receive a sanction from the calamity, they would be left scratching their heads as to why Green has been the only person to receive any sort of penalty. No criminal charges were ever laid against Eddy Grove, the mastermind of ABC Learning Centres. A minor civil charge that had been laid against Groves (for the sale of centres of former executive Martin Kemp), was quietly abandoned in July, after the Commonwealth Director of Public Prosecutions failed in its bid to prosecute Kemp.
Simon Green was appointed auditor of ABC Learning in 2005-06, which means that all of the company’s reporting before 2006 had been signed off by someone else -- in this case, the auditor was Russell Brown, a senior partner at Pitchers (Green was a more junior partner). Unlike Green, Brown had been a long-time contemporary of Groves, having originally audited ABC Learning when at his former firm Douglas, Heck & Burrell. Brown also audited Groves’ private company, Quantum Food Services (which was a large distributor of Paul’s Milk in Queensland).
It appears that in prosecuting Green, appears ASIC took aim at the getaway driver, but forgot about the bandits.
With the civil charges against Groves droves dropped, it seems that ASIC has all but given up on taking any action against anyone involved in the ABC disaster -- much like it has allowed the culprits at Allco and Babcock & Brown to scamper to their next ventures. This appears to be fortunate for Groves, given the circumstances of ABC's collapse.
While creditors and shareholders lost virtually their entire investment in what was once the world’s largest child-0care company, Groves and his extended family almost didn’t leave empty-handed. Before its collapse, Groves undertook a swathe of related party transactions, which served to transfer funds from ABC coffers, into his family’s. Most famously, Groves' brother-in-law Frank Zullo would be the beneficiary of one of the most generous maintenance contracts in Australia. In the five years before its collapse, ABC Learning paid Groves’ brother-in-law’s company more than $110 million in untendered maintenance works. ABC may have paid another $70 million to Zullo in 2007 but we will never know, as the company determined that it wasn’t necessary to disclose the amount paid to the shareholders who were footing the bill. Incidentally, the registered address of Zullo’s company was listed as Groves’ Brisbane apartment (and Zullo’s company would later lend $10 million to a company run by Groves’ current wife).
ABC would also make substantial payments to is financial adviser, Austock. In 2005, ABC paid Austock more than $16 million for financial advice -- which amounted to almost a third of the group’s total earnings. Perhaps coincidentally, Eddy Groves owned a 4% stake in Austock. Similarly, ABC Learning happily paid hundreds of thousands of dollars to sponsor the Brisbane Bullets basketball team. The team also happened to be owned by Groves.
Not only has ASIC not taken any action to recover these monies, but it has also not announced any criminal or civil claim against the ABC executives responsible for the alleged misrepresentations in the company’s financial reports. It appears even stranger that Green, ABC’s auditor, received a five-year ban, but the executives who actually prepared and signed off on those financial statements, including Groves, have not been charged with any offence. On the page above Simon Green’s signature on ABC’s 2006 financial reports sits the signatures of Groves and former chairperson, Sallyanne Atkinson.
It was Groves who signed off on the ABC financial statements that claimed that the company had generated revenues of $73 million in 2007 as a result of "payments from developers". These payments were little more than a round-robin of payments that originated from ABC and were paid to developers, only to be funnelled back to ABC in the form of rebates (and claimed as sales revenue). It doesn’t take an expert accountant to understand that those payments weren’t revenue at all, as the money was coming from ABC in the first place, but they had the purpose of making ABC’s financial reports appear far more rosy than they actually were.
While celebrating the penalties handed out towards a minor player in the ABC saga, ASIC and the DPP have allowed the perpetrators of ABCs collapse to ride off into the sunset with no civil or criminal penalties but tens of millions of dollars in assets.
*Adam Schwab is the author of
Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed