MICHAEL WEST July 31, 2012
When G4S fell short on its London Olympics security contract, the British army stepped into the breach and saved the day. But when it comes to winning world-class tax lurks at the expense of the Australian public, the world's largest security company is a true champion.
G4S, as you may have seen, was publicly humiliated in the UK parliament for its inability to supply enough staff to provide security for the Games, with the gaping holes revealed just days before the opening ceremony last Friday.
Be that as it may, the cultures and values section of G4S website says: "We can always be trusted to do the right thing". That might explain how Australian state governments happily allow the firm to run our prisons – just like in the convict days of yore.
G4S runs the Port Philip Prison in Victoria and the Mt Gambier prison in South Australia, among other things. Assorted government contracts for prison and custodial services deliver the contractor millions of Australian taxpayer dollars each year.
It is a good thing, though, that accounting irregularities and compliance breaches don't carry custodial sentences, because if they did G4S would have to construct a new prison wing just to house itself.
OK, that might be overstretching a tad on the metaphorical front, but a BusinessDay investigation of the G4S accounts - those which have actually materialised - has unveiled a medal-winning performance in the field of dodgy accounting.
We first brought the Australian arm of G4S into the picture as one of the many large foreign companies to benefit from government contracts but which was also late to file its annual financial reports with our corporate regulator, or didn't bother to file at all.
On March 23, 2012, we wrote that this "rampant failure of governance is an embarrassment that can hardly be ignored." But it seems we were wrong. Apparently, the Australian Securities & Investments Commission (ASIC) has continued to ignore the failure of G4S's financial reporting.
On June 8, 2012, G4S Australia Holdings Pty Ltd lodged its annual financial report for December 31, 2011, after the required deadline of April 30, 2012. And G4S Australia Pty Ltd does not seem to have lodged its annual financial reports for December 31, 2010 or December 31, 2011 at all.
The 50 per cent-owned Australian Correctional Facilities Pty Ltd filed its annual financial report for June 30, 2011 on June 8, 2012 but seems to have skipped doing the annual reports for 2009 and 2010 altogether. This effort is definitely a podium finish in the dodgy compliance stakes.
Our erstwhile accounting and regulation expert, Jeffrey Knapp from the University of NSW, reckons that ASIC doesn't seem to take financial reporting by large companies particularly seriously.
“When ASIC inactivity is associated with companies that have multi-million dollar government contracts this impugns its regulatory and enforcement activities as politicised".
In light of G4S's repeat offender status as a financial reporting vagabond, it is worth taking a closer look at some of the accounting information that it has managed to put on the public record.
The charge sheet is full to overflowing. In the 2011 accounts, G4S Australia Holdings has revalued its goodwill assets upwards by $36 million; from $15 million to $51 million. Yet there is no explanation in its accounting policies for this, how shall we put it, esoteric treatment.
"We don't revalue goodwill upwards in Australia - that has never been true and fair," says Knapp. "A company that increases its goodwill balance in respect of an historical transaction is at the very least obligated to explain why."
With great courtesy, G4S auditors KPMG thanked us for our inquiries on this matter but declined to comment as “KPMG does not comment on client matters”.
If an audit client was looking for an audit firm to revise its goodwill higher, would KPMG be a good place to start?
The G4S Australia Holdings accounts for 2010 disclose that KPMG received fees of $213,822 for "audit and assistance in the preparation of financial reports". Perhaps its auditor has been helping G4S to come up with the goodwill balance and then auditing its own handy work.
"It would be prudent for an auditor to avoid participating in the preparation of financial reports for large companies with multi-million dollar government contracts" says Knapp.
The G4S Australia Holding accounts for 2011 do not disclose KPMG's audit fees at all, an event which Knapp describes as “extraordinary".
He points out that, in Australia, companies that lodge their financial reports with the corporate regulator have disclosed annual fees of their auditors for more than 25 years.
Apparently, G4S and KPMG have taken advantage of a loophole that arises from the early adoption of accounting standards. "The non-disclosure of audit fees in the annual financial report of large company for 2011 is beneath the Australian accounting profession," said Knapp.
But there is more. The most glowing of the G4S accounting irregularities hinges on the rearrangement of the Australian group in February 2010.
In the restructure, there was no change in the Australian economic resources controlled by G4S Plc, merely some round-robin transactions. G4S Plc, the British parent, lent money to G4S Australia Holdings. That money was then given back to G4S Plc to acquire all of the shares in G4S Australia.
The upshot was that G4S Plc had created an Australian company with payables in excess of $40 million to the British mothership. And when the mothership is repaid from untaxed Australian cash earnings it may not attract any tax in Australia.
With apologies to Norman May, that is “gold, gold, gold” to the British.
"It smacks of a tax avoidance arrangement," says Knapp. "And if it is, that's beneath the Australian accounting profession too," he said, perhaps with an expectation too altruistic of the Australian accounting profession.
The chances are - in the sport of big company tax minimisation dominated entirely by the Big Four accounting firms - that the G4S example is not the only one involving an Australian corporate group that is owned by the British.
The federal and state governments may cry poor about funding valuable projects like the National Disability Insurance Scheme. In the meantime, though, the country gets taken to the cleaners by foreign-owned corporations with government contracts. All sanctioned by the Australian accounting profession and ignored by the regulator ASIC.
It's gold to Britain, silver to KPMG, and the Australian public didn't get through the qualifying rounds.
G4S was given a day to comment. This was the response:
"Due to the nature of your questions we need to provide a considered response. As you make reference to G4S Plc, we are liaising with our office in England and hope to receive information overnight or early tomorrow morning.
"Whilst we are willing to respond to your inquiries, please be aware that we strongly refute any suggestion that G4S has engaged in activity which could be categorised as tax avoidance.
"This is simply not true and any such allegation is completely unfounded. Accordingly, we put you on notice that should such a false statement be published we would consider it to be defamatory."