@Forbes: Judge Slams Centro Directors But PwC Will Answer Too

I wrote this post about a month ago for Forbes.com and my column, “Accounting Watchdog” on a very important legal decision related to a real estate company, Centro, in Australia. Centro’s auditors were PwC. Given all the traffic this site is getting because of my interview for Australian National Radio’s program “Background Briefing,” I thought I would post it here as well.

A judge’s dramatic ruling against directors and officers in the Centro “true and fair” disclosures case, has left the business community in Australia shaking in its boots.

In a landmark decision, the Federal Court has found that executives and directors of troubled property group Centro breached the Corporations Act by signing off on financial reports that failed to disclose billions of dollars of short-term debt.

The ruling in Melbourne today comes as a significant win for the Australian Securities and Investments Commission (ASIC), which poured considerable resources into the case following a string of high-profile losses.

In the United States, many wonder, now openly and loudly, why we haven’t seen more executives and boards called to account for the financial crisis. Passionate arguments – and dismissive ones – have been made on both sides. But no one argues that, compared to previous crises like post-Enron and the savings and loan scandals of the 1990’s, the number of significant prosecutions for fraud, accounting manipulation, and malpractice by third party advisors like lawyers and auditors is practically nil.

Members of company boards of directors, above all, seem bullet-proof.

The principle of fiduciary duty governs directors under state corporate law. A company can incorporate in any state, but Delaware leads the pack in the number of incorporations and, as such, as developed the most case law regarding duties of directors. Under federal law, the focus of directors’ responsibilities is on disclosure of material information  – completely and accurately.

Missing and misstated disclosures were the central issues in the Centro case.

The business community in Australia is divided over the judge’s decision. On one side, investors applaud Judge Middleton. He held the Centro directors and officers responsible for misstatements and omissions of material information. On the other side are executives and directors – many of them also investors – who claim the judge’s decision is unreasonable to expect what, they say, a director cannot reasonably be expected to do…

For the rest of the post, please go to, “PwC Will Answer For Centro But Judge Slams Directors First.”

15 replies
  1. Anon
    Anon says:

    Read the facts more closely. PwC did not opine on the incorrect Appendix 4E lodged with the ASX.

    The audited accounts lodged with the regulator had the misstatement corrected (which PwC picked up).

  2. Francine
    Francine says:


    Read the rest of the post, and the complaints against PwC. What PwC is accused of is helping internal management conceal the errors and the additional amounts that were missclassified from the Board and the public.

    The Age, April 8, 2011: It was not until late August 2007, after Centro had released its preliminary accounts, that a junior PwC staff member realised $1.1 billion of debt due to be paid in December 2007 had been wrongly classified and should have been classed as short term. The correction was made in final accounts, but it later emerged the group had billions of dollars more to be paid.

    The Age, April 11, 2011: The senior PricewaterhouseCoopers (PwC) partner in charge of Centro’s 2006-07 audit has conceded that he did not say a word about a $1.1 billion error in the property group’s debt classifications during a crucial September 2007 meeting of Centro’s audit committee.

    The Age, April 14, 2011: Mr Cougle also conceded that before the 2006-07 accounts were finalised, PwC staff had received letters from at least two banks confirming Centro had more than $US500 million of debts that would fall due within a year – on top of the $US1.1 billion.
    Mr Cougle acknowledged PwC had not included these facilities as short-term debts in Centro’s accounts.

    PwC is being sued and is countersuing their former client. In these cases they will have to answer further for what they did or didn’t do. To their credit, unlike so many other cases (AIG), they did resign the client.

  3. Anon
    Anon says:

    Again, the fact pattern is being distorted (by the media above):
    1. Centro lodged its unaudited Appendix 4E with the ASX. This contained the $1.1bn error.
    2. PwC detected the error AFTER the lodgement
    3. The audited accounts were lodged with ASIC in September, after the error was corrected.

    The additional $500m referred to above is still subject to discovery proceedings before the courts. Partners from the Big 4 under deposition have made certain “concessions” under oath but none of these has been tested in a full court examination with the benefit of a defence considered alongside the allegation and consession.

    On the resignation, this is frankly not worthy of credit. They resigned because they were sued by the company and under Australian independence laws immediately became impaired. They had no choice or would have received regulatory sanctions.

    It would be interesting to consider the full story of corporate collapses and whether the audit reports contained modified opinions in the sign off prior to their collapse. This might paint a more fulsome story than the headline grabbers the grubby media (which we have witnessed globally in recent weeks) tend to like (i.e. it actually involves some work).

  4. Anon
    Anon says:

    PS. They did not assist management to “conceal” anything. The reality is, if you read the case, the management and Board were forced to approve over 80 sets of accounts with insufficient time to properly consider all elements. It was a stuff up, not a fraud (as the word “conceal” infers).

  5. Francine
    Francine says:


    As you said, it is difficult to gather all the facts from media reports alone. But in this case we have actual testimony and depositions and a judges decision. The judge, whose words were rather strong and specific, had the benefit of all the information. All of my stories have said the jury is still out on PwC. Their case, which is complicated by their own countersuit against Centro, will, in my opinion, require a strong defense.

    I do not temper ‘concessions” made to the court as much as you do. In the United States it is unusual for depositions or testimony by auditors to be made public as cases are usually settled way before that. Admissions are admissions. I look forward to the trials of the class actions, although if it’s anything like here they will not allow those to go too far for the same reasons – no audit firm want the public to know how often they “concede”.

    As far as whether any of the failures or bailouts contained “modified” accounts or a qualifications such as a going concern that did not happen in the U.S. and was the subject of a House of Lords inquiry in the UK because it did not happen there either. The banks had to be bailed out for forcibly acquired or bailed out and had clean opinions until the end because to do otherwise, according to the UK Big 4 partners, would have shaken the confidence of the market.


    The issues of the resignation is also interesting to us in the U.S, because if it is true – that the auditor must resign for independence reasons if they are sued in Australia; I do not know that for sure – then it is quite different than the U.S. again. All the largest and next largest firms have been sured many many times by their audit clients, the shareholders, and are still serving as auditors. Our S.E.C. is not forcing the issue and the independence rules are vague enough to allow it, unfortunately. AIG and PwC, Deloitte and GM, KPMG and Wells Fargo/Wachovia, PwC and Freddie Mac, are just a few of the recent examples.

  6. Francine
    Francine says:


    I did not miss this issue with PwC and Tampa and incentives. I tweeted quite a bit about it. I did not write about it because Jeff Harrington at St. Petersburg Times did such a great job keeping up with it. I did mention it briefly in this post at Forbes about PwC and its legal woes


    It’s just another example of horrible corporate communications management – or partners who won’t follow PR advice – for the firm down in Tampa. After the layoff debacle last year, you think they would have learned. What the heck is the problem?


  7. Anon
    Anon says:


    You might wish to note that the judges in the Centro case issued one ban (to the CFO), one fine of $30k (to the CEO) and no penalties on any of the directors.

    This is as much a concession that, whilst the case was held that they failed in the duties, that it was of sufficiently low import on the negligence scale to warrant deeper sanctions.

    The auditors might be afforded the same presumption of attention and scrutinty in this case. It is important to remember that the allegations focus on the the classification error (rather than hiding of liabilities) and this issue did not bring down the group, the crappy business model did. The litigation by shareholders are those who traded over that period, supposedly on the reliability of the accounts. Yet the same institutional investors backing the litigation bypass accounts to get to analyst/investor presentations by management teams, do their own recalcs of company performance, etc etc. All I am really saying is that Australian media is grubby and sensationalist and should be questioned over its own lack of professional skepicism before being relied on a source of accurate and reliable reporting!

    Most of the Australian collapse over the past 3 years (notably B&B, Allco, MFS, Westpoint) all involved crappy business models on some level, but in these cases, the actual carrying amounts of recorded assets or the validity of significant related party transactions were also highly questionable.

  8. Francine
    Francine says:


    I read the judge’s opinion and have read transcripts. So I am not depending solely on Australian media for my interpretation, just using excerpts to shortcut explaining points to save time and space, especially on Forbes.

    Since I was recently on an Australian National Radio show, I am not sure if I fall into that group of Australian media and journalists you;re castigating, but I will say I am at a disadvantage due to distance and depend on sources there to help me keep up.

    The most recent case and the resulting paltry fines was an administrative case, brought on behalf of the securities regulator. I am not sure if the auditors could also be subject to a case by ASIC but in the US that would also be a possibility. Beyond that, it is the private actions which often flush out more facts and have a different, and sometimes bigger, impact on the defendants. The objectives are different – recovery of losses versus punishment and deterrence – and the rules are different. We shall see what comes of those. especially for the audits. That is where my primary interest lies.

  9. Anon
    Anon says:


    Sadly, we have little quality journalism left in Australia. Rarely are facts even-handedly presented; it is mostly hyperbole. That’s why my suggestions have been focused on getting to such facts.

    There is an interesting program on ABC TV called Media Watch. Every week they report on the scandalous behaviour of the media. Sadly, Australian media is drawn down 2 stark lines – the overtly left wing (ABC, The Age, the SMH) and the ridiculously conservative (News, and the rest). Balance is not in the media vernacular.

    Overseas media sources are often much more balanced.

    Your quotes on ABC Radio were intriguing (and how I learnt about your passion). In fact, the whole program was interesting. What again I found disappointing was the lack of analysis on what is actually working well and what isn’t. Sometimes, it seems a bit like criticising defence and policing agencies – no one reports the “saves”, only the “misses”.

    Good luck with your passion. I’d like to see you analyse issues with judgement quality (there is an abundance of information on documentation completeness issues). That might lead to your support for an AD&A (which is a very interesting development), but it also might lead to other ideas to tackle audit quality challenges.

  10. Francine
    Francine says:


    Thanks for your comments on my part of the ABC Radio program on auditors. It was an honor to have been asked to participate to such an extent.

    I do support an AD&A. And I will comment more on the issue of judgments in in audit quality.

  11. Suggestion
    Suggestion says:

    May I suggest a revisit to your audit days – I believe rule 101-6 in the aicpa is the same as Australia. If a company sues the auditors they are no longer deemed independent. The cases you cite are shareholder lawsuits and not reflective of the company’s position. Why you may ask? With millions of shareholders and lawyers who sometimes have the same jump to conclusion approaches that bloggers do without researching the facts might force auditors to resign everyday. As said before it is easy to point the finger on the mistakes but also give credit for the millions of f/s reports that are filed right. It’s a shame you didn’t know this rule. Seems to question your ability to be judge and jury.

  12. Francine
    Francine says:


    I am very familiar with this rule. In fact I had to point it out to the SEC and PCAOB at the most recent two day meetings on independence. They did not seem to be familiar with it. It was not incorporated into the SEC rules on independence nor was it reiterated and strengthened in Sarbanes-Oxley or Dodd-Frank. But as you say, it’s still there. Shareholder derivative suits are when shareholders step into the shoes of the company. That’s why they have so much trouble suing an auditor for fraud. In pari delicto, with few exceptions, bars two fraudsters ftomm suing each other, the shareholders who are acting for the company and the executives or audits who are alleged to be complicit.

    This rule is not enforced and audit firms do not follow it and resign voluntarily, in most cases, unless they see themselves suing the company such as in this case with PwC and Centro or in the Fannie Mae case with KPMG. Maybe you should not be sitting in the peanut gallery casting aspersions.

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