ABC Learning Centre Collapse & Auditing Standards

This assignment analyzes the auditing failures that contributed to the collapse of ABC Learning Centres. It investigates the specific issues that auditors missed, their impact on the company's financial stability, and the subsequent development of the new auditing standard ASA701 as a response to these failings. Students will need to research case studies, reports, and regulatory documents related to the ABC Learning Centres collapse and the evolution of auditing standards.

AUDITING ISSUES
RESPONSIBLE FOR
COLLAPSE OF ABC
LEARNING CENTRE AND
THE DEVELOPMENT OF
NEW AUDITING
STANDARD ASA701

EXECUTIVE SUMMARY
The reason behind presenting this report is to identify the auditing problems that led to the
subside of ABC Learning Centre and problems that ensured the development of new auditing
standard ASA701 Communicating Key Audit Matters in the Independent Auditor’s report.
Additionally, we also discuss the key audit matters which were essential to be unveiled in the
audit report of ABC Learning Centre during the period of its collapse. The report provides us
with an insight of the usefulness of Auditing Standard ASA701 (ISA701) and gives details of
the objective and scope of the said auditing standard. It also clearly provides what key audit
matters are and why is it important to communicate the same in the auditor’s independent
report and how by doing so shareholders are benefitted as they get an insight of the
company’s financial position.
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Table of Contents
INTRODUCTION.....................................................................................................................................4
ABC LEARNING CENTRE-AUDITING ISSUES RESPOSIBLE FOR COLLAPSE OF THE COMPANY..................4
AUDITING STANDARD ASA701 Communicating Key Audit Matters in the Independent Auditor’s
Report and ITS USEFULLNESS………………………………………………………………………………………………...............6
KEY AUDIT MATTERS TO BE DISCLOSED IN THE AUDIT REPORT OF ABC LEARNING CENTRE……………….7
RECOMMENDATION………………………………………………………………………………………………………………………….9
REFERENCES……………………………………………………………………………………………………………………………………11
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INTRODUCTION
ABC LEARNING CENTRE –AUDITING ISSUES RESPONSIBLE FOR
COLLAPSE OF THE COMPANY
ABC Learning Centre was an Australian child care company founded in the year 1988. It was
considered as the biggest child care corporation with around 800 centres in the year 2006 and
proceeds more than $50 million in the fiscal year 2004-2005. Owners Eddy Groves and Le
Neve started with this business expecting it to do well as during that time both the family
members were working without any extra support from other family members. The business
flourished with an added benefit from the government in the form of subsidies. Child care
industry is bound to earn profits as the expenditure is less and there is hardly any restriction
to start such business. The company started trading on the Australian Stock Exchange in the
year 2001 and its shares did significantly well which was evident from the fact that its profits
increased around 1100% from 2002 till 2006 with seven times rise in stock prices from the
year 2002 till 2004(Sumsion, 2017 ). Because of such an exceptional performance, the
company became more famous through news in the media and fascinated numerous
stakeholders towards the company. Within 4 year of entering the share market, 20 % of child
day care centres of Australia were possessed by ABC Learning Centre. The company
acquired several companies such as Future One, Kids Kampus etc. Further, with the
possession of Learning Care group, it rose to become the biggest listed childcare supplier
globally employing 16,000 workers and rendering services to around 100,000 kids.
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Source: (http://rayanbaaqeel.blogspot.in/2011/06/case-study-of-abc-learning-centers.html)
The above figure clearly shows rise in the number of ABC Learning centre from the year
2001 till 2007. Not only had the centres grown but also its share price from $2 to $13.94.This
expansion was supported by the government with the help of child care benefit schemes as
well as fee subsidies. The said industry was considered as downfall resistant.
However, in the year 2008, in the wake of international economic catastrophe, dreadful
reports were out, of the company’s profit being dropped from over 40% from the last year.
Market assumption increased concerning ABC Learning’s monetary conditions. There was a
dramatic decrease in the price of company’s shares; it fell by over 65 % in a month. Soon, the
company’s securities were no longer trading. Lawful intimidation against the company
intensified and both the owners Eddy Groves and Le Neve resigned from the company in the
month of September, 2008. The collapse of the company is anticipated to have started way
before the organization was aware of it. Controversy arose over the dubious practices
embraced by then accounting firm Pitcher Partners related with auditing of corporation’s
financial records. The company opted for deliberate receivership revealing it’s doubtful
accounting practices in the month of November, 2008. There were several reasons that led to
the collapse of ABC Learning including the growth in the competition, monetary disparities
owing to huge acquisitions and debts. However, the major reason for its failure was
disparities in the fiscal facts given by the management. The financial statement of the
company gave misleading information wherein 72% to 81% of intangible assets majorly
included numerous operating licences comprised the assets in the balance sheet (Baaqeel,
2008). These licences were insignificant but the company professed huge price on them. The
appraisal of these licences fascinated shareholders and increased its value. However, in a
statement by the Australian Securities and Investment Commission it is assured that the
licences were of almost no value to the company. Goodwill of around $37.4 million and
licences of around $647.6 were accounted in the commencement of the fiscal year 2006-07
(Teen, 2012). However, by the fiscal year ending 2007-08, goodwill increased to $271
million and licenses of around $2.4 billion whereas in these 2 years $2 million and $8.4
million were the impairment charges for goodwill and licences .Also, a complaint was
registered that the revaluation of licenses was the basis of profits of $390 million that the
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company made between the years 2001 and 2005. Also, potential cash flows of the company,
of which the company was unsure of was the cause of its increased value.
There were different views by different auditors on the practice adopted for auditing.
Incompetent judgment was given by the company’s auditors, Pitcher Partners from the time
of their engagement with the company in the year 2003. The accounting practise followed
showed exaggerated picture of the growth of the company. As a result, it was forecasted the
company to make $200 million of profits in the month of January 2008. This profitable
business ensnared shareholders which helped it to expand globally. However, the major
auditing issue accounting for the downfall of the company were incompetence on the part of
the auditors of the company. The company intended to disburse $70 million as per the
proclamation from a share market in the year 2008. (Walsh, 2015). Another major issue with
ABC Learning Centre was the existence of related party transactions. There was failure on
the part of company in adhering to corporate governance measures. The auditors failed to
provide substantial facts related to exact accounting of a number of fees and subsidies,
categorization of items that generate revenue and for its judgement on the company for being
a going concern. The auditor failed miserably in predicting threat and this all resulted in
overvaluation of company’s revenue which led to its collapse.
AUDITING STANDARD ASA701 Communicating Key Audit Matters in the
Independent Auditor’s Report and ITS USEFULLNESS
The Auditing Standard ASA701 Communicating Key Audit Matters in the Independent
Auditor’s Report was issued by The Auditing and Assurance Standards Board (AUASB) in
the month of December, 2015. It provides information to auditors in relation to new Key
Audit Matters (KAMs) that are obligatory to be incorporated in their reports (Bullock, 2017).
All the listed Australian corporations for fiscal year ending as of 15th December, 2016 are
bound to adhere to the said accounting standard. The main intend for the development of the
standard is to provide better understanding of the accounts of a company to its shareholders
and to augment auditors reporting. It is pertinent in agreement with the Corporations
Act 2001; an audit of a financial report for a financial year, or an audit of a financial report
for a half year and also an audit of a financial report, or a whole of financial statements, for
any other purpose. For a better understanding of the said standard, it is important to be
acquainted with the meaning of Key Audit Matters (KAMs). All substantial matters as per
auditors qualified perception, which is to be included in the audit of the fiscal report of the
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present year accounts for key audit matters. They are chosen from matters interfaced with
those entrusted with authority. As per the said standard, the major purpose of the auditor is
identification of such key audit matters, drawing judgment on the financial statement and
conveying the detailed analysis in his report.
Auditing Standard ASA701 explains auditor’s accountability in relation to key audit matters.
It is the duty of the auditor to convey key audit matters in his report which will not only
clearly explain auditor’s judgement for the matters he conveys but also the substance and
structure of the statement. Disclosure of key audit matters provides better clarity and will
further augment the significance of auditor’s report. Anticipated users will be benefited as
they will gain extra knowledge of the fiscal report from key audit matters which will help in
better understanding of those important matters. Further, it will help them in getting
considerable perception of the entity and also in identifying major fields of administration
prudence. Moving forward, such conveyance might offer projected users a foundation for
getting involved with the administration and with those who are in authority in relation to the
organization, the assessment and the assessed financial statement. These key audit matters are
in agreement with the auditor’s viewpoint on the complete financial statement and not an
alternative for revelations in the fiscal report that the relevant financial reporting structure
requires administration to make, or that are otherwise essential to attain reasonable
arrangement; an alternative for the auditor articulating a customized view when necessary by
the situation of a definite audit appointment in accordance with ASA 705; an alternative for
reporting in agreement with ASA 570 when a material uncertainty exists relating to events or
conditions that may cast noteworthy reservation on an entity’s ability to continue as a going
concern; or a detach view on individual matters. Assessment of general purpose fiscal
statements of listed companies requires adherence to this said auditing standard. It is
applicable in conditions wherein auditor determines to convey such matters in auditing report
of the company. It is also pertinent when auditor is lawfully enforced to convey such matters
in the report.
However, it is very important to ascertain key audit matters. Auditor should take into
consideration greater projected risk area, considerable auditor discernment in areas which
requires important administration prudence and the consequence of important dealings on the
audit while deciding key audit matters (Pratt, 2014)
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KEY AUDIT MATTERS TO BE DISCLOSED IN THE AUDIT
REPORT OF ABC LEARNING CENTRE
The ABC Learning collapse has been considered a major one in the history of company
failure. Since the purpose of accounting standard 701 is to provide more liberty in revealing
vigorous and significant details on key audit matters to the intended users of the financial
report, audit report of ABC Learning was lacking such information, its value was inflated and
most of its intangible assets in the asset side of financial statement were goodwill and
licences which are estimated to have no value. The said standard comprises of not much
changes in the auditors judgement but the statistics and data which is revealed to its users.
Now, the significant matters which were a part of the internal audit report will be affixed
with the available fiscal reports. However, in the case of ABC Learning, its liabilities were
almost invariable in between the months starting from June till December. Owing to
financing again with new loans at a lower rate of interest, liabilities of around $1.1 billion
were re-categorised as long term financial obligations. This matter accounts for significant
importance and users were not aware of what was happening within the organization as
auditing report had shown positive future prospects of the company.
Australian Securities and Investments Commission suspended the ex- auditor of ABC
Learning, Simon Andrew Peter Green for five years from performing his duties (Kruger,
2012). It is clear from the reports that former Pitching Partner was unsuccessful in
performing his services as an auditor. He could not gather satisfactory audit substantiation
associated with precise accounting handling for a variety of fees that lead to over valuation of
the company’s revenue. This particular matter was one of the major key auditing matters that
were not revealed to its intended users. Hence, had ASA701 been released before the collapse
of ABC Learning Centre, it could have been avoided. In the case of the said company, auditor
did not perform efficiently and ignored the area of high projected risk which led to
misstatement of financial report (ASIC, 2012). Further, he could not gain substantial proof to
categorize the revenue items which once more resulted in misstatement of the financial
reports as there were items which were inaccurately categorised as returns and these were
mostly not a part of child care services offered by the company. Miscommunication of this
particular key audit matter resulted in overvaluation of its income.
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Another flaw of the former auditor was that he could not gather considerable information to
facilitate any rational auditor to establish that the said company was a going concern and will
continue to operate in future. Hence, it proves that the auditing of the company’s financial
statement was not done efficiently and it lacked auditor’s competence. Hence, assessment of
a company as a going concern again accounts for another key accounting matter. He did not
work proficiently as he couldn’t draw facts to sustain his stand in relation to wages and
salaries, party transaction etc. However, an auditor is considered as the caretaker who is
expected to guarantee efficiency when it comes to the value of financial statements. Moving
forward, another fault on the part of the ex-auditor was that it couldn’t provide substantiation
in maintaining his judgement that there was no inaccuracy in the financial statement of the
company. However, as per Accounting Standard 701, conveyance of key audit matter
provides precision of the audit and auditor forms judgement on the complete financial report.
The auditor could not effectively file trial that was taken to access the possibility of scam. He
lacked the competence to gauge the possible financial threat. Lastly, there was a major fault
that led to the fall of ABC Learning Centre as the auditor was inadequate in qualified
perception and cynicism while conducting audit of the company’s financial report for the
year 2007.Hence, it is proven from the above issues faced by the company relating to the
audit were majorly responsible for its collapse. Hence, if the company adhered to the
provisions of ASA701, the scenario would have been entirely different and stakeholders
would have got clear picture of the entity.
RECOMMENDATION
At the end, we recommend that the auditing standard ASA701 Communicating Key Audit
Matters in the Independent Auditor’s Report was developed to provide its intended users to
understand the company they are investing their money in. The said standard will be useful to
get an insight of the profits of the company. By following ASA701, all the significant
information that was a part of internal audit report will be affixed with financial statement
which will in turn help the projected shareholders to get a better view of the company. Clear
understanding of key audit matters and communication of the same in independent auditors
report will surely involve greater participation amongst auditors, audit and managing
committees. Further, it is also clear from the above report that the collapse of ABC Learning
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Centre is the correct example of auditing failure in the history. One of the major reasons for
its collapse is to be blamed on the auditors.
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REFERENCES:
Sumsion, J., (2017), ABC Learning and Australian early education and care: a retrospective
ethical audit of a radical experiment Available at
https://www.cela.org.au/wp-content/uploads/2017/06/AttachmentChildcareMarkets.pdf
(Accessed 17th September 2017)
Baaqeel, R., (2008), Case Study Of Learning Centres CollapseAvailable at
http://rayanbaaqeel.blogspot.in/2011/06/case-study-of-abc-learning-centers.html / (Accessed
18th September 2017 )
Teen, Y.M., (2012), The ABC of a corporate collapse Available at
http://governanceforstakeholders.com/2012/12/28/the-abc-of-a-corporate-collapse/ (Accessed
18th September 2017)
Walsh, L., (2015), Key corporate governance systems ‘missing’ from ABC Available at
http://www.couriermail.com.au/news/key-corporate-governance-systems-missing-from-abc/
news-story/f601d3e4242f16efbc70610f9707de05?sv=96f188f44e8845619b7d48fa7cf73f91
(Accessed 17th September 2017)
Bullock, L., (2017), Auditors reminded on crucial 2017 changes Available at
https://www.accountantsdaily.com.au/tax-compliance/10014-auditors-reminded-on-crucial-
2017-changes (Accessed 18th September 2017)
Pratt, H., (2014), New auditing reporting requirements are imminent Available at
file:///C:/Users/hp/Downloads/Dec14%20-%20AuditorReporting%20(2).pdf. (Accessed 18th
September 2017)
Kruger, C., (2012), Five –year suspension for former ABC Learning Auditor Available at
http://www.smh.com.au/business/fiveyear-suspension-for-former-abc-learning-auditor-
20120808-23uj8.html (Accessed 18th September 2017)
ASIC., (2012), 12-186MR Former ABC Learning Centres auditor prevented from auditing
companies for five years Available at http://asic.gov.au/about-asic/media-centre/find-a-
media-release/2012-releases/12-186mr-former-abc-learning-centres-auditor-prevented-from-
auditing-companies-for-five-years/ (Accessed 18th September 2017)
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