CHAPTER 53
THE EXTERNAL AUDITS OF THE STATE BANK:
FINDINGS AND CONCLUSIONS
TABLE OF CONTENTS
53.1 PURPOSE OF CHAPTER
53.2 PLAN OF CHAPTER
53.3 REPORT IN ACCORDANCE WITH TERM OF APPOINTMENT B
53.4 OBSERVATIONS - SUBMISSIONS OF DIRECTORS
53.1 PURPOSE OF CHAPTER
Chapter 46 - "The External Audits of the State Bank: Background Information" presented background information regarding the statutory obligations of the Bank and the joint auditors of the Bank respectively, in relation to the preparation and audit of the accounting records and annual accounts of the Bank and the Bank Group. That Chapter also outlined in general terms the elements of an audit process that will characterise an appropriate and adequate audit, governed principally by standards and requirements of the Professional Accounting Bodies.
Chapters 47 - Review of the 1985 External Audit of the State Bank" to Chapter 52 - "Review of the 1990 External Audit of the State Bank" reported on matters arising from the assessment of the audit process applied by the external auditors in the audit of the accounting records and accounts of the Bank and the Bank Group for the years ended 30 June 1985 to 1990. Each Chapter sets out a conclusion as to the appropriateness and adequacy or otherwise, of the audit process undertaken in that year.
This Chapter sets out my overall findings and conclusions on the appropriateness and adequacy of the external audits of the Bank and the Bank Group for the purposes of Paragraph B of my Terms of Appointment.
This Chapter also sets out my observations as to certain implications of my findings and conclusions.
The external audit in respect of the year ended 30 June 1991 is outside the scope of my Terms of Appointment.
53.2 PLAN OF CHAPTER
The Chapter comprises the following principal segments:
(a) Report in Accordance with Terms of Appointment.
(b) Observations.
53.3 REPORT IN ACCORDANCE WITH TERM OF APPOINTMENT B
In each of the years under review, the accounts of the Bank contained an audit report to the effect that:
"... the Accounts of the Bank and the Group are properly drawn up in accordance with the provisions of the State Bank Act and --- the Companies Code as appropriate to a banking organisation and so as to give a true and fair view of the state of affairs of the Bank and of the Group as at ... and of the results of the Bank and of the Group for the year ended on that date and the other matters required by Section 269 of the Code to be dealt with in the Accounts and Group Accounts and are in accordance with the Australian Accounting Standards and Applicable Approved Accounting Standards."
In my opinion, for the reasons set out in Chapters 47 - "Review of the 1985 External Audit of the State Bank" to Chapter 52 - "Review of the 1990 External Audit of the State Bank", the audit opinions expressed by the joint auditors, known on 30 June 1990 as "KPMG Peat Marwick" and "Touche Ross & Co", on the accounts of the Bank and the Bank Group for the years ended 30 June 1985 to 1990 inclusive, were inappropriate, and the carrying out of the audit process leading to those opinions was inadequate, in the specific respects set out in those Chapters.
In my opinion, for reasons set out in those Chapters, the accounts of the Bank and the Bank Group for the years ended 30 June 1985 to 1990 inclusive failed to give a true and fair view of the results and affairs of the Bank and the Bank Group.
The more significant inadequacies affected:
(a) Provision for Doubtful Debts - In my opinion, the provision was materially understated, with a consequent material overstatement in profits, in 1989 and 1990. I am not satisfied that the provision was adequate in 1987 and 1988.
(b) Concessional Housing Reserve - In my opinion the reserves of the Bank were materially overstated in the years 1985 - 1988 inclusive.
(c) Superannuation Provision - In my opinion, the asset revaluation reserve of the Bank was materially understated, and it was likely that the Superannuation Provision was materially understated, with a consequent material overstatement in profits, in the years 1988 - 1990 inclusive.
(d) State Government Charge in Lieu of Federal Income Tax - In my opinion the change in accounting treatment of this item resulted in a material overstatement of net profit for the years 1987 - 1990 inclusive, and the reported amount of the charge was materially understated in 1990.
(e) Provision for Self-Insurance - In my opinion the provision was materially overstated in the years 1985 - 1990 inclusive.
(f) Sub-ordinated Perpetual Debt - In my opinion the inappropriate accounting treatment of this item led to the Bank's total capital resources being materially overstated in the years 1988-1990 inclusive.
(g) SAFA cumulative arrears of dividend - In my opinion, the failure to disclose the significant impact of the accumulated arrears of dividend due to SAFA at 30 June 1990 on the Bank's ability to retain future profits was a material non-disclosure.
In Chapter 46 - "The External Audits of the State Bank: Background Information" I set out the position as I understand it governing auditors' responsibilities. In reaching the conclusion which I have stated above, I have formed the opinion that the external audit was inappropriate and inadequate by reference to the ordinary standard of skill, care and caution which a reasonably competent auditor would bring to bear. I have sought not to conclude on these matters with the benefit of hindsight, but to assess the audits having regard to applicable professional standards and practices, and to matters which were known or ought reasonably to have been known to the joint auditors in the years in question.
53.4 OBSERVATIONS - SUBMISSIONS OF DIRECTORS
The Bank Board had an obligation under Section 23 of the State Bank Act to cause to be prepared accounts giving a true and fair view of the results and affairs of the Bank.
In each of the years under review, the accounts of the Bank contained a statement to the effect that:
"Where practicable, accounts have been drawn up generally in accordance with the requirements of the Companies Code and Schedule 7 ... and with Accounting Standards so far as they are considered appropriate to the Bank."
As noted in Chapter 46 - "The External Audits of the State Bank: Background Information", I consider that this means that the reader is entitled to infer that there is no material departure from those requirements unless otherwise expressly stated in the accounts.
In each of the years under review, the accounts of the Bank contained a Statement by the Directors to the effect that:
"... the accompanying accounts of the Bank and the Group are drawn up so as to give a true and fair view of the operating results of the Bank and the Group for the year ... and the state of affairs of the Bank and the Group as at ... and have been made out in accordance with Australian Accounting Standards and Applicable Approved Accounting Standards ..."
As noted above, I have concluded that the accounts of the Bank and of the Bank Group, for the years ended 30 June 1985 to 1990 inclusive failed to give a true and fair view of the results and affairs of the Bank and of the Bank Group. The obligation to prepare, and to cause to be prepared, accounts of a body corporate which give a true and fair view of the results and affairs of the company and its subsidiaries resides with management and the Board. This does not, however, relieve the External Auditors of their obligations.
My Terms of Appointment, however, do not require me to investigate and report on whether the steps taken by management and the Board with regard to the preparation of the accounts were appropriate and adequate. I make no finding with respect to this matter.
Submissions have been made to me on behalf of certain former Non-Executive Directors of the Bank Group to the effect that, if a Board appoints a person of good repute and competence to audit the accounts, then in the absence of a real ground for suspecting that the auditor is wrong, the directors will have discharged their duty to the company.() It has been submitted to me that the directors are clearly entitled to rely on the judgement, information and advice, of the auditor with respect to a company's accounts.() It has been put to me on behalf of the former Non-Executive Directors that they were entitled to rely, and did rely, upon the External Auditors of the Bank.() I have reviewed this matter with my legal advisers and I am not required by my Terms of Appointment, to make a finding upon these matters. In noting the above submissions I am not to be taken to accept them in any way.