Eddy Groves’s embarrassing audit mess: Kohler

The decision by Ernst & Young audit partner and chairman Brian Long to throw out ABC Learning’s prior year accounts, previously signed off by Pitcher Partners’ Simon Green, and do them again, is quite astounding, and surely more than a little embarrassing

All concerned are refusing to comment on what, exactly, is the problem, so we will have to await the eventual publication of ABC’s results, which have now been delayed three days beyond the deadline.

On 31 July, ABC flagged a negative adjustment to the 2007 profit of $19 million, as well as a one-off adjustment to earnings before 2007 of $34 million, because of the treatment of restructuring charges relating to the unwinding of its regional management companies structure.

It said there would be a partial reversal of income that had been recorded when an employment agency called 123 Carers paid cash for a 10-year contract to provide staff to ABC’s centres. That payment, according to the July statement, will now have to be amortised over the 10-year term of the agreement, rather than booked in just 2006, 2007 and 2008.

Whether that, or some version of it, is the issue that’s causing Brian Long’s green pen to hold up publication of the 2008 profit is not known, but it’s probably something to do with that.

Pitcher’s audits had gone through the usual process, both within the accounting firm and within the company. That included checking by the ABC board’s audit committee, which was chaired by David Ryan, now chairman of the company, and included Sallyanne Atkinson (the former ABC chair) Bill Bessemer and Larry Anthony.

In a way, this is another facet of how ABC’s US expansion has backfired on the company.

In March 2007, Pitcher Partners approached the company and said it could no longer function as its auditor because of the expansion offshore. The firm did not have the size or global reach to properly audit the accounts.

After a beauty parade, David Ryan and the audit committee settled on Ernst & Young and its senior audit partner, Brian Long, who is regarded by many as Australia’s top auditor. It was agreed he would start with financial year 2008.

“Hullo, hullo, hullo,” says Constable Long, peering at the 2007 and 2006 accounts. “Wot’s all this then?”

And to Eddy Groves’s utter dismay, he says he has to do them all over again. As a result ABC shares are suspended from trading and the company doesn’t make the August 31 deadline for lodging preliminary results.

With ABC’s share price having collapsed from $5 to 54 cents this year, and questions being raised about the company’s solvency, Long’s decision was the last thing Eddy needed.

Meanwhile the founder of ABC Learning owns no more shares in the company and is merely a salaried CEO, and he is out of the US and is concentrating on managing the Australian childcare business, which has been sadly neglected while he pursued glory in the United States.

And – surprise, surprise – the main problem is agency staffing, the same issue which seems to be holding up the results.

When Eddy Groves used to run the Australian childcare business personally, he never used agencies to supply staff, apart from covering sick leave and annual leave.

That’s simply because it costs twice as much, by the time you pay the agency.

When Groves wasn’t paying attention, poor rostering and poor recruitment practices led to an increase in agency staffing to more than 10% of total staff.

Running childcare centres is a bit like operating an airline – it’s a matrix of price, occupancy and labour cost. The first two have been going okay at ABC, but labour costs have risen because of the greater use of agency staffing.

Yesterday the company said that the 10% of agency staff would be cut, equating to about 1600 positions.
It also sold its British vouchers business to Computershare for $190 million, which will reduce ABC’s debt.
Now all they have to do is get Brian Long to sign the accounts.

This article first appeared on Business Spectator