Updated: Jul 16, 2019
The Australian Securities & Investment Commission (ASIC) today released its media statement regarding Mr Wayne Allan Armistead, former Chief Financial Officer of Calvary Health Care ACT Ltd, who was found guilty of 28 false entries between 7 September 2012 and 9 July 2014.
The outcome of the case is a slap in the face for many reasons, and shows why ASIC needs to be harder on such instances. Ultimately, this was a great case for ASIC to 'prove a point' and set an example, particularly in light of the scrutiny that auditors are currently receiving, however this is another opportunity that has been missed.
To provide some background, Calvary Health Care ACT Ltd is part of the Little Company of Mary Health Care Ltd (LCMHC). Calvary Heath Care ACT operate a number of hospitals in the ACT, with some hospitals being publicly funded. The issue first arose when the LCMHC Chief Financial Officer questioned the external auditors (Deloitte) about the reasonableness of a $3.717 million receivable. Following a review by the external auditors, the receivable was not deemed reasonable and triggered a windfall of events. As detailed in the ACT Auditor General's report, the Board requested Deloitte to perform a supplementary review of the financial statements for the year ending 30 June 2014. As a result, issues relating to accruals and bonuses were identified. These issues were not deemed material by the external auditor.
Financial Statement Audit procedures performed by the Auditor General for ACT Health identified a further receivable at Calvary Health Care ACT, however noted there was no corresponding liability within the accounts of ACT Health. As per the ASIC media release:
Primarily as a result of the false entries, Calvary Health Care ACT Ltd reported earnings of $1.925 million in the 30 June 2014 financial report. Once the entries were readjusted to reflect the true financial position, Calvary Health Care ACT Ltd reported a loss of $9.451 million.
However it is items within the ACT Auditor General's report that raise more concerns. The report makes reference to "...the extraordinary pressure imposed by the CEO to showing balanced positions". Furthermore, the Auditor General's report states:
A Deloitte investigation, which examined the inappropriate financial practices by Calvary Health Care ACT Ltd, recommended that the Little Company of Mary Health Care Ltd consider discussing various issues with the former Chief Executive Officer and former Chief Financial Officer. This did not occur.
So why, after noting the results of a Deloitte investigation and the findings from the Auditor General's report, does the former CFO of Calvary Health Care ACT, get away with being sentenced to a $1,000 good behaviour for two years and fined $2,000 in relation to the charges of providing false information to the company auditor.
Why is this penalty a slap in the face?
Tone from the top
It is clear after reading the Auditor General's report and most news articles in a simple Google search, that there is clearly pressure from the top. Further, the current state of Health Services within the ACT has shown a history of people falsifying or doctoring records to paint a better picture. This represents a huge cultural problem that has clearly been permitted by, or encouraged, by those at the top. Yet despite a history of hospitals manipulating data within the ACT, this is the first person to receive any form of punishment. There should have been more heads to roll that just the former CFO. Additionally, improvements need to be made within the sector to rid what seems to be a bad habit which is well accepted (and almost encouraged).
A recent article by Accounting Today and referenced on Internal Audit 360, showed that in a survey conducted by FloQast, 64% of respondents said they have felt pressure to misrepresent their company’s performance, with 10% stating this is a regular part of their job. The results of the survey, and the outcomes from the audit by Deloitte and the Auditor General, clearly show this level of pressure exists within Calvary Health Care ACT.
Although not so much an issue in Australia as it is in countries such as the United States and United Kingdom, there is a double standard whereby blame is passed directly to the auditor where an issue arises. In this instance, the auditors have performed appropriate procedures and made reasonable recommendations, yet the work of the auditor is unnoticed, and the offender is given a minimal sentence. Had this been the other way around, particularly in the United Kingdom, the firm would have received a substantial fine, the auditor 'named and shamed' by the Financial Reporting Council, and the audit partner fined and barred from performing services. Had an auditor falsified documents, the fine would have been substantially more than what was received by the former CFO.
Cost and impact
Although the loss incurred by Calvary Health Care ACT could be covered by its parent and did not result in any direct losses tot eh ACT Government, it has still had a financial impact. This issue required the involvement of the ACT Auditor General, tying up audit resources that could have been better utilised elsewhere. In fact, the history of manipulation issues within ACT Health has resulted in the Auditor General stepping in numerous times over the years. The cost of a review by the Auditor General is passed on through rates and taxes. Whilst the reviews are important, the cost of performing reviews is ultimately borne by the taxpayer and could have been avoided had the cultural issues been stamped out earlier. Alternatively, the funds could have been better spent focusing on other issues, providing real value and insights.
As a financial statement and internal auditor, the outcome of this case frustrates me. Throughout our careers we are repeatedly held to a high standard; being subjected to multiple reviews, fronting various committees, signing annual declarations, and undergoing numerous amounts of training or certifications, just to name a few. The penalties for an auditor are large, and are commonly made public. Yet inversely, an offender who has been caught manipulating and falsifying records, receives a slap on the wrist.
However as auditors, there is more we can do. I commend those involved for reporting the issue to ASIC, and for ASIC taking some form of action. Its a fine line to tread, particularly as Internal Auditors as we avoid acting like 'Police Officers', however when we joined the profession as a Chartered Accountants (or whatever your qualification it may be), we signed up to a number of ethical principles, one being to act with integrity. To maintain integrity, we should not be afraid to report issues such as this. Further, we should do what we can to minimise a culture whereby controllers or CFO's feel pressure to cook the books. We all have a role to play, and ASIC needs to step up.