Published October 28, 2009

Aussie case puts heat on directors

By R SIVANITHY

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THE name Centro Properties would probably not be readily recognisable to most readers, regulators and company directors here but if the Australian Securities and Investments Commission (ASIC) wins a legal case it initiated last week, you can be sure Singapore-listed companies' office bearers and anyone with an interest in directors' responsibilities would surely sit up, take notice and very quickly familiarise themselves with all things Centro.

Not only that, they'd also be wondering how far the buck should be pushed when holding company bosses culpable for accounting transgressions? Should it stop at senior management or should it include non-executive directors as well?

Centro is an Australian-listed operator and manager of shopping centres in Australia, New Zealand and the US. At the peak of its fortunes in mid-2007 its shares traded at A$10; today, after a spectacular crash triggered by the US sub-prime collapse and revelations surrounding a huge, apparently opaque debt burden, the shares sell for about A$0.30. Even now, after a lengthy financial rescue, Centro is still described as struggling to survive.

Adding to its woes, in a controversial move last week, ASIC said it is seeking management bans and pecuniary damages against the entire Centro board of 2007, alleging that the board breached its duty in approving accounts that year which contained material mis-statements.

At the heart of the issue is A$1.5 billion (S$1.9 billion) of short-term debt, or debt which has to be repaid within a year, that was incorrectly classified as non-current in Centro's accounts and its listed spinoff, Centro Retail Trust.

The company is currently embroiled in other legal wrangles, including one against its former auditors PricewaterhouseCoopers (PwC) and another against aggrieved shareholders who allege in a A$1 billion class action that Centro's failure to properly classify its debt levels led to the collapse in its shares once the correct picture was revealed.

The case is the first brought under new laws introduced in 2004 requiring the chief executive and chief financial officer to personally sign off on the accounts, declaring them as having complied with accepted accounting standards.

Now, it's worth noting that Centro's 2007 accounts had been passed by PwC so in effect the ASIC is saying it doesn't matter if external experts have endorsed the numbers, all Centro directors - executive and non-executive alike - should have had an intimate knowledge of the accounts and should have known of the mis-statement.

The case, described in the Australian financial press as having shocked the financial community, is sure to polarise opinion. Our guess is that ASIC's actions will be generally condemned within corporate circles because it significantly raises the bar on directors' performance and responsibilities, especially since even non-executive directors are being targeted. Critics will likely argue that it is unreasonable to expect all company officers to possess such detailed knowledge of the accounts and that if all directors are found guilty, such a ruling would deter many qualified people from holding directorships.

Supporters, on the other hand, would welcome the move and argue that the law requiring senior management to sign off on the accounts was introduced in the wake of the Enron and Worldcom scandals several years ago and such a law has surely to be enforced via the courts sooner or later.

Our sympathies are with the latter camp - it is entirely reasonable to expect top management to know their accounts inside out and to be made answerable for any large-scale accounting lapses that exert a material effect on the share price.

The only area open to debate really, is whether non-executive directors can be held similarly accountable since they are not closely involved with the day-to-day running of the business and may have no real managerial clout. Should they be made equally liable? It'll certainly be interesting to see what the Australian courts decide.