MG used debt to boost profits, class action claims
The Australian 12:00am October 21, 2016
Ben Butler, Daniel Palmer
Embattled dairy group Murray Goulburn overstated its profit by about $150 million by wrongly including money it hoped to recover from dairy farmers under its controversial milk price support scheme, according to a forensic accounting expert.
Including the hoped-for payments as an asset on Murray Goulburn’s balance sheet was an accounting “nonsense”, forensic accountant Brian Morris said in a report prepared for shareholders suing Murray Goulburn over its plunging share price. When it announced its results in August, Murray Goulburn should have declared a loss before tax of about $92m instead of the $57m profit it unveiled to the market, Mr Morris said.
In April, Murray Goulburn slashed the price it paid farmers for milk. However, it said some of the pain would be deferred through a “milk supplier support program”, under which farmers would be paid a higher price immediately but the extra money would be clawed back from payments for milk in the future.
Murray Goulburn yesterday suspended the controversial program until at least June 30 next year, saying it was under review and an update would be provided before the company’s annual meeting next Friday.
The company said a wetter than usual spring in Victoria had further reduced its milk intake, adding to supply pressure after a bevy of its farmer-suppliers walked away following the stunning April price cut.
Murray Goulburn said this would result in its intake tumbling 20 per cent compared to the prior year, to 2.7 billion litres, and crimp its profits.
The company’s shares fell 3.4 per cent to close yesterday at $1.15.
Mr Morris, whose track records of high-profile cases takes in the prosecution of notorious corporate criminal Alan Bond, failed shopping centre empire Centro and collapsed Perth property play Westpoint, produced the report for Melbourne solicitor Mark Elliott, who is running a class action brought on behalf of Murray Goulburn shareholders stung by the company’s collapsing stock price.
In his Victorian Supreme Court lawsuit, Mr Elliott is pursuing Murray Goulburn and its board, including chairman Phil Tracy and former chief executive Gary Helou, alleging the company made misleading and deceptive statements by forecasting bumper milk prices in a product disclosure statement issued to would-be investors in May last year.
Mr Elliott also alleges Murray Goulburn failed to keep the market properly informed in the run up to a shock profit downgrade on April 27, the same day it announced the MSSP and Mr Helou resigned. The announcement sent Murray Goulburn shares into free-fall, dropping from $2.14 to a close of $1.24.
In its 2015-16 report, the company recorded the value of “advances” to farmers under the MSSP as an asset worth about $183m.
In his report, obtained by The Australian, Mr Morris said this entry “will have reduced the amounts that Murray Goulburn recorded as the cost of inventories”.
“In my opinion, the manner in which Murray Goulburn recognised the MSSP assets of $183.334 million in its 2016 financial report resulted in Murray Goulburn increasing its reported profit before income tax by approximately $150 million,” Mr Morris said.
He said that for the entries to be legitimate, Murray Goulburn needed to be able to “unilaterally and retrospectively set the price at which it had purchased milk from suppliers” and the right to claw back overpayments with interest, which was contrary to his understanding of the company’s supply agreements.
A Murray Goulburn spokesman said the MSSP had “been accounted for in accordance with all applicable accounting standards and has been thoroughly reviewed and approved by our external auditors, including as part of the 30 June 2016 accounts”.
The accounts were audited by PwC partner Lisa Harker.