1.1 Centre for Corporate Law website – research resources
The Centre for Corporate Law and Securities Regulation at The University of Melbourne has a wealth of resources on its website dealing with corporate law, corporate governance and securities regulation. These resources include links to:
Asian-Pacific corporate law and securities regulation sites (links are provided, on a country by country basis, to sites such as stock exchanges, securities commissions, corporate law legislation and corporate law judgments for each of these countries);
world securities commissions (links to approximately 60 securities commissions);
world stock exchanges (links to approximately 110 stock exchanges);
corporate governance (links to a range of organisations which are involved in corporate governance issues);
professional and interest bodies; and
financial news.
The Centre for Corporate Law website also provides free access to corporate law judgments of the High Court, Federal Court and the State Supreme Courts as well as decisions of the Takeovers Panel.
There are over 2,000 judgments on the website. An advanced search engine allows convenient searching for key words in all judgments. In addition, it is possible to search for judgments loaded onto the website within specified periods of time (eg in the last day, last week, last two weeks or last month).
Also on the website is a range of topical research papers dealing with matters such as the Financial Services Reform Act, compulsory acquisition of shares, the Takeovers Panel, dual listed companies, and directors' duties. The Centre for Corporate Law has recently published 4 new research reports dealing with:
- Reforming Not-For-Profit Regulation
- Managed Investments: An Industry Report
- Use of prospectuses by investors and professional advisers
- ASIC enforcement patterns
All of these research reports are on the Centre's website.
The address of the Centre for Corporate Law website is http://cclsr.law.unimelb.edu.au/
1.2 2003 mergers and acquisitions study
In March 2004, Ernst & Young released its annual analysis of merger and acquisition activity in Australia. The Mergers & Acquisitions Index (M&A Index) is a barometer of takeover activity among listed Australian industrial companies.
Some highlights of the findings for 2003 include:
The M&A Index increased by 12 per cent in 2003.
The recovery in the mergers and acquisitions (M&A) environment occurred mostly in the second half of the year along with a significant increase in initial public offering (IPO) activity.
In terms of the total value of acquisitions, a higher proportion was financed using cash. Competitive debt markets and low interest rates assisted in this regard.
The material sector has been a strong performer in M&A in 2003 on the back of construction and housing activity.
The strengthening Australian dollar does not appear to have greatly impacted the attractiveness of Australian assets with some significant listed company takeovers by offshore buyers in 2003.
The private equity market has been particularly active over the past year.
The M&A Index is a composite measure of the acquisition activity of all listed industrial companies with a market capitalisation above A$45 million.
The M&A Index numbers are primarily based on the:
total number of acquisitions;
total value of acquisitions; and
average Price to Asset Ratio (PAR) paid for acquisitions.
Summary of acquisition activity
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2002
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2003
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Movement
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All acquisitions
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|
|
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Number of transactions
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320
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349
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9%
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Value of transactions ($M)
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$22,414
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$20,476
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-9%
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Average value per transaction ($M)
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$70.05
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$58.67
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-16%
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Average PAR per transaction*
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1.49
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2.00
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35%
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Transactions excluding mega transactions (more than $1billion)
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|
|
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Number of transactions
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302
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343
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14%
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Value of transactions ($M)
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$8,683
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$12,769
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47%
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Average value per transaction ($M)
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$28.75
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$37.21
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29%
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*excludes media companies
1.3 National Australia Bank’s response to foreign currency options trading losses
On 12 March 2004, the National Australia Bank Chairman, Mr Graham Kraehe, and Chief Executive, Mr John Stewart, announced a four point action plan to fully address all of the issues associated with recent foreign currency options trading losses.
The action plan follows a review by PricewaterhouseCoopers over the last two months involving interviews with over 45 employees and third parties and research into several thousand e- mails, numerous reports and a database of 10,000 transactions. A copy of the PwC report is available on the NAB website.
The Board has also received advice from Deloitte about potential conflicts facing PwC as a result of past and current relationships in areas relevant to the review, and probity and governance advice from Blake Dawson Waldron.
Mr Kraehe said: "The Board is confident that a full and fair assessment of all issues has been undertaken and that appropriate remedial actions are being taken to address all of the issues raised in the PwC report and to prevent them from recurring."
(a) Key points
Key points in the PwC report include:
the final loss arising from foreign currency options trading announced on 27 January is $360 million
the losses arising from the foreign currency options trading increased significantly between September 2003 and January 2004
four traders on the foreign currency options desk exploited loopholes and weaknesses in systems and processes to hide trading losses and protect bonuses
the trader's activities were contrary to the National's strategy of building customer-focused business
the foreign currency options trading losses were reported to management by several junior employees
no customers were directly or indirectly affected by the foreign currency options trading losses
in the Markets Division there was:
- inadequate management supervision,
- significant gaps in back office monitoring functions,
- escalation processes that did not work properly,
- weaknesses in control procedures,
- failure of risk management systems; and
- an absence of appropriate financial controls
there is not a suitable compliance culture within this area of the National and a tendency to suppress bad news rather than be open and transparent about problems; and
warning signals, both inside the National and from regulators and other market participants, were not properly acted upon.
(b) Board changes
Mr Kraehe said Directors had accepted the proposition in the PwC report that the Board is ultimately responsible for the culture and the reputation of the National, and any losses suffered by shareholders.
"The former Chairman, Mr Charles Allen, and former Chief Executive, Mr Frank Cicutto, resigned earlier this year because they felt that was in the best interests of the National and its shareholders," he said.
"However, the Board accepts that further action is required. I have already announced that we are seeking two additional Directors with banking experience, one from Australia and one from the United Kingdom. This process is well advanced.
"We have also made a separate announcement concerning changes in the Chairmanship of Board Committees and the appointment of a Senior Independent Director in accordance with international best practice in corporate governance."
(c) Management changes
Mr Stewart said that management changes were also appropriate.
"Primary responsibility for the unauthorised trading rests with four members of the foreign currency options desk and they have been summarily dismissed from the National," he said. "The four traders that have been dismissed are: Mr Luke Duffy, Mr David Bullen, Mr Gianni Gray and Mr Vince Ficarra. The Head of Foreign Exchange in the Markets Division, Mr Gary Dillon, who was the direct supervisor of the four traders, will also be dismissed."
Mr Stewart said the events surrounding the foreign currency options trading losses are being investigated by the Australian Prudential Regulation Authority (APRA), the Australian Companies & Securities Commission (ASIC) and the Australian Federal Police (AFP). Overseas authorities are also reviewing the events and the National's responses.
"These agencies will determine whether any civil or criminal actions will be taken against individuals as a result of the foreign currency options trading losses," he said.
"The National will continue to fully co-operate with the authorities in their investigations."
Mr Stewart said a number of other employees within the National would also be transferred or counselled as a result of the events surrounding the unauthorised foreign currency options trading.
Mr Stewart said the National had decided to review the employment of certain individuals: "Those who will be leaving the National include; the Executive General Manager of Corporate & Institutional Banking, Mr Ian Scholes, the Head of Markets Division, Mr Ron Erdos, and the Executive General Manager of Risk Management, Mr Chris Lewis. Experienced managers have been appointed to these positions on a short term basis until the National completes appropriate recruitment processes."
(d) Risk and control frameworks
Mr Stewart said the management team are continuing to implement remedial actions to close gaps and loopholes identified in the PwC report that were exploited by the traders or contributed to long standing breaches of policies and limits. "We will refine our risk management framework to get a more appropriate balance between management and policing functions," he said. "We have already reviewed value at risk limits and reduced our risk exposure."
"Weaknesses in control procedures identified by PwC have been or will be rectified without delay. This includes analysis of daily trading profits and accounts, reporting of all large and unusual transactions, investigation of all off-market rates on high risk transactions, critical review of revaluation rates sourced from third parties and a stronger back office function that properly checks all transactions."
"It is totally unacceptable that employees of the National breach policies and control limits. From now on, there will be a zero tolerance policy towards unauthorised limit breaches at the National."
Mr Stewart said the management team would also review responsibilities between business units to ensure that there would be clear reporting lines and accountabilities between Risk Management, Operations and Finance functions within the National.
"These and other specific issues identified in the PwC report will be addressed quickly and I will report to the Board regularly on our progress in tackling these long standing problems at the National."
(e) Culture
Mr Stewart said he was concerned about references in the PwC report to staff that adopt arrogant or aggressive attitudes towards others, or who abrogate responsibility and focus on suppressing bad news rather than engaging in full and frank dialogue.
"We will continue cultural change programs within the National such as Revitalisation and Making a Difference that promote positive and transparent behaviours," he said. "We will ensure that these programs are actively adopted in the Markets Division of the National."
"I am pleased that whistleblowers had uncovered the losses from foreign currency options trading and the National would continue to encourage and protect whistleblowers: "We need more brave people that are prepared to confront bad behaviours," he said.
Mr Stewart said the management team would also review its recruitment processes, the annual appraisal processes and incentive structures to avoid inappropriate behaviours in future at the National.
Download the full report or visit the NAB website for further information.
1.4 US Public Company Accounting Oversight Board approves standard for audits of internal control
On 9 March 2004 the United States Public Company Accounting Oversight Board (PCAOB) approved an auditing standard for audits of internal control over financial reporting and proposed amendments to the Board’s existing interim auditing standards to conform them to the new standard.
The auditing standard, "An Audit of Internal Control over Financial Reporting Performed in Conjunction with an Audit of Financial Statements," addresses both the work that is required to audit internal control over financial reporting and the relationship of that audit to the audit of the financial statements.
Section 404(a) of the US Sarbanes-Oxley Act of 2002, and the Securities and Exchange Commission's related implementing rules, requires the management of a public company to assess the effectiveness of the company's internal control over financial reporting. Section 404(b) of the Act, as well as Section 103, directed the PCAOB to establish professional standards governing the independent auditor's attestation, and reporting, on management's assessment of the effectiveness of internal control.
The text of the auditing standard and related appendices can be found on the Board's website under Rulemaking.
The auditing standard on internal control will be submitted to the Securities and Exchange Commission for approval, as required by the Sarbanes-Oxley Act.
Sarbanes-Oxley requires both reports of management about an issuer’s internal controls and an attestation to those reports by the issuer’s independent auditor. The PCAOB standard concerns the latter requirement. Key issues in the PCAOB standard include:
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