Misstatements In Financial Statements: Implications And Risk Assessment

Implementation of ASX CGC principles for Newcrest Mining

Discuss about the Misstatements in Financial Statements.

Newcrest is recognised as one of the “world’s largest gold mining companies” operating in four countries. The company is “headquartered in Melbourne”, Australia and among the top 50 companies listed in the Australian securities exchange. The mines of the company are seen to be in “Australia, Papua New Guinea (PNG), Indonesia, and Côte d’Ivoire”. The company’s main emphasis is seen with three key value drivers: “maintaining low costs, growing reserves and production and using capital efficiently”. The main mission of the company has been further identified with delivering “superior returns from finding, developing and operating gold/copper mines”. The vision of the company has been further identified with providing “safe, responsible, efficient and profitable mining” (Newcrest Mining Limited 2018).

Discovery of the new ore bodies is identified as the main strategy of the company and Newcrest possess a successful exploration track record in this aspect.

The main discussions of the report have been seen to with addressing the implication of ASX Corporate Governance Principles for Newcrest Mining. Some of the various types of the other scope of discussion has been seen to be based on relevant audit risk and potential steps to reduce risk. The latter part of the report has further computed the income statement and balance sheet ratio, and Development of common-size financial statements and suggested the potential steps to reduce the overall risk in audit.

The company has been recognised with the maximum standard of maintaining CG which is critical to the vision. The company has been identified to following the effective procedure of “Corporate governance as published by the Australian Securities Exchange (ASX) Corporate Governance Council (3rd edition ASX Principles and Recommendations)” and observed to regularly review the governance and compliance practices. The board of directors is seen to consist of ten directors. The board has determined all “Non-Executive Directors including the Chairman are considered independent” as per the “Board’s Independence Policy”. The main purpose of the board have been further set out with the Board charter. The charters of each board have been able to set out the responsibilities as per the board charter. In addition to this, the charters of each “Board Committee” set out the “roles and responsibilities for the committees” (Bryce, Ali and Mather 2015).

The company has been further seen to recognises to fully market the “company’s activities and stakeholder communication in a timely, transparent and balanced style”. Furthermore, the board has adopted the “Market Disclosure Policy” for ensuring that the company adheres to the continuous disclosure requirements as stated by the ASX. The board of Newcrest is seen to be supported by the “Disclosure Committee: Disclosure Committee Charter”. The employees are encouraged to be the “long-term holders of Newcrest’s” shares. It has been seen to be necessary for the company to take the necessary decisions on “acquisition or disposal of those shares or securities in any company in which the person may possess inside information”. The “Securities Dealing Policy” has included the blackout period when the employees are not allowed to deal in the securities of the company (Martinov-Bennie, Soh and Tweedie 2015).

Risk Assessment

It has been further seen ta the company has been seen to be adopting the “Code of Conduct” pertinent to all directors, employees and officers. In conjunction with the “Code of Conduct” the company has a “Speak Out Standard and Service” which is kept confidential, independent and anonymous.  The various types of the employees, suppliers and contractors are seen to be encouraged for raising the concerns of unethical or inappropriate behaviour which are seen to be in good faith for receiving security from negative consequences. The “Anti-Bribery and Corruption Policy” and “code of conduct” are associated to the policies which prohibits the activities such as “bribery, corruption, unauthorised payments or exercising improper influence by all employees and contractors”. In addition to this, the workforce diversity and organisational diversity is led by board in driven by the recognition of the diverse workforce which is supported by high performance. The “Diversity and Inclusion Policy” depicts the way “Newcrest supports” a diverse and inclusive workforce. The oversight of the risk management practices and internal controls are identified as the key accountability of the board. The company has been able to detail the risk management and the “internal control framework policies and procedures” which sets out the various types of the “roles, responsibilities and guidelines” for the identification and managing of material business risks. The effectiveness of the framework is reviewed regularly by the “Board with the support of the Audit and Risk Committee” (Boritz, Kochetova-Kozloski and Robinson 2015).

The different facets of the risk assessment are seen with those aspects which may adversely affect Newcrest’s “financial assets, liabilities or future cash flows”. Some of these risks factors are mainly identified with “Foreign currency risk, Liquidity risk, Interest rate risk, credit risk, Commodity and other price risks”. The various types of the commodity and other price risks are identified with the copper production which are sold into the global market. The market price of the gold and copper act as the key driver to generate cash flow for Newcrest’s overall capacity. The company has been identified as mainly an unhedged producer which provides its shareholders exposed to various risks pertaining to “changes in the market price of gold and copper”. In addition to this, the Foreign currency risk are considered with the different types of the fluctuations in the exchange rate. The revenue of the group is seen to be primarily dominated by the “US dollars whereas a material proportion of costs (including capital expenditure) are collectively in Australian dollars and PNG Kina”. In addition to this, the Australian entities have AUD functional currencies whereas “non-Australian operating entities have USD functional currencies” (Ruwanpathirana et al. 2014).

The various types of the risks are seen with the “Group’s Statement of Financial Position can also be affected materially by movements in the AUD:USD exchange rate”. Moreover, the audit committee of the company has identified that the different types of the risks pertaining to the liquidity has been considered with the “capital management policies and objectives, which utilise debt as a key element of the Group’s capital structure”. The specific exposure to the risk in this aspect has been seen to be based on the “sufficiency of available unutilised facilities and the repayment maturity profile of existing financial instruments”. The various types of credit risk arses from the potential default of the “counterparty to the Group’s financial assets” which includes the different types of the derivative instruments, trade, cash equivalents and other receivable’s. The group has been further identified to limit the counterparty credit risk on the liquid funds and derivative financial instrument is seen with dealings only with banks or “financial institutions with credit ratings of at least BBB (S&P) equivalent”. Additionally, the credit risks are limited with guaranteeing variation considered with maximum investment limits are considered with the credit ratings. The customers intending to trade on credit terms or the financial counterparties are subject to credit risk analysis. The audit risk paradigms have been segregated as per the Internal Control Framework, External Audit, internal Audit and management assurance (Pickett 2015).

The comparison of the consolidated income statement it has been seen that despite of the increasing revenue of the company from 2016 to 2017 there has been significant decrease in the profit for the period. In addition to this the development of the common size of the financial size of the financial statement has been depicted with an increased trend in the recent year.

The profitability ratio analysis has been depicted with a slightly decreasing net profit margin, return on equity and return assets. This has been evident with decreasing net profit margin of 10.17% in 2016 and 9.17% in 2017. The ROE has reduced from 4.71% in 2016 to 4.23% in 2017. This has been depicted with a profit risk in the years present financial years.

The efficiency ratio of the company has been computed with “inventory turnover ratio and Total Asset Turnover Ratio”. The overall depicts on the risk has stated that the company is in a better position in terms of the efficiency. This is evident with an increasing efficiency ratio of 2.22 in 2016 to 2.32 in 2017. It has been further seen that the Total Asset Turnover Ratio has slightly improved from 0.29 in 2016 to 0.30 in 2017.

Despite of the decreasing profitability, the risk of cash available operational activities has been considerable low in compare to the previous financial years. This has been evident with the increasing current ratio of 1.20 in 2016 to 1.88 in 2017 and quick ratio of 0.87 in 2017.

The decreasing nature of the debt ratio and debt to total asset ratio has suggest that the company has lower risk to pay off its credits in the current financial year. This is evident with increasing  Debt-to-total Assets Ratio  of 0.36 in 2016 to 0.35 in 2017 and D/E ratio of 0.57in 2016 to 0.54 in 2017.

The board has recognised the “risk management” and the internal controls which are central to sound management and oversight of matters of key audit obligation to the board. Newcrest has been able to detail the internal control framework which is seen to be regularly reviewed by the Board. The internal control framework risks are mitigated by following an n “integrated, robust planning and budgeting process” thereby delivering a detailed two-year budget. This budget is “subject to the approval of the board against the performance targets” which are reported against the monthly and supplemented quarterly forecast updates. A comprehensive way of capital approval is seen with the authorisation of the investments and capital expenditures. The main capital decision is subject to the commercial and technical review (Karalapillai et al. 2014).

As discussed by Jiang and Son (2015)Newcrest has been seen to employ “delegated authorities” which cascades “authority levels   for expenditure and commitments from the Board, to the MD & CEO, and then from the MD & CEO to the rest of the Company”. In addition to this, the appropriate due diligence procedures are also seen to be employed in place for the acquisitions and divestments. Additionally, capital strategy documentation prepared annually is set out with the “capital structure, liquidity and cash flow at risk objectives of the Company” (Ruhnke and Schmidt 2014). The treasury department of Newcrest has detailed the policies and systems for the management of the “debt, commodities currency exposures, investment of surplus cash, and interest rate risk management”. The “financial control processes” ensure the integrity of the financial reporting. The maintenance of the financial control is further able to ensure the various types of the data which are seen to be related to ensuring the integrity in the financial reporting. The system of the financial control maintained by the company processes the integrity of the financial reporting. In terms of “external audit, the risk committee” is seen to be accountable for the “selection, evaluation, compensation” and “replacement of the external auditor subject to approval form the shareholder” (Czerney, Schmidt and Thompson 2014).

The company’s current external auditor is identified to be EY and reelection of the external auditor is seen to be reviewed annually. The EY’s Audit and risk committee is seen to acknowledge in the “areas of knowledge, quality of team, coverage ability, industry knowledge, cost and audit methodology,” which the corporation believes to be critical for the service delivery. Moreover, the “Audit and Risk Committee” ensures “lead external audit partner and quality review partner” change their role in “every five years” and in case they have acted with the capacity for the five out of the last seven successive financial years. It has been further seen that the “Audit and Risk Committee” sees the “external auditor” throughout the year for reviewing the adequacy of the “existing external audit arrangements, with particular emphasis on the effectiveness, performance and independence of the auditor”. It is also seen that the “Audit and Risk Committee” meets with the external auditor in the absence of management following most meetings (Chen et al. 2015).

The “internal audit function is managed by the manager” of the internal audit. The manger of the internal audit is responsible for reporting to the general manager “Finance & Accounting” and is considered to be having direct access to the “FD & CFO”. The “Manager Internal Audit” has thee access to the “Audit and Risk Committee and its Chairman” who are in need of information and explanations. The annual internal audit plan is able to include the risk for covering the material risks of the operating processes and sites. The status of the report is further able to include the “Audit and Risk Committee” during most meetings (Guénin-Paracini, Malsch and Paillé 2014).

Conclusion

The discussions of the study have stated that Newcrest Mining has been recognised with the highest standard of maintaining CG which is critical to the vision. The company has been identified to following the effective procedure of “Corporate governance as published by the Australian Securities Exchange (ASX) Corporate Governance Council (3rd edition ASX Principles and Recommendations)” and observed to regularly review the governance and compliance practices. Some of the main findings on the on the risk assessment has been further able to state that Some of these risks factors are mainly identified with “Foreign currency risk, Liquidity risk, Interest rate risk, credit risk, Commodity and other price risks”. In addition to this, the company has been identified as “predominantly an unhedged producer which provides its shareholders” exposed to various risks pertaining to variations in the market price of gold and copper. The income statement and balance sheet ratio has been seen with decreasing profit margin from 2016 to 2017. However, the company has been able to lessen the risk in terms of current assists, debt to equity ratio and increased efficiency. 

References

Boritz, J. E., Kochetova-Kozloski, N. and Robinson, L. (2015) ‘Are fraud specialists relatively more effective than auditors at modifying audit programs in the presence of fraud risk?’, in Accounting Review, pp. 881–915. doi: 10.2308/accr-50911.

Bryce, M., Ali, M. J. and Mather, P. R. (2015) ‘Accounting quality in the pre-/post-IFRS adoption periods and the impact on audit committee effectiveness – Evidence from Australia’, Pacific Basin Finance Journal, 35, pp. 163–181. doi: 10.1016/j.pacfin.2014.12.002.

Chen, Y., Gul, F. A., Veeraraghavan, M. and Zolotoy, L. (2015) ‘Executive equity risk-taking incentives and audit pricing’, Accounting Review, pp. 2205–2234. doi: 10.2308/accr-51046.

Czerney, K., Schmidt, J. J. and Thompson, A. M. (2014) ‘Does auditor explanatory language in unqualified audit reports indicate increased financial misstatement risk?’, Accounting Review, 89(6), pp. 2115–2149. doi: 10.2308/accr-50836.

Guénin-Paracini, H., Malsch, B. and Paillé, A. M. (2014) ‘Fear and risk in the audit process’, Accounting, Organizations and Society, 39(4), pp. 264–288. doi: 10.1016/j.aos.2014.02.001.

Jiang, W. and Son, M. (2015) ‘Do audit fees reflect risk premiums for control risk?’, Journal of Accounting, Auditing and Finance, 30(3), pp. 318–340. doi: 10.1177/0148558X14560896.

Karalapillai, D., Weinberg, L., Galtieri, J., Glassford, N., Eastwood, G., Darvall, J., Geertsema, J., Bangia, R., Fitzgerald, J., Phan, T., OHallaran, L., Cocciante, A., Watson, S., Story, D. and Bellomo, R. (2014) ‘Current ventilation practice during general anaesthesia: A prospective audit in Melbourne, Australia’, BMC Anesthesiology, 14(1). doi: 10.1186/1471-2253-14-85.

Martinov-Bennie, N., Soh, D. S. B. and Tweedie, D. (2015) ‘An investigation into the roles, characteristics, expectations and evaluation practices of audit committees’, Managerial Auditing Journal, 30(8/9), pp. 727–755. doi: 10.1108/MAJ-05-2015-1186.

Newcrest Mining Limited (2018). About us | Newcrest Mining Limited . [online] Newcrest.com.au. Available at: https://www.newcrest.com.au/about-us [Accessed 17 Apr. 2018].

Pickett, K. H. S. (2015) Audit Planning: A Risk-Based Approach, Audit Planning: A Risk-Based Approach. doi: 10.1002/9781119201175.

Ruhnke, K. and Schmidt, M. (2014) ‘Misstatements in financial statements: The relationship between inherent and control risk factors and audit adjustments’, Auditing, 33(4), pp. 247–270. doi: 10.2308/ajpt-50784.

Ruwanpathirana, T., Reid, C. M., Owen, A. J., Fong, D. P. S., Gowda, U. and Renzaho, A. M. N. (2014) ‘Assessment of vitamin D and its association with cardiovascular disease risk factors in an adult migrant population: An audit of patient records at a Community Health Centre in Kensington, Melbourne, Australia’, BMC Cardiovascular Disorders, 14(1). doi: 10.1186/1471-2261-14-157.

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