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A Brief Account of the Adsteam Saga

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Introduction

A Brief Account of the Adsteam Saga The Adelaide Steamship Company Limited began operating passenger and cargo ships since 1875. A downturn in its core activities during the 1960's and 1970's led the company to diversify into other activities. Under the leadership of John Spalvins it went to acquire enough interests to effectively control some of the leading companies in the food, ship towage, building, retailing and financial industry throughout the 1980's, without having majority ownership or more than 50% interest. Clarke et al described how this acquisition strategy resulted in an extremely complicated cross-shareholder-based structure for Adsteam (2003, p. 158). Things took a different turn in 1989. Adsteam went for two ambitious investment schemes that went bad, one of which involved the 100% debt-financed acquisition of IEL for $900 million. Analysts took notice of this and gave unfavourable assessments of Adsteam's liquidity and ability to pay its debts. With the growing perception from its financers that it lacked assets to guarantee its loans, the money stopped flowing to prop the conglomerate's operations, leading to John Spalvins' departure and the eventual breaking up of Adsteam under a new administration. Building The Adsteam Pyramid Debt and gearing The Adsteam acquisition binge was fuelled by massive borrowings. ...read more.

Middle

This approach relied purely on verifying whether the prevailing accounting standards and statutory guidelines of that time were complied with. The problem with this was that these standards were deficient to shed light on the true and fair position of Adsteam as described by some (Kohler, 1991). Deloitte 's exercised little of its professional judgement or original thought when attesting to Adsteam's assertions. It would have been more appropriate for the auditors to pay more attention to the client's systems dynamics, not only the company's transactions, but also the its environment, its emergent behaviours that have great impact on the company's business. KPMG calls this the Strategic-Systems Lens approach (Bell et al, 1997). The complexity involved in Adsteam's business strategy of cross-shareholdings within diverse industries implies complex transactions that inherently pose the occurrence of more misstatements. Attesting to the truth and fairness of financial assertions simply because they adhered to accounting standards was simply not enough to unravel Adsteam. This is view is supported by Deane 'that a company's compliance with the standards virtually ensures that the income statement will not show its actual financial performance or the balance sheets its actual financial position in any meaningful, serviceable, way' (2002, p. 9). Gay and Simnett puts emphasis on this point that complying with accounting standards would not ensure financial reports will be true and fair. ...read more.

Conclusion

2). Auditors can mitigate this engagement risk by careful assessment and acceptance of clients, and following an approach for instance resembling the Strategic-Lens Approach method when planning their audit and adhering to client independence. Signs that auditors endeavour to observe professionalism. Clarke et al (2003, p. 291) remind us, that much of the publicly disclosed accounting by failed companies was in accord with the prevailing accounting standards. They were creative but certainly within the bounds of the regulations. The key role of auditors is to therefore use their independent, professional judgement in determining when attesting to financial reports and that these represent commercial realities. The accounting data must reflect the actual business activity of the entity being audited. Furthermore, auditors should understand the client's business operation and strategy to better plan auditor procedure to cover all materials for credibility and reliability of financial statements. As we know, the company had a weak internal control system due to its extremely complicated corporate structure, multiple intra-group deals, incompatibility of data systems, and lack of transparency in respect of disclosures. Therefore, the auditor should also understand internal control structure to determine the nature, scope and time of audit procedure. On the other hand, regulators such as CPA and ICAA should try to improve the accounting standard as a whole and to fill in the 'missing pieces'. This will help keep corporations from collapsing due to the playing with the standards. ...read more.

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