Para 8.0  Accountancy/Auditors  – perceptions of “forensic accountants”  

I understand from other people within Big 4 audit firms that Forensic accounting people consider themselves to be amongst the “elite” members in their accounting/audit profession. I also believe from my research that most lay people would attribute such roles in such people and firms as having the following characteristics:

8.A.  Numeracy/finance skills  – basic logic and maths   -see paragraphs 9.1 and 9.2
8.B.  Reliance on them – “comprehensive/thorough” =  truth underpinned by independence /objectivity
         - see paragraphs 9.3, 9.4 and 9.5
8.C.  Access to information – global knowledge management /other audit clients and public information  underpinned by technology in access to documents and records – see paragraphs 9.6, 9.7 & 9.8
8.D.  Professional scepticism, checking and validity:audit testing and deep technical skills - paras 9.9 & 9.10

These are the hallmarks of the independent “forensic accounting professional” in a large global firm??.
   
 8.5.                   Oral evidence from Mr Dekker on 10 June 2009.

Judge

If the Q4 2006 EAC had continued with the underlying gross loss of 5.22 million and the further £2.734 million costs increase by Q4 2006 had been recorded at circa $10 million loss, would MAC senior officers have recorded from that EAC a circa $10 million plus loss in Q4 2006 earnings and then stated that in the FY 2006 published accounts?

Mr Dekker

YES.

Mr Little 

Right

Mr Dekker

But --

Judge 

But --

Mr Lynch 

Yes, please.

Mr Dekker 

But it's based on a lot of presumptions.

Judge

Right.

Mr Dekker

The final question is, would we post the accounts correctly, of course we would, if that was truly a loss we would post the accounts correctly and record a loss.

Mr Little

Can I just clarify something now, if we just look at document 1831 in the bundle, what you're saying, John, then, is, and this is for everybody else, if the number do you know here, $137172, which is the very bottom of the sheet, marked D, I think, sir.

Judge

Yes….. we have it

Mr Little

So, Mr Dekker, if D was minus $10 million, I think you've just told the tribunal that you would then be posting 10 million loss to the accounts?

Mr Dekker

If you're asking me if this schedule generated the number of minus 10 million in the bottom of the programme total, would we record it that way, no.  Not solely on the basis of this schedule.  This schedule is an estimate at complete, and each quarter we do various scenarios of this schedule, there are three major variables that affect the outcome of this schedule, sorry to bring it to such basic levels, but it's number of units, times revenue per unit, and the cost.  Each of those three variables has a habit of changing on us. And as such, this schedule will change each time we do it.  We also have uncertainty about the future, so our view as to what's going to happen into the future will also affect how this schedule is completed.

Mr Little

But the core question is, if as a result of doing all of that, that number became minus 10 million, would you be posting minus 10 million to the accounts? (BL : Note also the relevance to the Q2.2006 A340-500/600  EAC of ($5.2m) etc etc)

Mr Dekker

If our best view, our -- let me identify best, our most reasoned view and most likely outcome showed a 10 million loss, yes, we would post that loss.   (see BL Observation 1 below)

Mr Little

And it is correct, Mr Dekker, that this document is the primary document which Ernst & Young would use in their audit process?

Mr Dekker

We would give them this document in the audit process, plus the supporting detail, I can't say that this is the primary document but I have to believe it's one of the key ones.

 

 

Mr Little 

 

 

Right, and in the audit testing processes, which we're both familiar with, in terms of the primary part of their job, for want of a better word, that's what this Excel work sheet will become, and its backing paper, what they use to do their calculations of mathematics on.

Mr Dekker

I believe so, I'm not present at each of the business units when the auditors are in but certainly that would be a logical assumption, I would expect nothing different.

Mr Little

Right, and sir, just for factual record, in the final report at paragraph 8.61, PwC, it confirms that this was the document used for year-end audit testing purposes. (See BL Observation 2 below)

<BL Observation 1 from oral evidence above
Mr Dekker             “…..  This schedule is an estimate at complete, and each quarter we do various scenarios of this schedule, there are three major variables that affect the outcome of this schedule, sorry to bring it to such basic levels, but it's number of units, times revenue per unit, and the cost………..  If our best view, our -- let me identify best, our most reasoned view and most likely outcome showed a 10 million loss, yes, we would post that loss.

It is neither rational nor credible that in the face of the following contemporaneous documented facts  that, in short,  Mr Neill and Mr Dekker had any legitimate basis for making a decision through “Management override”  to move to an undocumented “A340 -500/600 EAC program break-even” as, to quote Mr Dekker above, the “most reasoned view and most likely outcome”. 


(1)

Number of units  :  production volumes were reducing in the near term – FY2007 - FY2009 , a A350-1000 XWB product had just been announced by Airbus in July 2006 at the Farnborough Airshow, (with no A340-500/600 orders) which would effectively mean the end of the A340-500/600 product life/series production was now certain within five years.  (Mr Vandersteen of Airbus UK – recorded - A340 600 “Trashed”). With these facts and my Protected Disclosures on 8/9/10 August 2006 (PD22&PD23) how could Mr,Neill, Mr Dekker and MAC rationally and reasonably believe that it was appropriate simply to defer the A340-500/600 volumes and revenues in to later years so as to still complete the amortization quantity (843 units) by the end of the current Aircelle commercial contract in FY2012?  What is equally revealing is Mr Neill’s commentary on 15 August 2006 during the Q2.2006 earnings webcast –pages 1 & 2  after my A340.PD22 and PD23 but before my termination) in which he set out his perspective in what we heard /can read on the Boeing success – “In Boeing’s case  -- different story. The story of the quarter was the strength of the order book for the Boeing 787 that built through that period but also for the Boeing 777 as well. Boeing won the bulk of the orders for twin-aisle airplanes and had, for the first time, some success that they could boast about.  We saw that at the Farnborough Airshow.

 

 

(2)

Prices per unit      :  Mr Edwards (12 Aug) and Mr Dekker (11 Aug)  had just approved Mr Butyniec’s BAFO for settlement with Aircelle on 11/14 August 2006(e.g. $179,623 for FY2006) which had LOWER pricing than in our Q2.2006 EAC (e.g. $181,270 for FY2006) and which would lead to a reduction in revenues of $5.2m - $8.9mand further increase the $5.2m gross losses. If internally Magellan were satisfied with this documented BAFO pricing settlement for A340 - and Aircelle had indeed accepted this Magellan final offer - how could Mr Dekker and Mr Neill rationally and reasonably believe that this lower pricing would have more than set off the A340-500/600 $5.2m gross losses in our Q2.2006 EAC document and was in the best interests of non-management MAC ordinary shareholders.

 

 

(3)

Costs per Unit      :   By that August 2006 re Q2.2006 we faced actual costs on A340 which were escalating further and further away from our FY2006 Budget/Program EAC. Throughout my attendance at the FY2006 MAC weekly staff meetings which Mr Edwards attended (e.g 25 April 2006, 1 Aug. 2006, 15 Aug. 2006-2021, 12 Sept. 2006-2179 we discussed on multiple occasions that Mr Butyniec and we were failing to meet our operational budget/EAC targets in FY2006 in the factories. Why would those documented cost facts not have led anyone to the view within Magellan that our A340 gross losses would be reduced and not increase further beyond the $5.2m gross losses in our Q2.2006 EAC document.

 

This Neill/Dekker decision of “zero losses” was then published in the Q2.2006 earnings statement on 14 August 2006 to the TSE etc and in subsequent financial statements.   These MAC Q2.2006 financial statements were then certified in Mr Neill’s Q2.2006 and Mr Dekker’s Q2.2006 quarterly certificates when publicly filed with SEDAR – public securities documents within Canada. 


On the basis of the late July - mid August 2006 contemporary information and documentation available the “diametric opposite” was the case – the documented A340 Program Q2.2006 EAC $5.2m gross losses were set to deteriorate based on the available information.

The MAC Audit Committee minutes on 10 August 2006 (which I did not attend) for that Q2.2006 meeting also record at Point 5 in the Private Session with Ernst & Young “ .. that Mr Linsdell of E&Y had …”only received the financial statements and the MD&A at the meeting”.

PwC correctly recorded in the Final Draft report at para 8.61 that “Brian Little stated in the E&Y presentation that his concerns regarding the treatment of the A340 NRC were raised following Q2.2006.” and as you can hear on the audio tapes (Tape recording - Part 1 (16 minutes) and then Part 2 (7 minutes) ) I stated “And the fundamental issue here, which we have to come to terms with, is that this product is a product that has not only got a cost/price problem but it’s now also got a programme volume one!”

 

<BL Observation 2: as per this oral evidence there was an addition to the PwC Final Report in August 2007 at para 8.61 {691} which stated the E&Y $137K gross profit assessment / representation reliance as follows   “The Q4 FY2006 EAC was also used by EY for year-end audit testing purposes.”   The Estimate at Completion (EAC) process/documents are the MAC management  “most reasoned view and likely outcome – oral evidence :Dekker”  and showed in this Q4.2006 EAC submission to the auditors E&Y and PwC an improvement over Q2.2006 to a miniscule  $0.1m gross profit on $250m program revenues

Mr Dekker also disclosed in May, June and August 2009 doc 1830A,1831A and the 3605 document series (3605A, 3605B-G – 1 March 2007 , 3605H  - 14 March 2007 in Part C - - - NONE of which appear or were mentioned in the PwC report) which had been provided to both E&Y and PwC in March 2007 as one of the key Representation documents in which he asserted–

 “At a glance the assessment that would have been carried out by the auditors in order to satisfy themselves that the accounting on this matter was appropriate

Separately Deloittes and I have produced working schedules which extended this “At a Glance” for the A340 Program Q2.2006 and Q4.2006 EAC together with the underpinning numeric Quantity/Number of Units and prices analyses & stated cost assumptions which enabled an overall A340 financial summary/outcomes.>