Bingo! Ownership Matters uncovers accounting error

Shareholder advisory firm Ownership Matters has been rummaging through ASX-listed waste manager Bingo Industries' garbage and has uncovered an error in its cash flow statement. According to Ownership Matters' "bespoke" report dispatched to clients this week and obtained by Street Talk, Bingo confirmed the error had "overstated operating cash flow and understated financing cashflow by $1.856 million". At Bingo's 2019 AGM presentation it said it expected to report underlying EBITDA between $159 million and $164 million for the 2020 financial year, with the caveat of exclusions relating to one-off expenses. However three months later at Bingo's half-year result, the company reiterated the same guidance but added that the "range incorporates AASB 16 changes of ~$4.8 million in EBITDA". Adjusting for these gains and AASB 16, Bingo delivered $76.4 million EBITDA in the first half of 2020, according to the report. In the period, Bingo recognised lease expenses as depreciation of $1.4 million, and interest cost of $1.856 million on lease liabilities.

'Overstated'

Cash paid for principal reduction on leases for the first half of 2020 was $2.5 million, and interest paid out via the cash flow statement was around $1.856 million. Advertisement "Following inquiries, representatives of Bingo indicated after consultation with the companys auditors, that there was an error in the cash flow statement, under which interest outflow for AASB 16 purposes was counted both in interest paid and in principal repayment for lease liabilities." "In subsequent discussions, Bingo confirmed that the offsetting error in the Bingo cash flow statement is an understatement of payments to suppliers and employees. The follow on of this is that the net cash flows from operating activities line is overstated." However, after speaking with its auditor, Bingo told Ownership Matters the error was not sufficiently material to require restatement or correction. It comes after Credit Suisse sales trader Sujit Dey sounded a note of caution on Bingo in an email to clients last Thursday, which had the subject heading: "BIN - A Closer Look at the Accounts." Dey said Bingo's guidance implied a slowdown in the business in the second half and "this is either conservative and hence there will be an upgrade or it could mean things arent going as well we thought." He concluded his missive with "considering the accounting quality issues, I just cant buy the stock here."

Question.

Identify, describe and discuss the key issues reported in the news article and identify a range of relevant accounting theories that are applicable to the issues reported in the news article

Note

A number of highlight theories are readily apparent:

• The history of accounting: Accounting issues are socially-constructed
• Measurement in accounting: AASB 16: Leases
• Normative accounting theories: AASB Conceptual Framework: Chapter 1-The objective of general purpose financial reporting
• Accounting regulation and politics: ASIC, APRA, IASB, and compliance with AASB Standards