Bondholders launch class action against PwC, Hannah Wootton, 8 Sep 2020, Financial

Review

The country's largest blue-chip company auditor, PwC, is facing a class action from bondholders of its collapsed audit client Axsesstoday over allegations of shoddy accounting work by the big four consultancies.

The action, filed in the Federal Court last month, is the seventh time in the past decade that the

firm has been sued over its work on audit clients that later collapsed. It has so far settled four of these.

Listed lending company Axsesstoday went into voluntary administration in April 2019 after breaching its loan term conditions and was later sold to an affiliate of private investment firm Cerberus Capital Management for almost $260 million.

But a prospectus given to bondholders in June 2018 suggested Axsesstoday was not at risk of breaching any loan or debt obligations, and those investors now want compensation.

The bondholders allege that the audit giant failed to adequately consider changes to accounting standards that would see the financial assets and liabilities of lenders such as Axsesstoday measured and classified differently.

Expected losses would also be recorded on a prospective basis, rather than the incurred loss model used before the rule change. These changes would ultimately contribute to Axsesstoday's collapse.

The bondholders allege that PwC either failed to tell Axsesstoday that it had not assessed the likely effect of the rule change on the company's financials, or wrongly assessed it.

They also claim that by doing the accounting work behind the flawed prospectus, PwC engaged

in misleading or deceptive conduct.

They say that without these misrepresentations, they would not have entered into the bonds.

The lead applicant, Compumod Investments, is seeking damages for the more than $36,000 in bonds it lost when the company collapsed. It had invested in the bonds as trustee for its staff super fund.

Other group members in the class action will also be entitled to damages if their case is successful, though the quantum of these amounts will not be known until everyone who plans to join the action has done so.

Audit issues

PwC failed to raise any concerns about Axsesstoday's continued survival in its initial audit of the company's last financial statements before its collapse, but did so in its restated annual report.

In August 2018, PwC signed off on Axsesstoday's financials without flagging any concerns about the lender's ability to continue trading.

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REQUIRED

Currently it is not standard practice for companies to disclose terms and conditions of their debt arrangements. Thus, the bond investors in the article provided above often cannot accurately determine the risk of investing in a company likeAxssesstodayif they do not have information about debt covenants.

After reading this article, your client, HN International, is concerned that they should be disclosing their debt covenants and would like your professional advice and an explanation of the complex issues at stake here. Explain whether or not your client should disclose the debt covenants and inform your client of any potential risks and benefits of doing so.