What is Serco hiding?
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Services company Serco . doing well out of asylum seekers arriving in Australia.
The influx of asylum seekers may be a matter of national acrimony but there are those who welcome the boats with open arms and broad smiles. The British multinational which operates Australia’s detention centres is one of them.
Serco is rolling in it. According to its opaque financial statements which have just been filed, Serco Australia Pty Ltd enjoyed a rise in net profit from $49 million to $128 million last year. The bulk of this bottom line bonanza was not due to the surge in boats – although Serco’s immigration detention centre contracts with the federal government have spiralled by $1.5 billion in three years – but rather, due to a one-off gain arising from an acquisition.
Unlike last year, Serco has managed to report on time and in accordance with the Corporations Act but its financial statements are so inadequate as to warrant suspicion. It seems that Serco is hiding something.
Nine years ago, the company prepared a ‘general purpose’ financial report for the year ended December 31, 2003. The auditor was Deloitte. Then, Serco had 1343 employees, $127 million in revenues and $63 million in gross assets.
Everything appeared to be in order. Its ‘general purpose’ report included disclosures for business segments, financial instruments, directors remuneration, and related party transactions. The directors of Serco and its auditor agreed back in May 2004 that Serco should prepare general purpose financial reports, that is, Serco was a reporting entity under the Corporations Act.
Somehow since then, Serco and its auditors have managed to transmogrify this reporting entity into a non-reporting entity. It is a gross failure in disclosure and accountability, says accounting expert from the University of NSW, Jeff Knapp. It is a failure, he says, which represents the extent to which ‘financial reporting among Australia’s leading proprietary companies has become a shambles”.
It was revealed last year how a range of multinationals running privatised water, gambling, transport, health and prisons services have failed to report on time, or at all.
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Turning to Serco’s latest accounts, the company had expanded dramatically by 2012, boasting 5252 employees, $915 million in revenues and 493 million in gross assets.
“But somehow Serco and Deloitte believe that the company has become less significant from an accounting point of view,” says Jeff Knapp. “Serco now claims that the company is not a reporting entity and it prepares a special purpose financial report that does not include disclosures for business segments, financial instruments , directors remuneration and related party transactions and balances.”
There has been no substantive change to the definition of ‘reporting entity’ and there appears to be no reason why Serco and Deloitte should think that the company was a reporting entity back in 2003 but is not a reporting entity any more.
It now has 3909 more employees, $788 million more revenues, $430 million more in assets and, in the past four years alone, its government contracts have ballooned from $323 million to a whopping $1.86 billion.
There is good money in detention centres.
And given the cherished position of companies which win mandates to run privatised government assets, their duty of disclosure and transparency should be greater, not less.
Serco occupies a dominant position in the market. It has 8000 people in its care (almost 3000 of this country’s 5000 people in immigration detention) and there are the interests of many stakeholders to be considered, not least the taxpayer, on whose behalf elected officers in Canberra have struck billions in secret contracts.
The lobbyists register shows Peter Costello’s lobby group ECG Advisory Services (Jonathan Epstein, Peter Costello, David Gazard) has done work for Serco. What deals have been done? We do know that Serco has won $1.86 billion in contracts. Why are there no ‘related party transactions’ disclosed in the Serco accounts? What consultants are doing what? What are they earning, care of the taxpayer?
As the economic and political status of Serco has increased, rather than diminished, there is no justification for this plunge in reporting standards and disclosure.
“Serco and Deloitte seem to have taken a path of doing whatever it takes to avoid disclosures,” says Jeff Knapp. “Serco and Deloitte have some explaining to do. Who is going to hold them to account? The government, the corporate regulator (ASIC), the Institute of Chartered Accountants in Australia?
“Serco’s transition from reporting entity in 2003 to non-reporting entity in 2012 is another in a growing list of known examples of bad financial reporting practice. That list seems to be growing in size even faster than Serco.”
On a lighter note, on page ten of the accounts the auditor Deloitte signs off its audit certificate with a true and fair opinion in relation to the group’s financial position as at 31 December 2011. At first glimpse, it appears that the 2012 accounts might not been audited at all.
But there is a more plausible explanation, and that is that Deloitte isn’t exactly over-servicing its large proprietary client and has just pocketed its $1 million in audit fees without getting the dates right. It probably meant to say 2012.
The 2012 consolidated accounts of the UK parent company, Serco Group Pty Ltd, published a couple of weeks ago, include the results of Serco Australia and other subsidiaries. Yet they too fail to reveal much additional information.
You can see that Serco Group total revenues were almost $1.1 billion in 2012 (up 33 per cent from the prior year). The $128 million in net profit after tax was almost entirely due to the $79 million exceptional gain on acquisition of the other 50 per cent of the Defence Maritime Services joint venture.
Apart from the Great Southern Rail transport business (which operates the Ghan and Indian Pacific rail), all other business relates to government outsourcing. Serco also operates prisons, hospitals and traffic cameras.
Interestingly for Victorians, the 2012 year accounts for Serco Traffic Camera Services (Vic) Pty Ltd (STCV) are out. This is Serco’s sole purpose subsidiary which operates Victoria’s traffic camera services on behalf of the Victorian Department of Justice.
And business is good. Net profit after tax increased to $3.5 million on revenues of $32 million in the 2012 year.
When it was first awarded the contract in late 2007, Serco estimated the four year contract to be worth $90 million (or $22.5 million a year). This would suggest that Serco revenues increase with the number of speeding fines collected (as they have increased at a similar pace over the past five or six years).
Strangely, STCV is directly owned by Serco Group Ltd (UK) and therefore its figures do not appear in the consolidated accounts of Serco Australia or Serco Group Pty Ltd.
Like other multinationals such as Google, Australian revenue is sometimes booked straight to other jurisdictions. Unlike Google, which pays a derisory amount of tax on its estimated $1 billion to $1.5 billion in local revenues, Serco paid $24 million (its $78.6 million one-off was exempt from tax). Gross profit was $118 million on revenue of $1.1 billion. So it at least deserves a tick on the tax front.
Here is the response to some questions sent to Serco:
We are committed to working transparently, in accordance with the law and financial reporting requirements.
As required by the Corporations Act 2001, we submit a Special Purpose Financial Report to meet the directors’ reporting requirements. We work hard to ensure that this is thorough and compliant with the Act and with accounting standards.
Serco Group plc is listed on the London Stock Exchange and in accordance with its Rules, publishes Annual Reports and Accounts and Stock Exchange Announcements. We publish the Group Annual Report and Accounts on our Serco Asia Pacific website.
Serco Asia Pacific is listed as a client of ECG Advisory Solutions on the Prime Minister and Cabinet’s Register of Lobbyists.