Writing Assignment help on :  Centro property group

Introduction to Centro property group:

Centro properties (CNPR) group, generally known as ‘Centro’ is an Australian company which is an investment enterprise that has specialization in the ownership, management and progress of retail shopping centres. It is a listed enterprise with securities traded on the Australian Securities Exchange. Moreover, Centro group addresses both listed and unlisted retail property and has a wide-ranging collection of shopping centres across Australia, New Zealand and the United States (Centro properties group, 2001).

In contrast, Centro’s programmed property investment products consist of Centro Properties Group (CNPR) and Centro Retail Trust (CER). In unlisted funds, Centro also manages 34 Centro MCS syndicates, direct property associations, two wholesale funds in addition to the Centro Direct Property Fund and the Centro Direct Property Fund International on the other hand. The DPF and DPFI are unlisted property funds investing largely in Centro organizations and funds. The responsible entity of the DPF and DPFI is Centro MCS Manager Limited, an entirely owned subsidiary of Centro (Centro properties group, 2008).

What led to the collapse of CNPR group? :

The financial statements of various Centro entities for the financial year ended 30 June 2007 failed to:

• Properly classify definite interest bearing current liabilities, restated accounts finally demonstrated $2.6 billion for Centro property group that was up from $1.1 billion primarily disclosed in the accounts. It also failed to disclose certain undertakings such as post-balance date events entered into after the balance date (The Sydney morning Herald, 2007).
• Centro properties of Australian troubled amounted $ 1.1 billion loss and articulated that it has acknowledged terms of interests for two of its funds as it attempts to elevate the cash to diminish a heavy debt load. In sum, greater funding cost led to the collapse of Centro properties group and strained the organization to demote its distribution guidance. After this the shares of Centro group sank by more than 70 percent and made it the biggest sufferer of the US sub-prime credit crisis (Retail traffic, 2012).

Apart from that, Australia’s second leading shopping centre owner also downgraded its full year distribution management by 14 percent to 40.6 cents from 47 cents. In simple words, In December 2007, Centro declared that it had not been able to roll over $1.3 billion in short-term loans due to termination on 15 February 2008. It was contemplated that the American-based subprime mortgage render down was the cause of a turn down in lending and credit market problems. Several reasons can be explored in this regard of collapse of Centro properties group. Next section of the report attempts to identify some of the reasons of this failure (Mayne, 2007).

Mismatch between the debt and capital raising profile;

Generally, when an organization has fallout with its business and it arrives in a condition of being failure, things come forward in terms of spending excessive money too far and too fast. In this context, it is considered that when any business pick over, it comes up with the business strategy. A major reason was recognized in case of Centro properties group’s collapse that it had got the disparity between the debt profile of the company and their capital hoisting profile (Maiden, 2009).

 As Centro is considered to be the best at raising money in syndicates because they have been doing it for many years, it has been very successful. But Australian securities and investment commission (ASIC) suspected that Centro undoubtedly did mislead, by classifying massive wads of debt that was short term – payable within a year – as long term, or to be paid after more than one year. It was a big mistake made by the enterprise, and it was Centro that first carried forward it to light (Eyers, 2011).

Inadequate disclosure:

Financial statements and other significant matters are disclosed and approved by directors and chief financial officer of the company in order to retain the enterprise financially strong. Moreover, it is the responsibility of every director to read the financial statements suspiciously and consider whether what they reveal is reliable with the directors’ own knowledge of the company’s affairs. Likewise, the 2007 annual report of Centro property group failed to reveal some of the significant matters related to account and finance (Harper, 2012). In the case of Centro property group (CNPR) the core team of directors became unsuccessful to release $1.5 billion of short-term liabilities by classifying and concerning them as non-current liabilities. Besides, Centro had given an amount of about US $1.75 billion to an associated company. Centro also failed to disclose the undertaking of short-term liabilities with respect to that particular amount provided (Akerman, 2011).

Directors’ failure for financial statement and debt related significant disclosures:

According to ASIC & Healey, the directors of Centro group did not take significant step in checking and approving financial statements of the company, which led to the failure of Centro property group. The end result of the corporate regulator’s detection of Centro Properties Group’s directors over suspected contravenes of their duties/responsibilities presents the deficiencies in corporate governance of the company. Therefore, the forthcoming segment of the report highlights the meaning of corporate governance and areas of deficiencies in Centro group’s corporate governance which played role in company’s failure (Langes, 2011).

Deficiencies in corporate governance:

Over the last few decades, corporate governance has fascinated a great deal of public interest because of its noticeable significance for the economic health of both corporations and society in general.

Corporate governance:

Corporate governance crafts a framework by which business corporations are intended for and then controlled. The corporate governance structure stipulates an appropriate distribution of rights and responsibilities among different members in the corporation such as, the board, managers, shareholders and other stakeholders. Similarly, it also specifies the statutes and procedures for making decisions in corporate affairs. By doing this, it also proposes the system through which the company goals and objectives are established and the means of accomplishing those objectives and examining performance (Centro investor, 2010).

From this it can be observed that corporate governance includes the link of an enterprise to its shareholders/investors and to the society, the promotion of fairness, transparency and accountability. Centro property group’s failure was the result of poor role of board and directors in approving and disclosing financial reports. In the face of such mismanagement, there has been a transformed prominence on corporate governance. In this context, role of board, audit committee, board strategic policies on conflicts of interest comes into consideration as the area of deficiencies in Centro’s corporate governance (Mallin, 2007).

Role of Board:

The board of directors is an essential constituent of corporate governance. Each director is positioned at the head of the structure of direction and management of a corporation. The greater the administrative centre would be that is apprehended by an individual, the greater the duty would be that falls upon him or her. The role of board of directors is momentous as their actions may have a reflective effect on the business’ society, and not just shareholders, employees and creditors. The directors of Centro property group failed to take all sound steps needed of them, and worked in the performance of their responsibilities. Moreover, it can also be made a point to be noted that directors acted without practicing the extent of care and attentiveness the law requires of them (Nickless, 2012).

Accordingly, in the light of the importance of the matters that they knew or were considerable for correct information could not verify the truth and fairness of the financial statements, and published the annual reports in the absence of the disclosure of those significant matters. Centro board by mistake classified $2.6bn of debt as non-current in its 2007 financial reports as well as faulting to disclose a $2.8bn debt undertaking used to acquire a US shopping centre portfolio (Akerman, P 2011).

Breaches of director duties as outlined in the Corporations Act;

Following the failure of Centro property group, ASIC and Healey revealed that Centro board did not take all considerable steps to protect compliance with section 295A of the Act, and next approval of the financial statements by them breached sections 180(1) and s 344(1). Therefore, the Federal Court articulated and came forward with the core findings that eight directors of Centro Properties Group and Centro Retail Group breached their financial reporting obligations and their duties of care and diligence under the Corporations Act 2001 in approving erroneous fiscal reports of the entity during 2007 (Harvey & Briffa, 2011).

Audit committee;

Centro group has implemented an audit committee charter performing the responsibilities of establishing the company’s objectives and other audit related functions of the business. This committee comprises of chief executive officer, group chief financial officer, and general manager- finance, compliance officer, group risk and internal audit manager and external auditor manager as well (Centro properties group, 2011).

Here in Centro, Audit committee did not provide the enough information and detail. In contrast, one of the cross-examinations of the Centro group’s crisis, it was brought into light that Centro’s former chief executive; Andrew Scott had an obligation to put the significant matters forward before the board of director’s consideration but he accepted that he stayed silent about the error of $1.1 billion. In this case, the partner, Mr. Cougle accepted that PricewaterouseCoopers staff had been provided confirmation letter from at least two banks. These letters had acknowledged that Centro group had debts of more than $US500 million that were due within a year- debts which were on the top of $1.1 billion. After this confirmation they took proceeding steps and finalized the accounts (Francine, 2011).

Less emphasis on shareholders and the financial community:

One of the major areas of deficiencies in Centro’s corporate governance was the less emphasis on shareholders’ consideration in business revealed by ASIC. Following this, the investors of Centro group sought more than $2 million in damages in their business. They indicted Centro of misleading and unreliable conduct by not revealing the true state of its debts. This issue of non-disclosure further led to the share price collapse. However it was considered that the shareholders who have invest interest in Centro was in the misconception that it was a company that was well positioned against the backdrop of the budding global financial crisis (Plessis, 2012). While, Centro did not disclose that they had $6 billion of liability due before the Christmas time. This condition clearly reveals Centro’s less emphasis on its Shareholders/investors and responsibilities towards them.

Failure to follow corporate governance principles:

Centro properties group’s board operates under a set of well-established corporate governance principles and requirements of the corporation act 2001 and Australian Securities Exchange (ASX). But this crisis proved that Centro could not be able to follow the duties and obligations mentioned under corporate governance (Centro investor, 2010). It failed in exercising due diligence and vigilance in performing its responsibilities in protecting the rights and interests of security holders. Moreover, Centro had a principle responsibility to keep proper books of account containing true information and publish the financial reports and accounts. But it was not proved to be successful in following those properly (Centro properties group, 2011).

Strategies that should have been implemented to avoid the collapse:

Failure in corporate governance is an existent hazard to the future of every corporation. With effective and strategic corporate governance based on core values of reliability and trust (reputational value) organizations can have viable advantage in attracting and preserving talent and generating positive reactions in the marketplace. Some of the following strategies have been outlined that could be exercised by Centro to avoid the collapse.

Adherence to corporate governance:

This corporate collapse may have been evaded if the board had made adherence certain to the principles identified as “the essential corporate governance principles” (Mallin 2010).

Principle1, 2, 4, 5, and 7 revolve around sound and effective board management including the outline for board’s duties, accountability, safeguard integrity in financial reporting, timely and balanced disclosure, and recognize the risk. Centro could have put down solid foundations for management and misunderstandings by identifying and publishing the respective roles and duties of the board and audit committees involved. Because the board is finally responsible for ensuring that, as a collective body, it has the suitable skills, knowledge and experience to perform its role effectively (Tricker, 2009).

Secondly, it should have an appropriate framework to autonomously certify and protect the integrity of the company’s financial reporting and other information released in relation to accounts and financial statements because crisis in Centro properties group occurred due to the wrong interpretation of published financial report and accounts. If all the financial reports would have been cross-examined before the approval, then that collapse could have been avoided (Davis, 2011).

Strong accounting principles:

Next, the most appropriate strategy that Centro could take into consideration for the business is timely, balanced and true disclosure of company’s state of the debts. This proceeding involves taking accountability for documents effectively signed-off by, agreed, or accepted by the directors. What needed is that such essential documents, before they were approved by the directors, should have been read, understood and focused upon by each director with the knowledge each director has or should have by high calibre of his or her position as a director. Likewise, Centro should have followed strong accounting practices to generate the accurate and reliable information published in financial reports, so that investors could know the sound financial condition of the entity.

Finally, Centro should have identified and managed the risk in advance as it was required. For that, it could have established an effective system of risk oversight, management and internal control. All these strategies could have been implemented by Centro to evade this collapse.

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Lessons to be learnt:

There are a number of following lessons that Centro learnt from the mistakes made in that collapse in 2007:

• First, review of accounts and financial reports and statements. It made Centro learnt that directors have an irreducible responsibility to read, understand, and focus upon the facts and state of the financial statements before agreeing upon them in order to ensure that the information included in them is accurate and well-examined (Drummond, 2012).
• Subsequently, failure by board or directors to get a sufficient level of financial literacy or acquaintance with the company’s affairs may of itself amount to a breach of the obligation of care and attentiveness (Davis, 2011).
• Next, Centro considered that a board should be well- established which gets pleasure from varied wisdom, experience and capability of individuals drawn from different business backgrounds.
• One of the major lessons it learnt and kept in mind that directors may rely on others, including management and external advisers, to prepare financial reports and to take advice on accounting principles and standards.
• When Centro properties group understood that it is up to the board to manage and control the course of the information, they found out that directors should consider the way they get the information from various sources. Consequently, if information is capacious then directors should consider whether it can be   diminished or persist on sufficient time to consider it (Langes, 2011).
• Next, they must be in a position to guide and monitor all the related financial activities, so that it could be recorded and amounted at the right time. It can be articulated that directors should have known of the degree of the relevant entities borrowings and maturity profiles and the post balance date undertakings as the information had been provided to them was over time (Drummond, 2012).
• Moreover, directors and management must have an interest in ensuring that suitable procedures have been taken in place to organize multiple drafts and maintain clear records of the content presented to the directors at board and committee meetings (Langes, 2011).

Need arose to provide some lessons to the board and directors of Centro properties group because all the directors failed to perceive obvious errors. Reason being, they all took the similar approach in relying exclusively upon those processes and advisors. None of the directors stood back, equipped with his/her own knowledge and looked at and considered for himself the financial statements (Davis, 2011).