In an article by Carrie La Frenz entitled ‘Hastie auditor rejects PPB concerns’ that appeared in The Australian Financial Review on 22 January 2013 (p. 16) and which is adapted here, it was reported that:

In 2012 Hastie Group collapsed and there were wide-ranging job losses (2,100). PPB Advisory was appointed as Hastie’s administrator. PPB’s second report to Hastie’s creditors criticised the company’s auditors, Deloitte Australia, and said there were issues with Deloitte’s diligence in checking Hastie’s accounts. Deloitte’s adherence to accounting standards was in question and it appeared that undervaluing of impairment charges by Hastie had occurred or that they were not expensed when they should have been. This had given a false impression of Hastie’s earning forecasts.

Craig Crosbie from PPB said that Deloitte knew that Hastie was carrying excessive goodwill in the June 2011 statements despite Hastie’s ongoing poor financial performance but didn’t insist on further impairment. At the time the company collapsed the impairment charges were $254M and goodwill was $291M. The PPB report said the goodwill should have been written down at the time of the June 2011 statements especially as it was followed by a capital raising of $160M in July 2011 and a further write down in December 2011.

In its defense, Deloitte said that it had implemented proper auditing standards in its audits of Hastie Group and refused to comment further.

REQUIRED

a. On the basis of the facts provided, what do you believe was the correct accounting treatment in relation to goodwill? If you need additional information to make your judgement, then what information would that be?

b. What are some possible reasons for why the management of the Hastie Group might not have wanted to reduce the value of the assets being reported in its financial statements?