Gippsland auditor ticked off by receivers

Gippsland Secured Investments dismissed the regulator's benchmark capital adequacy ratios for loan books with property development exposure and hired an inexperienced and possibly conflicted accountant to "tick-off" its audit requirements, the Supreme Court of Victoria heard yesterday.

Barrister Jonathon Redwood, representing GSI receivers and managers Adam Nikitins and Simon Cathro of EY, tabled an independent business review of GSI by EY, completed in 2013, that documented a 96 per cent increase in the value of the loan book between 2010 and 2012.

GSI's long term auditor, Joanne Loh from LSM Associates in Morwell, was questioned closely about GSI's tiny capital adequacy ratio of 3.93 per cent backing up the group's risky portfolio of loans, including many property development loans.

ASIC's benchmark provisioning ratio for loan books with more than ten per cent of loans for property development is 20 per cent.

"They were very relaxed about the capital adequacy ratio, weren't they?" asked Redwood.

"I don't have an opinion on that," replied Loh.

Redwood said EY's 2013 report called on GSI to strengthen its balance sheet.

"Did you agree?" he asked Loh.

"I'm not sure if I have an opinion on that," she replied.

"But this is the kernel of the matter, it goes to heart of whether GSI is a going concern," said Redwood. "You are the auditor. It is your responsibility to form an opinion on the adequacy of their position."

Loh advised management on "ways of getting past" audit requirements so they could be "ticked off" in a 2012 memo tabled in the court relating to GSI-owned properties in East Gippsland, Victoria.

GSI's biggest liability was a complicated web of bad loans made to the Riviera Group, headed up by director John Stephenson, who was also a director of GSI.

Joanne Loh was also Riviera's auditor.

"Did you have concerns about a conflict of interest [in relation to Stephenson]?" Redwood asked Loh.

"No because he was not on the [GSI] loan approval committee," replied Loh.

Redwood asked Loh if she had ever audited a significant publicly listed financial institution before, to which she answered "no".