The key principle of independent assurance is not about delivering the news you want to hear or give; it’s about the news that you need to hear, even when it is potentially deeply uncomfortable for the business.
Reports coming out of the Banking Royal Commission have made for some very interesting – and at times distressing – reading for many over the past few weeks.
What really caught our attention was the alleged manipulation of an external report as part of the investigation into the ‘fees for service’ financial advice scandal unfolding at AMP, one of Australia’s oldest financial institutions.
As reported in the Australian Financial Review AMP’s (now former) CEO, Craig Meller, was publicly advocating high ethical standards yet the Royal Commission heard that AMP was charging customers for advice they hadn’t been given, that it had been caught lying to the corporate regulator (ASIC), and then manipulating an external investigation into AMP itself.
One of the key issues for the commission was the discovery that a report presented by AMP as independent had, in fact, undergone a staggering number of internal revisions, before being provided to ASIC as supporting documentation that AMP was taking the 2016 allegations about unethical behaviour in its financial planning arm seriously.
The outrage about the report has been wide and intense and indicates to us two things: First, that ‘independence’ has immense value to an organisation, and second, when the independence is brought into question there can be serious ramifications for boards and executives.
So how has AMP found itself in such hot water given its public stance?
A Recap: What Actually Happened?
Let’s do a quick recap of AMP’s actions, again courtesy of the AFR’s recent coverage.
Ahead of the report’s commission, the Australian Securities and Investment Commission (ASIC) sent 85 demands in 2016 for information to AMP’s financial planning arm and sought access to 18 current and former employees to answer its questions.
On May 19th of that year, Head of Division Jack Regan raised an issue with AMP’s top lawyer, Brian Salter and the then chief executive, Craig Meller. The problem was that AMP staff appeared to be charging clients for advice they weren’t in fact getting.
The company’s board was informed and AMP engaged Salter’s old law firm, Clayton Utz, to find out what had happened, ostensibly to provide independent analysis because the AMP board may have suspected the company may have breached the Corporations Act.
What has since come to light is that AMP’s board went through 25 revisions and exchanged more than 700 emails with Clayton Utz before it was presented to ASIC as an independent report. A senior Clayton Utz partner has also said that CEO Craig Meller’s name was struck from a list of AMP employes in the fees-for-no-service affair within the report, on the basis that keeping his name in would ‘attract unnecessary attention’ from ASIC.
On October 11, 2017, AMP received what Clayton Utz expected to be the final version of its report, however, it was reported that Chairman Catherine Brenner wanted to make some final tweaks, including a statement to the effect that “Craig Meller was unaware of the practices or their illegality.”
Was this ‘independent’ and factual?
We can only speculate that the course of action AMP took of engaging an external organisation to undertake what it subsequently submitted to ASIC as an ‘independent’ review of the 2016 allegation was to strengthen their case that they were taking the issues seriously.
But in this instance as various executives have been questioned by the commission, the so-called independence and indeed the factual accuracy of the final report has been brought into serious question.
The sheer volume of review cycles undertaken between AMP and Clayton Utz – 25 in total and over 700 email exchanges – is an inordinate amount of engagement for a process that is said to be independent and the alleged changes to the report, such as the removal of names of who knew what and when has called into question whether the report is in fact accurate.
For AMP’s part, there seems to be a very recent change of heart on how the reviewer was engaged and the process undertaken. The Australian institution has announcement that group general counsel, Brian Salter – who had previously spent 19 years in the banking and financial services department at Clayton Utz before joining AMP and who helped provide instructions for the review – will step aside pending an investigation to be conducted by a new internal committee in collaboration with law firm King & Wood Mallesons.
And the Reviewer’s Perspective?
It would be remiss to not canvas the views of the reviewers themselves, who would appear to be much maligned in the drama surrounding AMP if their statements are to be believed. Clayton Utz’s chief executive partner, Rob Cutler, said in a statement on Sunday night: “Clayton Utz rejects any suggestion that the independence of its investigation and report findings to the AMP board into AMP’s advice business was in any way compromised.”
“The terms of engagement stipulated that the investigation was to be undertaken independently of management of the Advice business being reviewed and under the instruction of the AMP board and its general counsel.”
A Confused Position?
If we were to attempt to dig into these statements that the review was not compromised in anyway because it is independent of the AMP management team and advice business – which on the surface makes sense and is entirely appropriate – but we hit the reality that it was undertaken under the instructions of the AMP board and its general counsel, who was also a former employee of Clayton Utz for 19 years.
It would appear to many that it is difficult to reconcile these seemingly opposing positions and accept that the independence of the investigation and report’s findings were not in anyway compromised.
It is indeed a confused and confusing position – in equal measure.
The moral of this story is that ‘independence’ must not just be perceived but it must also be real to maintain its value to an organisation and indeed those external to an organisation, like the regulator. Failing to do so is to feed quite justified outrage and be held up to ridicule – and now potentially criminal charges – as has occurred in recent weeks.
What Constitutes “Independence”?
It’s fair to say that the Royal Commission into the banking sector has taken a different view to both AMP and Clayton Utz as to what constitutes independence for this particular external report.
As reported in the Sydney Morning Herald, a recommendation has been made for criminal charges to be considered under section 1308 (2) and 1308 (3) for AMP for presenting the Clayton Utz report to ASIC as independent despite the 25 revisions. This relates to making misleading statements to ASIC.
What will be interesting is to see how this unfolds – not just the recommended serious criminal charges but also the newly minted independent ‘review into the review’ called by AMP. We are particularly keen to see how this impacts the quality of future independent assurance now and into the future.
Hopefully this is a watershed moment for independent corporate advice in Australia and a salient reminder for all organisations that independence not only matters for assurance it is in actual fact almost the only thing that does.
Updated Monday 30 April 2018
The fallout from last week’s revelations is that AMP’s chairwoman, Catherine Brenner, has resigned. While the board has accepted that there was no wrong-doing on her part regarding the independence of the Clayton Utz report, a statement from AMP says that the board “… were unaware of and disappointed about the number of drafts and the extent of the [AMP] group general counsel’s interaction with Clayton Utz during the preparation of the report.”
“The board commissioned and received the report. It was not a matter for the board’s approval.”
This still begs the question: Why would the board of a public company send a report to a regulator it had not approved? Is this what the false art of splitting hairs looks like? The shakeout of how this will reshape AMP looks set to continue as the Royal Commission continues to dig into the value of independence in the assurance of financial organisations.
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