“Westpac hit by $510m provision, and Hayne compo costs could rise.”
Westpac is a publicly listed company with a focus on providing banking services through a portfolio of financial products and services. The selected article discloses the “fee scandal”, Westpac has been involved in lately. Predictably, by the bank to attempt to remediate the scandal resulting in reduced profits by the massive cash outflow reduction in profits that was induced by the rise in provisions. The investigation launched by the Royal Commission has negatively impacted Westpac Banking by reputation but also affected the company’s earnings. As a result, Westpac’s stock price plummeted at the time of the investigation at the amount of $23.83, the lowest in 5 years. Despite the falling stock price, Westpac has reported a higher profit compared to the previous financial year (Westpac, 2018). Reports like this lead to many business risks and the integrity of the accounts within the financial statement as it is inconsistent with the practices of generating revenue.
A business risk that is prominent in Westpac is the risk of liquidity due to the significant outflow in economic resources. According to the article, the Royal Commission is imposing a $510 million pre-tax provision on Westpac in regards to the illegal problem. The rule will have a significant impact on the bank’s liquidity as well as the availability for funds. The rising cost from the Royal Commission has dramatically impacted the bank; especially it will increase the strain on the financial position with a “potential repayment” of $297 million back to the customers. Besides, this has also driven a widespread investor pessimism which could affect the bank’s credit rating as well as the ability to raise capital. Instead, to maintain funding flexibility, the bank did not change its dividend policy. By attempting a significant positive outlook, the bank is trying to keeping it consistent, by paying the same amount of dividends as previous financial years. As the risk in liquidity increases, this will also increase the chance of Westpac’s management to manipulate the provision for remediation as a result of artificially improving the financial health of the firm. About the following standard, AASB 137 paragraph 14 – “Provisions shall be recognised when there is the present obligation with a probable outflow of economic benefits that can be reliably estimated”. The provision for remediation of accounts overcharged may not have accounted for all the customer accounts. Therefore, the 2018 & upcoming 2019, the annual report could be subjected to manipulation to increase financial capability. The compensation for the fee also comprises missed earning on interest by the bank. Consequently, the “provision account” signifies a higher audit risk since the calculation of interest is more comfortable to manipulate compared to principal payments. The result could accentuate material misstatement on the provision for remediation account and will increase the chance of providing inappropriate audit opinion (ASA 200).
January 2019