Many Australian businesses are taking high-risk short cuts with the most basic controls relating to physical assets and their valuation, according to a new survey by Macquarie Collins, a specialist business advisory firm associated with professional services firm, Deloitte.

This survey is the first assessment in Australia of the performance of directors and executive management in physical asset control and valuation - a notoriously difficult and neglected area of corporate governance.

Macquarie Collins Managing Director, Stuart Hayes, said the survey found that basic controls such as physical inspection of assets and proper accounting for their value were missing in many businesses.

“We found an alarming number of businesses with little protection against the type of fraud inflicted on the National Safety Council of Victoria.

“Whilst directors and management may feel safe that they don’t have a fraudulent executive in their ranks – the physical asset safeguards that ought to lead to such assurance often do not exist. This also means, businesses are being placed in a position where they could be put in breach of their loan covenants or unable to recover from disaster because of a significant under insurance of assets.

“Just as serious is the fact that shareholders are potentially misinformed about their company’s financial position.”

Mr Hayes said the survey found widespread use of short cuts in physical asset control and valuations, including:

• reliance on the asset register for proof of the existence of physical assets (52% of respondents);
• use of historical cost figures to determine present day values (47%); and
• use of desktop reviews without physical inspection of assets (59%)

The survey also revealed a lack of awareness of key valuation drivers. In fact, most respondents admitted that their valuations did not take account of:

• offshore price changes and foreign currency movements on the carrying value of major assets (72%);
• changing occupational health and safety rules and other laws (62%); and
• improvements, idle capacity and obsolescence (53%).
  

Mr Hayes said the alarming state of physical asset controls and valuations was a result of historical and more recent factors.

“There is tradition of accepting errors in physical asset registers, which is out of date in today’s environment of increased accountability.

“Directors should ensure that the existence of assets has been physically checked, and that values are properly established. They assume the obvious questions have been addressed, but many times this is not the case. “

He said more recent developments had compounded the problem.

“There is an emphasis in the modern business environment on cash flows and intellectual property rather than physical assets, and directors are simply less aware of the issues in this area.

“Physical assets can be complex and specialised, such as a high technology process line of a food processing company. An independent director with little industry experience may be at a serious disadvantage when it comes to understanding the assets of the business and identifying shortcomings in their control and valuation.”

He added that the adoption of International Financial Reporting Standards (IFRS) from this year presented businesses with an opportunity to remedy many of their physical asset controls.