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FRRP decisions: significant errors at Cambrian Mining

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20th Feb 2008
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This week the Financial Reporting Review Panel (FRRP) concluded its review of Cambrian Mining plc’s report and accounts for the year ended 30 June 2006. It was the end of an embarrassing saga for Cambrian, which saw trading in its AIM-listed shares suspended, new auditors brought in, and a £40 million operating profit reduced to a £4.6 million loss.

Cambrian’s accounting troubles first hit the press in December 2005 when the Financial Services Authority (FSA) fined then finance director Jonathan “Jo” Malins a record £25,000 for buying Cambrian shares ahead of the company announcements. The FSA ruled this market abuse, and levied what was then the largest fine to date for misuse of information (although other offences had attracted harsher penalities).

Malins offered his resignation but Cambrian chairman Charles de Chezelles said the affair was “a storm in a teacup”, and chose to strip him of share options instead. He did have to resign from directorships at two related companies, however: Asia Energy and Cambrian Oil and Gas. Less than six weeks later the board had changed its mind. Malins’ resignation was suddenly re-accepted, and the firm also changed its nominated advisor and broker from William de Broe to Teather and Greenwood.

At this point Cambrian was making its money from selling investments rather than operational turnover. After Malins’ departure it was almost a year before the company finally recruited a replacement, albeit on a part-time basis. Richard Round joined in January 2007, splitting his time between Cambrian and Anglo Asian Mining. The board backed him up by appointing a financial controller, one Malcolm Lowry from Millfield Group.

Taking all these staffing problems into account - Malins’ resignation, the prolonged absence of a replacement, and the eventual recruitment of a part-time finance director - perhaps it isn’t surprising that the accounts for 05/06 proved so problematic. In any case, the accounts themselves were filed well within deadline, being approved at the AGM in November 2006. The auditors were Southwark-based Chapman Davies, auditors for numerous AIM-listed mining and energy companies.

It isn’t known when the matter came to the attention of the FRRP, and nor does the Panel publicise its involvement in such cases until they have been satisfactorily rectified, but it is unlikely their interest could have been awakened before early 2007. The FRRP’s involvement may have been a factor behind Cambrian’s appointment of Deloitte as its new auditors in June of that year.

Last December, Cambrian announced it had been conducting “a comprehensive review of its financial reporting”. This, the company said, had been the reason for new auditors, as well as new additions to the board, and a new management team. In part, this consisted of the appointment of Mark Burridge as chief executive officer that May, and of John O’Reilly and Ted Button as non-executive directors. De Chezelle was replaced as chairman by John Byrne. As is normal practice, the company did not mention the FRRP.

In the same announcement Cambrian further admitted it was reissuing the 05/06 accounts, and worse, that it would be unable to file its 06/07 accounts by deadline. Consequently, trading in its shares was suspended.

“The re-issuance was deemed necessary after the 2006 accounts were found to contain a number of mistakes and missing disclosures,” the board said. Rather than an operating profit of £40 million, the company now showed a £4.6 million loss. Much of the materiality came from restating chunks of revenue and operating profits to items below the operating results line, reflecting Cambrian’s ultimate status as an operating mining company rather than an investment holding company. It may also reflect the complexity of International Financial Reporting Standards: prior to 2006, accounts were filed in accordance with UK GAAP.

This Wednesday the FRRP went public and said it considered its inquiries into the 05/06 accounts closed. It summarised the principal adjustments behind the re-issuance as follows:

  • Revision of the accounting in respect of the 2005 acquisitions of Deepgreen Minerals Corporation Ltd and AGD Mining Ltd to reflect the existing interests already held by the company and revisions to the fair values of net assets acquired.
  • Revisions to the accounting for interests in associates, including the impact of dilutions, foreign currency translation and alignment of the results of associates with group accounting policies.
  • Revisions to the accounting for associate interests to reflect the fair value of options held in associates upon exercise of those options in exchange for shares.
  • Revised accounting for investments in convertible notes and debentures including separate reflection of the conversion option.
  • Revisions to the accounting for convertible notes issued.
  • Reclassification of profit on the sale of associates, subsidiaries and other investments in the income statement from revenue and operating profit to gains on disposal of interests in associates, gain on disposal of subsidiaries and other gains and losses.
  • Recognition by the group of foreign exchange gains of the company arising from intra-group loans as part of movements in equity instead of gains in the income statement.
  • Amendment of the statement of changes in equity to reflect the payment of dividends in the year and other movements previously omitted, in addition to the effect of the above.

The following day Cambrian announced its appointment of Vivian Silverman as an interim finance director. The accounts for 2006/07 have still not been filed and as of today its shares are still suspended.

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