Consulting giant EY was complicit in systematic fraud in which one of the world’s biggest coal companies, Peabody Energy, exaggerated the quality of Australian coal it sold to customers, a whistleblower has claimed.
The whistleblower, a former employee of Peabody Coaltrade Australia, alleges Peabody, along with two testing laboratories, falsified records by manually “upgrading” the certified quality of coal after it was tested but before it was shipped.
The claims were made in a partially redacted submission uploaded to a parliamentary committee’s website last year and then removed.
EY and Peabody have both strongly denied the allegation contained in the confidential submission to federal parliament’s inquiry into ethics in the accounting industry in the wake of the PwC tax scandal.
Peabody said similar accusations were extensively investigated and not substantiated while EY Oceania assurance leader Glenn Carmody said the firm “comprehensively rejects” the allegations, and stood by the quality of its Peabody audit.
Coal quality affects the amount of energy coal releases and how cleanly it burns. Higher-quality coal is worth more, so faking it is in effect a fraud on the company’s customers and shareholders because even small increases in coal quality can inflate the value of a company’s mines.
In 2022, Brisbane-based coal testing laboratory ALS admitted to the stock market that between 45 and 50 per cent of the coal quality certificates it issued to companies over about 13 years had been “manually amended without justification”, always upwards.
The Peabody whistleblower alleges the quality of the company’s coal was inflated fraudulently over several years by ALS and another testing laboratory, SGS, before it was shipped, “to increase the price received from customers”.
Documents tabled in parliament by independent MP Andrew Wilkie in 2022 also suggest SGS upgraded the quality of coal. SGS has been approached for comment. ALS declined to comment on the most recent allegations.
The whistleblower says he was present many times when EY was auditing Peabody’s sales and purchases, with two “very junior auditors” from the accounting firm and three Peabody employees assessing coal weight and quality. He says the EY auditors knew the figures had been falsified but signed off on the accounts anyway.
“I was always uncomfortable in how Peabody regularly caused shipment results to be adjusted without any lawful justification,” the whistleblower’s submission says. “I regularly discussed this with different EY auditors during their different audit cycles. I also asked how EY could sign off on Peabody’s financial statements saying they knew them to be correct when in fact they knew them to be incorrect and to a large degree relying on the fraud of Peabody.”
‘This is not a small amount and has massive financial consequences.’Whistleblower submission
According to the whistleblower’s submission, when he raised the concerns, the EY auditors told him their other coal clients did the same thing, and that Peabody “expects employees to commit fraud to Peabody’s advantage, but if an employee does it to Peabody’s disadvantage they will be fired”.
The submission alleges the auditors also told him that, as its auditors, it was EY’s “job to protect Peabody not Peabody’s customers,” and that he should not worry about the practice.
“Peabody’s audit committee know about the practice and approve of it, which is why EY are auditing for [Peabody],” they told him, according to the submission.
“EY were highly detail orientated, very focused, extremely diligent, and thorough in protecting Peabody’s interests. In short EY was an excellent auditor from Peabody’s perspective,” the whistleblower’s submission says.
The submission says it was common for Peabody to decrease the total moisture of its coal by about 1.5 per cent, which increased the net calorific value of the coal by about 1.8 per cent.
“This is not a small amount and has massive financial consequences. This means that for a shipment costing $US200 per metric tonne for a 70,000 megatonne shipment the invoice was overstated by just over a quarter of a million dollars US.”
A spokesperson for Peabody, said it takes allegations such as this very seriously and that “similar allegations … have been extensively investigated”.
“After considering the allegations, the evidence available and its investigations, it was concluded that the allegations were not substantiated.” It did not release the investigation on which the statement was based.
EY Oceania assurance leader Glenn Carmody said the company “comprehensively rejects the unsubstantiated allegations”, adding they “do not reflect the conduct or the approach of our professionals to meeting our obligations of independence, professional scepticism and professional obligations”.
The allegations are similar to those made against other coal companies in Australia, particularly miner TerraCom, which is facing charges from corporate regulator the Australian Securities and Investments Commission for allegedly falsifying its coal quality readings through ALS before export. ASIC last year dropped its investigation into ALS because coal quality certificates are not a financial product.
Source: Thanks smh.com