National Telecoms Group Ltd v John Fairfax Publications Pty Ltd

Materiality 8The Plaintiff objected to paragraphs 1.3.18 and 1.3.19 which read: 1.3.18 Ernst & Young calculated materiality at 30 June 2002 as $527,350, being 5% of profit after tax. This amount converted to a "pre-tax equivalent of materiality" of $753,357. That is, for items such as revenue and tax deductible expenses, $753,000 would be the relevant materiality amount to be used. 1.3.19 In undertaking my assignment, I have adopted the above pre-tax amounts of $300,000 and $753,000 for the December 2001 and June 2002 periods, as an indication of what might be considered material. 9The objection is that it is accounting standard AASB1031 which deals with how materiality is determined and, therefore, to take the figure calculated by the auditors in their working papers as the benchmark is to have regard to an irrelevant matter. It was submitted that the figure of $753,000 was a preliminary figure used by the auditors which would have changed during the course of the audit. 10The evidence of Mr Wayling, the auditor, was that this was the final figure calculated as being the benchmark figure for materiality (see at T732-3). It is true that the accounting standard provides the presumptions (based on being less than 5% or more than 10%) by which materiality is to be considered. However, where the auditors have fixed on this figure at the end of the audit process, it does not seem to me inappropriate for Mr Temple-Cole to test the matter of materiality by reference to that figure. It may ultimately prove too narrow a basis, but that is a matter for cross-examination and final submission. 11I reject the challenge to these paragraphs.

(1) The cash position 12This issue arises out of the statement in the board papers of June 2002 that some $5.6 million worth of creditors had been held back which was one reason for the improvement in the cash position of the company at 30 June 2002. There are 2 imputations to which this issue relates, being imputations 1 and 2. Those imputations are: (1) That the Plaintiff produced misleading accounts by not complying with generally accepted accounting standards. (2) That the Plaintiff falsified its accounts so as to make its financial position look better than it actually was. 13That has raised a sub-issue of what is meant by the word "accounts". It is because of that sub-issue that the Plaintiff objects to paragraph 1.3.28 which reads: In my opinion, the term "accounts" refers to the Annual Report, because usually for a public company such as NTG the financial statements are published together with, or as a part of, the Annual Report. For this reason in my opinion it is reasonable to assume that the term "accounts" in this case refers to the Annual Report and financial statements as one document. 14The Defendant's case here is not that the financial statements are other than in accordance with the accounting standards. Rather, because statements made in the Chairman's report, forming part of the annual report, make reference to the improvement in the cash position, it is said that the word "accounts" includes more than the financial statements of the Plaintiff and embraces other aspects of the annual report including the Chairman's statement. 15Simply because generally accepted accounting standards (GAAS) do not apply to other than the financial statements, the notes to those statements and the Directors' declaration, does not mean that the evidence in this paragraph is irrelevant. I will need ultimately to determine what constitutes the "accounts" that are referred to as falsified and misleading. The Defendant no doubt wishes to submit that the word "accounts" should be given a broad meaning in accordance with what appears in paragraph 1.3.28. That determination cannot, and should not, be made at this stage of the proceedings. In addition, there is likely to be argument about whether the words "generally accepted accounting standards" in imputation 2 is a specific reference to Accounting Standards which have been promulgated or whether it is a more generic term referring to the good practice of accountants. Again, that is an issue to be determined at the end of the hearing. 16The challenge to this paragraph fails. 17Objection is taken to paragraph 4.3.4 which reads: Had NTG paid those creditors prior to 30 June 2002 in accordance with its usual payments cycle, then it would not have been able to adopt the accounting treatment which it in fact did adopt. Had it done so (retaining the $5.6 million within cash assets), then this accounting treatment would not have been in accordance with GAAS. This paragraph is repeated in the table contained within paragraph 2.1.3 of the report (section 2 of the report is a summary of Mr Temple-Cole's opinions). 18The Plaintiff submits that because there is no allegation in the case that the Plaintiff improperly stated the cash position in its financial statements this part of the opinion is irrelevant. In my opinion, the expert is entitled to express an opinion about the hypothetical position as part of his conclusions on the cash issue particularly the conclusions expressed at paragraph 4.3.5 (to which objection is not taken). 19The challenge to paragraph 4.3.4 fails. 20Objection is next taken to paragraph 4.2.4 which reads: In my opinion, the meaning of "holding back" of creditors is that NTG had $5.6 million of creditors which were due and payable in June 2002 and would otherwise have been paid by that date in accordance with NTG's usual payments cycle. Due to the holding back, these creditors were recognised as current trade creditors, and the amount of $5.6 million was included within "cash assets" on NTG's balance sheet at that date. Further, the payment of creditors would not have been included in NTG's cashflow statement for the year ended 30 June 2002 as they had not been paid by that date. A similar but abbreviated form of that statement appears within the table in paragraph 2.1.3. 21The Plaintiff objects on the basis that this is mere assertion on the part of Mr Temple-Cole. I do not agree. Mr Temple-Cole is setting out what he understands by the expression "holding back". Whilst that understanding may be able to be challenged, it is entirely proper, and indeed necessary, for Mr Temple-Cole to set out what his understanding of the term is so that he can then go on to consider what flows from that matter. 22The challenge to this paragraph fails. 23Objection is taken to paragraph 4.2.8 which reads: Given that NTG's management and Board had knowledge of the "holding back" of creditors, in my opinion this means that the financial statements contained in NTG's 2002 accounts were falsified. Given the additional emphasis placed on NTG's cash position in the introductory sections to the Annual Report, in my opinion this also means that the 2002 accounts (i.e. the document including both the Annual Report and financial statements) are also falsified. This is so because, having held back the creditors, and retained the $5.6 million within cash assets, specific reference was then made in the introductory comments to the 2002 Annual Report about the strong cash position and strong cashflow. Further, this treatment, and the accounting entries which were made by NTG meant that the financial statements contained in the 2002 accounts were misleading as they were unreliable and failed to give a true and fair view (refer to discussion on accounting standards commencing at paragraph 4.2.14 below). This paragraph is repeated in the table in paragraph 2.1.3. Paragraph 4.2.14, to which objection is also taken on the same basis, is in similar, albeit briefer, terms. 24The Plaintiff objects because Mr Temple-Cole asserts that the accounts were falsified and because there is no foundation for that assertion. 25The objection to this paragraph goes to the heart of an important aspect of the case that was debated in the openings and has arisen in the course of other evidence. Mr Temple-Cole's thesis appears to be that where the accounts did not deal with the position as Mr Temple-Cole asserts that they ought to have, this means that the accounts have been falsified. Reference can be made in this regard to paragraph 5.6.1(ii) and (v) (in relation to internally financed transactions), to paragraph 6.8.15 (in relation to loss making contracts) and paragraph 7.7.29 (in relation to the carrying value of good will). 26An allegation that something is "falsified" is a serious allegation to make because it necessarily involves an allegation of wrongdoing and may suggest criminality. It must be proved by showing the intent of a person (here) to publish information that was known by that person not to be true or correct, or it must be shown that the material was published by the person with reckless disregard for its truth. The proof would need to be to the standard identified in Briginshaw v Briginshaw (1938) 60 CLR 336. That necessarily means that there must be good evidence and not mere assertion. 27A difficulty the Defendant would need to overcome in order to show, at the end of the hearing, that the accounts were falsified would include an identification of who made those representations on behalf of the Company, whether named persons or, at least perhaps, a class of persons, in order for such intent or recklessness to be proved. That is not the present issue. 28A statement that the accounts were falsified is a conclusion. The Defendant accepts that this is so, and accepts that the final determination of whether the accounts were falsified is a matter for the Court to determine. The Defendant submits, however, that that does not preclude an expert giving an opinion about it. The Defendant submits that Mr Temple-Cole is well qualified to give an opinion on what was described as "a financial manoeuvre" in the accounts. The Defendant submitted that the inference of falsification is overwhelming from Mr Temple-Cole's reasoning and that the Court will be assisted by having his opinion about the matter (as well as competing opinions) to reach the appropriate conclusion about falsification. 29In one sense the issue of falsification might be described as an ultimate issue. In that regard I note that s 80 Evidence Act 1995 does not make evidence of an opinion inadmissible only because it is about a fact in issue or an ultimate issue. So, in a not unrelated area, it has been held that "a company director should have specialised knowledge and be able to speak of directors' duties of due care and proper conduct and their application": Adler v Australian Securities and Investments Commission [2003] NSWCA 131 at [629]; Forge v Australian Securities & Investments Commission [2004] NSWCA 448 at [271]. 30Nevertheless, as Austin J pointed out in ASIC v Vines [2003] NSWSC 1095; (2003) 48 ACSR 291 at [27] "expert evidence directed to answering a question of law or fact that is directly before the Court for decision ... is likely to be inadmissible not because it goes to the ultimate issue, but because it will not be wholly or substantially based on the expert's specialised knowledge, or it will be irrelevant: Allstate Life Insurance Co v Australia and New Zealand Banking Group Limited (No 6) (1996) 64 FCR 79 at 83". That statement was apparently approved in Forge at [272]. Further, in Makita (Aust) Pty Ltd v Sprowles (2001) 52 NSWLR 705 at 745 [87] Heydon JA said that expert evidence will be inadmissible if it usurps the function of the trier of fact. 31The only reasons offered by Mr Temple-Cole for his conclusion of falsification were, first, that the Plaintiff's management and Board had knowledge of the "holding back" of the creditors. His subsidiary reason was the additional emphasis placed on the Plaintiff's cash position in the introductory sections to the annual report. 32Given that Mr Temple-Cole seems to be implicating the Board of Directors in the falsification, it may be doubted whether he has demonstrated the necessary degree of expertise to suggest by his opinion that the Directors have not only not acted in accordance with their obligations as Directors, but have taken the further step of engaging in positive wrongdoing in their role. Mr Temple-Cole has not been shown to have had any experience as a company director, nor to have any body of specialised knowledge about the obligations of company directors, particularly in relation to their need to rely on management in respect of financial decisions that may be reflected in the company's accounts. 33Moreover, his "reasons" that the accounts were falsified are simply an assertion of what he says is an inevitable conclusion from the knowledge of the directors that creditors were held back in the way he understands that phrase to be used. It is not immediately apparent to me that the fact that $5.6 million of creditors were not paid in accordance with the Plaintiff's usual payment cycle leads inevitably to the conclusion that the accounts are falsified. That would mean that there is no other possible explanation for the non-payment of the creditors. It also has regard only to the cash position in the accounts and ignores the fact that the accounts quite properly disclose that trade creditors were increased by the $5.6 million that had not been paid. 34When questions came to be posed to the joint experts for the purposes of the conclave that I directed, the Defendant included a series of questions designed to avoid simply asking if the experts believed the accounts were falsified. The question in relation to the holding back of creditors was this: (21) Assuming the deferral of payments to creditors in June 2002 did result in the incorrect disclosure of NTG's cash position in the 2002 accounts: (a) Are you able to exclude the possibility of a reasonable explanation for the deferral of payments to creditors in June 2002 which is inconsistent with the NTG's accounts being internationally falsified as a result? 35In answer to that and similar questions Mr Temple-Cole said that he was able to exclude the possibility of a reasonable explanation for what had been done. On the other hand, Mr Samuel, although noting that the question required speculation, said that he could not exclude other explanations, and put forward a number of possibilities. 36At the moment, all that is being considered is Mr Temple-Cole's reports. However, even if one were to take into account his statements in the joint report that he can exclude other reasonable explanations, the report would still suffer from the serious problem that no reasons have been given for the view that (here) the accounts were falsified. Indeed, because it is possible to think of other explanations that may be available, none of which has been addressed by Mr Temple-Cole in his report, it becomes clear that Mr Temple-Cole's statements concerning the falsification of the accounts is a mere "ipse dixit" contrary to the judgment of Heydon JA in Makita at [87]. 37Paragraphs 4.2.8 (including its repetition in the table in paragraph 2.1.3) and 4.2.14 are rejected. 38Objection is taken to paragraph 4.1.6 which reads: Although it is correct to say that Note 8 to NTG's 2002 financial statements did disclose the extent of funds set aside as bank guarantees, thereby allowing me, as a reader of the accounts to calculate 'free-cash', this fact did not receive prominence in the introductory comments to the Annual Report. 39This is not a statement based on Mr Temple-Cole's expertise. Whether or not some aspect of the financial statements "did not receive prominence" and what flows from that, are ultimately matters for the Court. 40I reject this paragraph. 41Objection is taken to paragraph 4.2.3 which reads: I have not seen any evidence that NTG undertook similar "holding back" of creditors at the end of other accounting periods. 42The Plaintiff objects to this paragraph on the basis that it is an unsubstantiated assertion. It seems to me, however, to be a statement that Mr Temple-Cole is entitled to make on the basis of his expertise. It is clear from his report that he examined material in other accounting periods. 43The challenge to this paragraph fails. 44Objection is taken to paragraphs 4.2.9, 4.2.15 and 4.3.3 which read: 4.2.9 Further, the effect of this holding back of creditors was not that it made NTG's financial position look better than it actually was. Rather, the effect was that it made NTG's position look better than it should have been. ... 4.2.15 The effect of this holding back of creditors was not that it made NTG's financial position look better than it actually was. Rather, the effect was that it made NTG's position look better than it should have been. ... 4.3.3 Given that NTG's management and Board had knowledge of the "holding back" of creditors, in my opinion this means that the financial statements contained in NTG's 2002 accounts were falsified. Given the additional emphasis placed on NTG's cash position in the introductory sections to the Annual Report, in my opinion this also means that the 2002 accounts (i.e. the document including both the Annual Report and financial statements) are also falsified. This is so because, having held back the creditors, and retained the $5.6 million within cash assets, specific reference was then made in the introductory comments to the 2002 Annual Report about the strong cash position and strong cashflow. Whilst perhaps a minor point, the effect of this holding back of creditors was not that it made NTG's financial position look better than it actually was. Rather, the effect was that it made NTG's position look better than it should have been. 45The principal objection to these paragraphs is that no basis is stated as to why the holding back of creditors made the Plaintiff's position look better "than it should have been". That submission should be accepted. Indeed, it is a little difficult to understand what Mr Temple-Cole means by making a distinction between the position looking better than it actually was and the position looking better than it should have been. Mr Silver of counsel for the Defendant accepted that that was so. He argued that the words should be given a liberal construction to mean that although the financial statements were technically correct they should have looked worse. 46Given the imputations being defended are falsification and misleading accounts, a consideration of the position looking better "than it should have been" seems an irrelevant matter. 47Those paragraphs are rejected although I note that paragraph 4.3.3 would otherwise be rejected because of the assertions of falsification. 48Objection was originally taken to paragraphs 4.2.10 to 4.2.13. Subsequently, the Plaintiff withdrew its objections to paragraphs 4.2.11 and 4.2.12. Paragraph 4.2.10 reads: 4.2.10 Had NTG paid those creditors prior to 30 June 2002 in accordance with its usual payments cycle, then it would not have been able to adopt the accounting treatment which it in fact did adopt. Had it done so (retaining the $5.6 million within cash assets), then this accounting treatment would not have been in accordance with GAAS. 49This paragraph is difficult to understand. It is not made clear what Mr Temple-Cole regards as "the accounting treatment". Moreover, the paragraph is postulated on the assumption that creditors were paid within the usual cycle and $5.6 million would have been retained within cash assets. On that basis his statement that "this accounting treatment would not have been in accordance with GAAS" does not appear to make a great deal of sense. In any event, no reasons are offered for his assertion that it would not have been in accordance with GAAS. This paragraph should be rejected. 50Paragraph 4.2.13 reads: 4.2.13 In respect of the comments included under the heading "Highlights" on page 3 of the 2002 Annual Report, and the first comments to appear following the title page and contents: (i) Instead of a statement that: Revenue, on a pro-forma basis, increased 105 per cent to $117 million (forecast $110 million); Net profit after tax (pro-forma), increased 67 per cent to $10.5 million; Strong cash flow, with $18.4 million cash at year end... (ii) NTG would only have been able to state: Revenue, on a pro-forma basis, increased 105 per cent to $117 million (forecast $110 million); Net profit after tax (pro-forma), increased 67 per cent to $10.5 million; $12.825 million cash at year end ... (iii) It would not have been able to make a statement as to 'Strong cash flow' for the reasons outlined at paragraph 4.2.11(iii) above. 51This paragraph seems to pose a hypothetical, namely, what would or might have been said in the annual report if the creditors had been paid. That is not a statement based on any expertise of the witness. 52This paragraph should be rejected. 53Objection is taken to paragraph 4.2.16 which reads: 4.2.16 In my opinion, the "holding back" of creditors is therefore a clear case of "window dressing". This term means that NTG arranged the presentation of its balance sheet so as to give the best possible presentation. 54A separate objection is taken to each of the 2 sentences. However, the paragraph can be dealt with as a whole. The paragraph would not appear to be based on any expertise of the witness. Moreover, there is no issue in the case about "window dressing" or whether the balance sheet was presented in the best possible way or any other sort of way. The opinions expressed are irrelevant. 55The paragraph should be rejected.

(2) Internally financed transactions 56Objection is taken to paragraph 5.6.1(v) (which is reproduced in paragraph 2.1.3) but paragraph 5.6.1(ii) is also relevant. Those paragraphs provide: 5.6.1 In relation to the disclosure of the volume and value of internally financed transactions, and assuming the earliest acknowledgement by NTG that they had internally financed customers was on 12 December 2002, the following are my opinions: ... (ii) NTG's claims that it had not commenced internally financing customers until after 1 July 2002 does not appear to be correct and means that the financial statements contained in NTG's 2002 accounts were falsified in this respect. By 30 June 2002 it had already internally financed at least 204, and perhaps as many as 341 customers, meaning that it had spent around $2.5 million by 30 June 2002. ... (v) The incidence of a material number of internally financed transactions with a settlement date prior to 30 June 2002 and NTG later stating (at various times to various audiences) that the incidence of internally financed transactions commenced since 1 July 2002, means that the financial statements contained in NTG's 2002 accounts were falsified in this regard. ... 57The matters pertinent to these paragraphs have largely been dealt with when considering falsification earlier in this judgment. The further point to note is that the only basis upon which Mr Temple-Cole appears to assert that the accounts were falsified in relation to internally financed transactions was an incorrect statement made in December 2002 that internally financed transactions had commenced since 1 July 2002. Even if it was accepted that the later statements made were false statements, it cannot be argued backwards (as Mr Temple-Cole purports to do) that the 2002 accounts were falsified in respect to internally financed transactions. Such an approach is logically flawed. 58These paragraphs (including the repetition of paragraph 5.6.1(v) in the table in paragraph 2.1.3) should be rejected. 59Objection was taken to paragraphs 5.3.4, 5.3.5, 5.3.7, 5.3.8 and the last 4 items in the table in paragraph 5.3.2 . 5.3.2 Mr Ross sets out at paragraph 7.5.150 of his report a table showing the settlement dates of the 659 leases contained in the "Schedule 2 Contract". This summary is repeated below with an additional column setting out when the total 1,100 internally financed customers would have been settled by, assuming the same proportions as those for the 659 known settlement dates: Settlement date of lease prior to Number of contracts settled prior Cumulative number of contracts for the 659 known Cumulative number of contracts for all 1,100 internally financed 28 February 2002 9 9 15 30 June 2002 195 204 341 30 September 2002 176 380 634 1 December 2002 167 547 913 12 February 2003 52 599 1,000 31 March 2003 60 659 1,100

... 5.3.4 Adopting an average cost of equipment per internally financed customer of $7,500 would result in NTG having spent the following amounts on all internally financed customers, all of which are, in my opinion, material to NTG's accounts: (i) Around $2.6 million by 30 June 2002; (ii) Around $4.76 million by 30 September 2002; (iii) Around $7 million by 1 December 2002; and (iv) Around $8.25 million by 31 March 2003. 5.3.5 Whilst the above amounts are estimates, I note that the amounts spent by 1 December 2002 and 31 March 2003 are commensurate with the amount disclosed as payments for the acquisition of physical non-current assets in NTG's cash flow statements in the 3 months ended 31 December 2002 (refer paragraph 5.2.2 above). ... 5.3.7 Ernst & Young's audit files show in a paper titled "Schedule of COGS adjustment" that as at 31 December 2002 NTG had spent $7.011 million on the purchase of physical non-current assets for internally financed deals. It is not clear from the aforementioned document whether these internally financed deals were entered into from 1 July 2002 onwards or an earlier date. In my opinion, given the reversal of some internally financed sales referred to in section 5.4 below, it is most likely that these internally financed deals were entered into from 1 July 2002 onwards. Assuming I am correct, then NTG must have spent a minimum of $7.011 million on the purchase of physical non-current assets for internally financed deals in the period from around 1 March 2002 to 31 December 2002. 5.3.8 In my opinion, the data referred to above supports the estimates set out in paragraph 5.3.4 above and Mr Ross's opinion that NTG had spent $8.3 million on the purchase of equipment for internally financed customers in the period to 31 December 2002. 60As can be seen, most of the material in these paragraphs deals with the position after 30 June 2002. The Plaintiff objects on the basis that internally financed deals after 30 June 2002 is not an issue in the proceedings. 61The Defendant explains the reason for the inclusion of this material as being that at the time Mr Temple-Cole prepared his first report there was an absence of relevant data about internally financed deals up to 30 June 2002. The material in these paragraphs was used by Mr Temple-Cole to form the basis for an estimate of the value of internally financed deals prior to 30 June 2002 62However, subsequently he was provided with the information he needed and he considered that material in his second report. The Defendant now accepts that it probably does not need to rely on the material in these paragraphs because of the provision of more accurate information that Mr Temple-Cole has used in his subsequent report. It wishes, however, to have these paragraphs admitted into evidence in case there is a dispute about matters contained in his subsequent report. 63In my opinion, given that he has been provided with more accurate information and has employed that in his second report, this present material has simply become irrelevant. Further, some measure of agreement had been reached between the experts when the joint report was prepared. 64These paragraphs should be rejected.

(3) Loss making contracts 65Objection is taken to the whole of section 6.2 of the report. That section is headed "Arthur Andersen Audit Committee Report dated 14 February 2002". A good deal of time has already been spent in the cross-examination of various witnesses about this report. The report identified 3 possible accounting methods called "scenarios" which could be used to account for sales of the Synergy packages. It appears to be the case that Arthur Anderson recommended to the Plaintiff "Scenario (ii)" as the most appropriate accounting method. However, they said that if Scenario (iii) was adopted a provision for loss making contracts should be recognised. Ultimately, the Plaintiff adopted Scenario (iii). 66It is not necessary to set out the whole of section 6.2. The objection to it is made on the basis that what was dealt with in the 14 February 2002 report was revenue recognition which, the Plaintiff says, is not an issue in the proceedings. 67In my opinion, although revenue recognition as such is not the issue in the proceedings, it is likely to be inextricably linked with the issue of loss making contracts and the provision, it is said, should have been made in respect of them. The precise relevance of the 14 February 2002 report is a matter for debate at the conclusion of the evidence as part of the submissions in the case. Whether Mr Temple-Cole is right or wrong on the issue of loss making contracts, he draws support for his position, at least in part, from the report of 14 February 2002. 68The evidence is relevant, and the objection to this portion of the report should be disallowed. 69Objection is taken to paragraph 6.4.1 to 6.4.4 which read: 6.4.1 As set out in section 7.4 of the Ross Report 99, Ernst & Young undertook an analysis of NTG's customers in September, October and November 2002 and the results were used to make an assessment that around 35% of NTG's customers were loss making. I am not aware of the reasons why this review was undertaken, or who instructed Ernst & Young to undertake it. In my opinion, however, it is likely that the review was similar in nature to the review which Andersen had recommended be undertaken in February 2002, but which apparently was not undertaken. 6.4.2 The Ross Report also rectifies errors in the analysis undertaken by Ernst & Young and concludes that by November 2002 at least 53% of NTG's airtime customers were loss making. That is, this analysis would, adopting NTG's calculation, have the effect of increasing the provisions made by NTG in its 2003 half-year financial report. I have reviewed and re-performed the calculations undertaken by Mr Ross and agree with the conclusion that by November 2002 53%, and not 35% of customers were loss making based upon the information available at that time. I discuss my reasons for this opinion further at section 6.6 below. 6.4.3 This data from Ernst & Young's analysis was used to support calculations for the provision for loss making contracts made by NTG in its 2003 half-year financial report. This provision was stated to be as a result of adopting a new accounting standard (AASB 1044) for the first time. This adoption of the accounting standard also required NTG to adjust its opening retained earnings for the provision that would have been recognised in the financial statements contained in its 2001 and 2002 accounts had it adopted the accounting policy earlier. In my opinion, this provides clear evidence that NTG had loss making customers as at 30 June 2002 and as at 30 June 2001. 6.4.4 It appears from the statements at paragraph 6.3.3 above that NTG believed that it was justified in its use of the Scenario (iii) method, however there is nothing in those statements to acknowledge that NTG needed to make a provision for loss making (or onerous) contracts in the financial statements contained in its 2002 accounts (or earlier). As already noted, by not providing for loss making contracts NTG acted contrary to the advice provided by Andersen under Scenario (iii) that ' Management must also consider the level of losses incurred by DTL '. Further, in my opinion this position is not supportable for the reasons outlined below. 70Objection is taken by the Plaintiff on the basis that the review that these paragraphs are dealing with postdates 30 June 2002 and is therefore irrelevant to the issues in the case. 71The Defendant says that the material is used to show that when an analysis of loss making contracts was undertaken for the months September to November 2002 it was found that perhaps 35% or (according to Mr Temple-Cole's analysis) perhaps 53% of the Plaintiff's airtime customers were loss making. Mr Temple-Cole says, therefore, that if an analysis had been undertaken for the period to 30 June 2002 it could reasonably be concluded that the Plaintiff had loss making customers within the year to 30 June 2002 and even the earlier year. 72The objection to these paragraphs is not unrelated to the objection to section 6.6 which the Defendant no longer presses because of further information that Mr Temple-Cole has dealt with in his second report. The Defendant submits, however, that what is contained in section 6.4 has a wider purpose as to the methodology adopted by the auditors in their analysis later in 2002 and the approach of Mr Temple-Cole. 73Although I have considerable doubts about the relevance of the material in section 6.4 I do not consider it should be excluded. 74A similar objection is taken by the Plaintiff to section 6.5 which was Mr Temple-Cole's assessment of the Plaintiff's calculation of the provision for loss making contracts later in 2002. The material is supported for similar reasons to that of section 6.4. 75Again, although I have considerable doubts about its relevance, I do not think it should be disallowed. 76Objection is taken to section 6.7 which is headed "Provision for loss making contracts made by NTG as at 30 June 2003". 77The significant difference between material in section 6.7 and that contained in sections 6.4 and 6.5 is that the Plaintiff changed its accounting policy for revenue recognition for the year ended 30 June 2003. The Defendant does not dispute that the analogy drawn by Mr Temple-Cole in paragraph 6.7.6 is drawn between 2 different accounting standards and that the basis of the analogy is not supported by reasoning. 78In these circumstances, I consider that the material in this section of the report is irrelevant and should be disallowed. 79Objection was taken to paragraph 6.8.15 which reads: 6.8.15 The apparent failure to make this information available for the purposes of finalising the financial statements contained in the 2002 accounts is, in my opinion, highly suggestive that management falsified the financial statements contained in the 2002 accounts in this regard. For this reason I state that it is probable that the financial statements contained in the 2002 accounts were falsified. In my opinion the ability to understand whether or not individual customers are generating a profit or loss is a fundamental responsibility of management. 80For reasons given earlier when discussing the issue of falsification this paragraph should be rejected. It suffers from the further difficulty that the conclusion is based on an apparent failure to make available information which (according to Mr Temple-Cole) indicated that it was highly likely the Plaintiff had significant numbers of loss making customers prior to 30 June 2002. Since it is accepted that no analysis of loss making contracts was performed for the purposes of those accounts there seems a high degree of difficulty in asserting falsification of the accounts. It may be for that reason that Mr Temple-Cole is only prepared to say that this is "highly suggestive" that management falsified the financial statements. That conclusion itself undermines the assertion of falsification because it points to a conclusion without evidence. 81This paragraph (and its repetition in the table in paragraph 2.1.3) should be rejected. 82Objection was taken to paragraph 6.8.17 but I note that that paragraph, together with paragraphs 6.8.18 to 6.8.21 are no longer pressed by the Defendant.

(4) Direct Telecom's goodwill 83Objection was taken to paragraph 7.7.29(iii) which reads: 7.7.29 In my opinion, the adequacy and reasonableness of the goodwill paper generally, and in particular the revised DTL forecast, are both highly questionable, because: ... (iii) Based on the above, in my opinion the fact that management intended to, and did, change the way that DTL's financial information was reported, and then utilised this information to, in part, support a forecast turnaround in DTL's performance, is highly suggestive that NTG's management falsified its accounts in this regard; and ... 84For the reasons given earlier in relation to falsification, including my reasons with respect to the phrase "highly suggestive" when dealing with loss making contracts, this paragraph should be rejected. A similar paragraph in the table in paragraph 2.1.3 (on p.14) should also be rejected. 85Objection was also taken to a number of paragraphs in the report that deal with the comments of analysts about matters emanating from the Plaintiff including its accounts. These matters are to be found in paragraphs 3.1.8, 3.2.2, 5.1.6, 5.1.7, 5.6.1(iv) and 5.6.1(vi) . 86Largely for the reasons given in my earlier judgment on this issue these paragraphs should be rejected. In addition, what appears in paragraphs 5.1.6, 5.1.7 and 5.6.1 deal with the reactions of analysts to disclosures made in December 2002 and January 2003 concerning internally financed transactions. The reactions reported do not appear to relate in any way to any failure of the Plaintiff to disclose internally financed transactions in the accounts to 30 June 2002. They are therefore irrelevant on that further basis. 87The material in all of these paragraphs concerning the reaction of analysts is rejected.

The second report 88Although some particular objections were taken to parts of the second report of Mr Temple-Cole, the parties accepted that the rulings contained in this judgment in respect of the first report were likely to provide a sufficient basis for agreement to be reached about the portions objected to in the second report. I have not therefore dealt in this judgment with the second report. 89The parties should identify by agreement those parts of the second report which are not to be admitted into evidence. If there is any continuing controversy in that regard I will hear further argument about the matter.

Conclusion 90The following portions of the report of Mr Temple-Cole of 21 October 2008 are rejected - para 3.1.8, para 3.2.2, para 4.1.6, para 4.2.8, para 4.2.9, para 4.2.10, para 4.2.13, para 4.2.14, para 4.2.15, para 4.3.3, para 4.3.16, para 5.1.6, para 5.1.7, the last 4 entries in the table in para 5.3.2, para 5.3.4, para 5.3.5, para 5.3.7, para 5.3.8, para 5.6.1(ii), the last sentence in (iv),(v) and the second sentence in (vi), section 6.7, para 6.8.15, para 7.7.29(iii), and corresponding parts of the tables in paragraph 2.1.3.

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