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Balancing risk and entrepreneurship

SONS of Gwalia was hailed as one of Western Australia's most successful mining companies during the 1990s and early part of this century. In 2005, it shocked investors when it fell into administration.

Audit firms Ernst & Young and KPMG have attracted many people looking for a stable and predictable working life. In the past month, both have negotiated commercial agreements to bring an end to long-running disputes that potentially threatened their reputation.

Bruce Gray is a former university researcher who established one of Australia's most successful biotechnology companies. For the past few years he has been embroiled in legal disputes with his former employer, the University of Western Australia, and the company he established, Sirtex Medical.

These examples illustrate some of the dangers that lurk in the world of business.

Sons of Gwalia co-founder Peter Lalor never would have anticipated that the company he built over many years would collapse, leaving a cloud over his judgment and reputation.

Similarly, young graduates entering one of the 'big 4' accounting firms don't anticipate they will become enmeshed in disputes with lawyers and regulators that could threaten their careers.

Yet that is what EY, courtesy of its role as Sons of Gwalia auditor, and KPMG, via its role as auditor of Norm Carey's failed property investment group Westpoint, have been through.

EY announced last week that it has offered $125 million to settle its dispute with the administrators of Sons of Gwalia.

That followed KPMG's recent decision to accept enforceable undertakings from three Perth partners who were involved in auditing Westpoint.

The KPMG undertakings resulted in the audit partners stepping aside from audit work for up to two years.

In both cases, the explanation from the accounting firms was remarkably similar. Neither accepted any admissions of liability or wrongdoing, and both said the deal was a pragmatic commercial outcome.

Both cases also show that whenever there is a corporate failure, the survivors will look for anybody nearby with deep pockets.

That usually means the banks and the auditors, who so often cop the blame for business failures.

The debate over the role of auditors often founders on a misunderstanding of exactly what they do.

Outsiders perceive auditors to be experts on all of the finer points of a business they are reviewing, and therefore insist that auditors should be aware of any cracks in the business.

In practice, auditors follow a process that is less ambitious in its goals.

Sure they review the financial accounts but they do not, and cannot, be across the minutiae of their client.

The Australian Securities and Investments Commission thought it had a strong case against KPMG's Westpoint auditors. That is why it was pursuing them.

Similarly, Sons of Gwalia's administrators, Ferrier Hodgson partners Garry Trevor, Andrew Love and Darren Weaver, believed they had a strong case against EY.

The settlements mean the files will be closed on these cases and the rest of us will not be able to make a fully informed judgment about rights and wrongs.

Dr Gray's case is different again. He is not particularly well known in Perth, but he should be.

His main achievement, matched by very few people across the country, was to commercialise groundbreaking intellectual property developed while he was employed at UWA.

Sirtex Medical last month reported 72 per cent growth in annual sales to $65 million while net profit rocketed 1,406 per cent to $18.3 million - an outstanding result for the biotech sector.

Dr Gray hasn't had much opportunity to enjoy this commercial success. For the past few years he has been embroiled in costly legal disputes with UWA, which unsuccessfully claimed it was the rightful owner of the intellectual property, and with Sirtex's remaining directors, who pushed Dr Gray off the company's board.

It's not much of a reward for someone whose commercial achievements should be held up as a model.

Many other researchers have achieved outstanding results in the laboratory but only a handful - think Cochlear and Resmed - have turned that into major commercial success.

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