Police asked to follow up Firm insolvency

The Department of Finance has asked WA Police to investigate Firm Construction, while the company’s administrators say Firm may have misrepresented its financial position.

Business News revealed in November that RSM partners Greg Dudley and Jerome Mohen had been appointed administrators of Firm, previously a $100 million-a-year builder.

Administrators issued their creditor’s report yesterday (filed with the Australian Securities and Investments Commission), raising concerns Firm may have had a shortage of working capital as early as June 2020.

But the report said that finding did not match up with financial statements Firm had provided to other parties.

“A review of correspondence between the company and various third parties show the company may have misrepresented (its) financial position… by providing signed financial statements which prima facie appear to materially misstate the company’s working capital position,” Mr Mohen said in the report. 

“In addition, I have been provided unsigned financial statements by the company’s pre-appointment external accountant, which materially differ from signed financial statements provided to third parties by the company. “

Administrators also said they had found potential claims against directors for breaches of directors’ duties, which had been reported to ASIC.

Documents obtained from the Department of Finance by Business News under freedom of information rules include redactions under a clause of the FOI Act which exempts matters that could “prejudice an investigation of any contravention or possible contravention of the law in a particular case”.

That included Firm’s accounts for the year to June 2022, which were provided to the Department of Finance in August last year.

When asked for clarification, the Department of Finance said “several matters have been referred to the WA Police for investigation”.

The department said it could not disclose the grounds for that referral as the matters are currently under investigation.

Firm was working on six projects for the department prior to the company’s administration, including Wellard Village Primary School.

A former director of Firm did not respond to requests for comment.

Insolvency

A preliminary analysis by administrators suggests the company was insolvent from December 2021, and possibly earlier.

The RSM report also says further investigation will be needed of a potential $1.4 million shortfall in retention project bank accounts associated with Firm’s works.

Those accounts were part of a state government effort to improve payment certainty for subcontractors across the construction industry.

The company’s management said the reconciliation had potentially been erroneous, and that its accounts team may have made errors, the report said.

Inside the books 

The report gives the first full look at Firm Construction’s books since RSM took the reins of the business in November.

Firm’s income halved, dropping from $121.5 million in the 12 months to June 2021 to be $54.8 million in the 2022 financial year.

The company posted a loss of almost $10 million in 2022FY, and $466,000 in the remaining months it traded.

Firm had been impacted by supply chain issues, labour shortages and material price rises due to the pandemic, the report said.

But administrators also said poor financial controls and systems, unprofitable contracts and a lack of working capital were added causes.

The report shows the Department of Finance paid more than $2.8 million to 85 subcontractors of Firm to cover off invoices for works on six government contracts following the administration. 

“Finance… provided significant support to Firm Construction and its subcontractors working on government projects over the last 12 months, including expediting contractual payments to the company, making payments for unfixed plant and materials, and granting extensions of time due to material and labour shortages,” a spokesperson for the department said. 

“Finance has also processed substantial payments to subcontractors for debts owed by the company at the time of its insolvency, which was made possible through the use of project bank accounts.”

Administrators have also disputed the state of Firm’s balance sheet.

The company’s books showed current assets above current liabilities, indicating a working capital surplus; and a positive net asset position.

RSM said preliminary inquiries indicated the accounts would need to be adjusted to reduce entries for work in progress.

There did not appear to “be sufficient evidence in the form of working papers and calculations to support the calculation or veracity of the work in progress reported on the company’s balance sheet”, the report said.

RSM’s adjustments suggested a working capital deficit by June 2020, running up to as much as $13.5 million at the time administrators were called in.

“The current ratio declined sharply from 1.03 in (2019FY) to 0.32 as at the date of my appointment,” the report said. 

“A current ratio below one is an indicator of cash flow insolvency.”