78 Accounting: Business Reporting for Decision Making
business could be adversely affected if the public found out about your recommendation and non-
disclosure. If the project fails and your clients lose their money — possibly all their life savings —
you would feel responsible. You would also risk professional negligence action if discovered.
c. Because the clients were kept informed of all investment opportunities, there is no link between
the clients’ decisions (whether they invest or not) and the payment of your commission. Regard-
less of the success or otherwise of the investment, your conscience should be clear and your
professional reputation remain untarnished.
d. If the investment fails, you will have a clear conscience about not recommending a highly specu-
lative investment. The clients would need to find other projects in which to invest their money,
perhaps with a reduced rate of return. If, however, the investment pays off, the clients could
blame you for a missed investment opportunity and withdraw their custom.
Step 7: Decide the course of action.
The best course of action is to investigate the proposal further. Be open and honest with your clients
regarding the proposal, including the risk, the return and the commissions payable to you. If a client
decides to go ahead with the investment, then you need to ensure that all details disclosed have been
documented, and satisfy yourself that the client is fully aware of the risk being taken.2.2 A well-known fraud scandal in Australia involved the collapse of the Westpoint Corporation.
Essentially, investors thought they were funding property development projects for a 12 per cent
per annum return. However, Westpoint Corporation was a property development company that
relied on mezzanine finance schemes. (As above, the term ‘mezzanine’ in this context is used
to describe a group of companies in the middle, between the parent company and the property
development projects.) The unsuspecting investors thought they were providing funding to
a particular company for a particular property development. However, once the money was
received, it was farmed off by the parent company for distribution to other companies to pay
for previous projects, the directors’ large salaries, financial planner commissions and previous
investor returns. In essence, more and more investors were needed to fund the previous investor
returns and projects. The group of companies eventually collapsed. The following is typical of
media attention the collapse attracted:It’s being called the biggest corporate collapse since HIH — and whether or not that’s accurate,
it’s probably the most predictable property disaster since Henry Kaye collapsed. Depending on
which report you read, as many as six thousand investors may lose as much as $1 billion after
investing their savings with Perth-based Westpoint Corporation. Whatever the final numbers, it’s
going to be very big and very tragic. But, worst of all, it was all so predictable and avoidable.
Westpoint... [was]... a property development company. It needs to find two types of
investors — financiers to fund its apartment projects and then buyers to buy the apartments. To
fund the building of its projects, financial predators (who call themselves financial planners)
advised their trusting clients that Westpoint Corporation’s projects were safe and secure.
The investors effectively loaned their money to Westpoint in schemes known as Mezzanine
Lending. Thanks to these financial planners, Westpoint raised hundreds of millions of dollars.
So why did many financial planners recommend Westpoint to their clients? Because they’re
more predators than planners. When Westpoint offered extra big commissions, they knew it
would attract the most predatory of the planners. Hundreds of millions of investors’ money
went into Westpoint’s Mezzanine Finance schemes because of the financial planners. The
second type of investors that Westpoint needed were buyers for its apartments. In order to pay
big interest rates and big commissions, Westpoint needed a big price for its apartments, well
above the true market price. Enter more predators.
Australian Securities and Investments Commission chief Jeff Lucy said of the financial
planners who steered their clients into Westpoint, ‘They should have known better’. Yes,
indeed, it was all so predictable. Now, it’s all so tragic.
Source: Extract from Jenman, N 2006, ‘The Westpoint disaster’, Jenman Real Estate Monitors, 17 January,
http://www.jenman.com.au.