course material

1. HI6026 Audit, Assurance And Compliance
Answer:
Introduction
“Freedom Foods Group” is an Australia based public limited company that deals in
manufacturing, sourcing, marketing as well as distributing a wide range of “food and
beverage” products. It is based in “Taren Point”, NSW, Australia. However, its operations are
spread over North America, New Zealand, South-East Asia and China apart from the whole
country of Australia. It is to be noted that it is an ASX listed company which is traded as
“FNP” that employs more than 755 people. The company categorises all its products under
three basic categories namely “Dairy and Nutritionals”, “Plant based beverages” and
“Specialty seafood.” The major famous brands under the “Dairy and Nutritionals” includes
“MILKLAB, Australia’s own, Vitalife (C-store.com.au, 2021, p1). So Natural and many more.
The popular brands under the “Plant based beverages” includes “MILKLAB and Australia’s
Own Organic.” While the popular brands under the “Specialty seafood” includes “Paramount
and Brunswick.” It is thus one of the most popular food and beverages manufacturing,
marketing and distribution company in whole Australia and parts of South Asia. The aim of
this assignment is to establish the importance of auditor’s professional liability and to
portray what negative publicity is created for an auditor or the audit firm in general owing
to the negligence or lack of dure care or lack of proper application of professional
competence during the audit. Therefore, the objectives of this report are to identify the legal
and economic basis of auditing as well as proper application of applicable reporting
requirements and auditing standards, followed by analysing and communication of legal
and professional judgement of the auditor and his responsibilities to clients and other
parties. The report also aims to assess optimum audit strategies and audit approach so that
the professional integrity could be maintained and risk of litigation for the auditor could be
lessened thereby enhancing the reputation of the auditor and not downgrading it. The aim
of this assignment is to be accomplished through deciphering a practical case of accounting
scandal concerning “Freedom Foods Group” that was discovered in 2019-2020 where the
audit firm, “Deloitte” was sued for professional negligence.
Operational Areas Of Freedom Foods And Synopsis Of The Assignment
“Freedom Foods Group” deals in manufacturing, sourcing, marketing as well as distributing

2. a wide range of “food and beverage” products such as “Dairy and Nutritionals”, “Plant based
beverages” and “Specialty seafood (C-store.com.au, 2021, p1).” The aim of this assignment is
to establish the importance of auditor’s professional liability and to portray what negative
publicity is created for an auditor or the audit firm in general owing to the negligence or
lack of dure care or lack of proper application of professional competence during the audit.
The report also aims to assess optimum audit strategies and audit approach so that the
professional integrity could be maintained and risk of litigation for the auditor could be
lessened thereby enhancing the reputation of the auditor and not downgrading it.
Factual Events And Key Issues Behind The Case Of Legal Liability
The legal liability case which will be discussed here in this report is concerning the
accounting scandal of “Freedom Foods Group” which was discovered in 2019-2020. In this
case, both the “Freedom Foods” as well as its auditor, “Deloitte” has been accused. A “class
action” has been lodged against Freedom Foods for accounting malpractice and fraud and
its auditor, ‘Deloitte” has been accused of negligence of not able to decipher such accounting
fraud irrespective of auditing the firm over the last five financial years. The case for which a
class action was lodged by the shareholders of Freedom Foods in the “Victorian Supreme
Court” is regarding a total of $590 million asset valuation write down as well as
restatements in the previous year’s results (Annual Report 2020, 2022, p2(3)). It was
material accounting fraud committed by Freedom Foods over the last few years which was
discovered in financial year 2019-2020 (Afr.com, 2021, p1(3)). According to the class
action, Freedom Foods allegedly contravened its obligations of continuous disclosure as
required by the ASX listing rules where it failed to inform the market regarding the “price-
sensitive” information concerning FY 2020 as well as historical performances thereby
misleading the market altogether. The auditor, “Deloitte” was accused of not able to detect
such material accounting fraud for so many years in spite of the fact that it was the same
audit firm that audited Freedom Foods over the last five financial years. It is to be noted that
Deloitte is also accused of devising out a unique audit strategy which was very useful in
treating a considerable amount of expenditures incurred during years as capital assets and
hence as a result the profits were inflated by a considerable margin every year in spite of
the fact that Freedom Foods were making substantial amount of loss year after year. This
made the company to restate several years of accounts again in 2020. The company at last
accepted that the accounting figures and data published year after year was very inaccurate
and restated several years accounts again in 2020 under the pressure and ongoing
investigation being conducted by ASIC. Among the several ground breaking revelations
being conduct6ed by Freedom Foods under the ongoing investigations were a reported
profit of “$11.6 million” in 2019 when the company actually incurred a net loss of “$145.8
million (Afr.com, 2021, p1(3)).” The company also revealed the fact that the amount of
losses were not restricted to the above-mentioned figure of $145.8 million, but was way
above the figure for the subsequent year ended, June, 2020 where the loss reached as big as
$174.5 million (Afr.com, 2021, p1(3)). So, the audit firm was charged of negligence. It is to
be noted that the auditors can be sued of negligence and no proper application of due care

3. being employed by the auditor during audit which cased material loss for the parties relying
on such audit report especially the shareholders. It is to finally noted that the total amount
of restatements and asset write-downs for Freedom Foods was $590 million out of which
the major contributor was asset write downs and faulty capitalisation practices being
followed by the company that accounted for $372 million (Afr.com, 2021, p1(3)). This
proves that the expenses which Freedom Foods was incurring was completely capitalised in
place of putting it on the “Profit and Loss statement” as expenses. Deloitte as an external
auditor who was auditing Freedom Foods over the past five financial years failed to detect
such smart accounting or earnings management or window dressing conducted by the
company executives. So, in this case, the shareholders of Freedom Foods suffered monetary
loss due to negligence or non-application of dure care by the auditor, Deloitte, though the
charges are yet to be proved. It is to be further noted that there was fraud being committed
by the company executives regarding “Stock options” as well worth $5.5 million. Certain
share options or extensions that were given were not authorised by the Board and as a
result, there was a restatement of $5.5 million concerning share options which were
completely unauthorised. Hence, the auditor was sued by the shareholders of Freedom
Foods and a “Class action” had been launched against both the Freedom Foods and its
auditor, Deloitte.
Responsible Parties Along With Penalties Imposed On Them
Now, speaking about the parties who were held accountable for the accounting scandal case
concerning Freedom Foods firstly includes the top executives of Freedom Foods. It is to be
noted that the class action was directed on both the company Freedom Food as well as its
auditor, Deloitte. So, the second party who were held responsible here in this case is the
audit firm Deloitte. The “Class Action” which was filed by the shareholders of Freedom
Foods are currently under the legal jurisdiction of the “Victorian Supreme Court” which is
being currently investigated by the ASIC. So, the case is yet to be decided and judgement is
yet to passed thereby imposing penalty on the fraudsters by the Court of law. The Court has
yet not declared any specific name related to the company to be blamed for this financial
accounting fraud at Freedom Foods where the status is till now pending. However, the most
probable offenders who are to be blamed here in this case are the top executives of
Freedom Foods such namely, “Rory Macleod”, CEO and CFO, “Campbell Nicholas” who
resigned just after the accounting fraud was discovered. The audit partner of Deloitte
responsible for the audit of Freedom Foods for the past five years may be considered
equally liable for the financial accounting fraud through they might not have a direct
association with the financial fraud. They can only be charged with negligence and non-
application of due care and professional competence and behaviour during the past audits
which is stressed by APES 110 (APES 110, 2010, p11-22(1)). Finally, commenting on the
appropriateness of the case or penalties imposed, it can be said that the suing both the
company and its auditor is justified by the shareholder as they have lost a considerable
portion of money or investment out of such fraud. If the shareholders have incurred loss out
of negligence on the part of the auditor, they are legally capable of suing the auditor, which

4. they did.
Relevant Issues In Accounting And Auditing In Respect To The Case Of Fraud And Legal
Liability
The relevant issues on both accounting and auditing as per the financial accounting fraud
case concerning Freedom Foods firstly includes “faulty capitalisation practices” followed by
“faulty and ambiguous accounting policies.” Proper authorisation and improper accounting
treatment of “Share options” was yet another accounting issue that was highlighted here in
this financial accounting fraud case concerning Freedom Foods. The eminent auditing issues
here in this case includes “negligence” on the part of auditor followed by non-application of
“professional competence, due care and professional behaviour’ by the auditor, Deloitte
who has been auditing Freedom Foods for the past five years. So, the first accounting issue
was “faulty capitalisation practices.” As the independent investigation being conducted by
the ASIC, it could be seen that Freedom Foods were treating a considerable amount of
expenses especially the ones incurred on machinery, maintenance of new product lines or
even on buildings were treated as capital expenditure in place of posting such expenses on
the “profit and loss account.” This faulty or purposeful act decreased the expenses by a
considerable level every single year thereby inflation the profit for every single year. This is
why a reported profit of “$11.6 million” in 2019 turned into a net loss of “$145.8 million”
upon investigation and the company had to restate its accounts for several years including
the one of FY 2019 (Afr.com, 2021, p1(2)). The second accounting issue is the “faulty and
ambiguous accounting policies.” There was no proper oversight concerning the
implementation of the accounting policies which resulted in excess asset write down every
single year. Depreciations were charged ambiguously that resulted to a total faulty write
down of assets amounting to be $372.8 million (Abc.net.au, 2021, p1(2)). It is not all,
Freedom Foods even wrote down its possessed brands and goodwill worth $75.9 million.
The impartial investigations being run by the ASIC also revealed that the company had to
legally write down another $60.1 million worth inventory which was included into
inventory on account of the inventory being either obsolete or unsaleable or out of date.
Lastly, there was issues regarding the appropriate accounting or treatment for “Share
Options” as well. The impartial investigations being conducted by the ASIC revealed that
granting or extension of “Share Options” to the eligible employees were unauthorised by the
Board and proper accounting treatment was also not followed. This resulted into a
restatement of $5.5 million concerning the Share Options by Freedom Foods. Now, speaking
about the auditing issues that were highlighted by the accounting fraud scandal concerning
Freedom Foods firstly includes “negligence” on the part of the auditor, Deloitte. The auditor
also did not employ proper due diligence, due care, professional competence and
professional behaviour during the audit of Freedom foods during the last five financial
years. These facts can be proved by the revelations made by the ASIC investigations reports
which states that the current year 2020 when the fraud was discovered, the audit report
was 11 pages long and all previous audit reports provided by the same auditor, Deloitte was
merely half-a-page long (Afr.com, 2021, p1(2)). The auditor in the current year, 2019-20,

5. when the fraud was discovered also identified the control deficiencies within the internal
operations as per ASA 240 stating the management’s role to override the internal controls
(Afr.com, 2021, p1(3)). If this professional behaviour, due care and diligence and
enthusiasm could have been shown by the auditor earlier, then such heinous accounting
crime would not have occurred at such a large scale or would not have occurred at all at the
first place.
Root Cause Of The Issue
Now speaking about the root cause of the issue was fraud and market pressure. The first
root cause of the issue was fraud. The fraud was committed by the top executives working
at Freedom Food namely the CEO, “Rory Macleod”, and CFO, “Campbell Nicholas.” There was
restatements and asset write-downs for Freedom Foods worth $590 million out of which
the major contributor was asset write downs and faulty capitalisation practices being
followed by the company that accounted for $372 million (Afr.com, 2021, p1(3)). The
company did not charge many expenses such as the ones incurred on buildings and other
items instead was capitalised by the executives. This was a major fraud which was
conducted by the top executives over the duration of the last five years. The result of the
fraud was portrayed through “$11.6 million” profit as of 2019 which turned into a net loss
of “$145.8 million” in the same year (ANNUAL REPORT 2019, 2022, p6). As a result, the
company has to restate all of its accounts over again in 2020. This whole incident of fraud
committed by the executives of Freedom Food can also be considered as a market pressure
which included the top executives to commit such fraud in order to portray better financial
performance of the firm over the years. This portrayal of profit in place of loss is done out of
self-interest by the executives as the executive compensation is completely linked to the
performance of the firm. There is one more issue which is to be mentioned over here which
is a kind of fraud being committed by the granting or extension of “Share Options” to the
employees especially to the executives or other top-level employees worth $5.5 million
without the proper authorization or recommendation of the Board. So, the root cause of the
identified issues is fraud being committed by the top-level employees or executives who
have been employed at Freedom Foods.
Recommendation On Appropriate Audit Strategy And Audit Program In Respect To The
Case Of Fraud And Legal Liability
The audit strategy which will be most suitable here would be “substantive procedures
approach.” The audit strategy is appropriate here in this case as there is serios doubt
regarding various accounts that is to be thoroughly investigated (Almasria et al., 2021,
p7(1)). The accounts of machinery and building is to be thoroughly investigated as the
maintenance of new product lines or even on buildings were treated as capital expenditure
in place of posting such expenses on the “profit and loss account.” This faulty or purposeful
act decreased the expenses by a considerable level every single year thereby inflation the
profit for every single year. This is why a reported profit of “$11.6 million” in 2019 turned

6. into a net loss of “$145.8 million” upon investigation and the company had to restate its
accounts for several years including the one of FY 2019 (Afr.com, 2021, p1(2)). The
occurrence, classification, completeness and accuracy are to be thoroughly tested by the
auditor for these accounts in order to provide an impartial view on the prepared financial
statements (Maldonado, Pinho and Lobo 2019, p2(18)). The accounts of share options
should also be properly verified. The occurrence and completeness of the revenues and
expenses are also to be tested on a thorough basis.
Other Effective Measures To Prevent The Happening Of Similar Cases Of Litigation Against
The Auditors
The other effective measures which would prevent the filing of similar kind of litigations
against the auditors includes maintenance of due diligence, due care and professional
behaviour by the auditors during the audit where they should word work with utmost
objectivity and integrity (APES 110, 2010, p12-22(1)). The auditors should apply due care
and be vigilant at all times during the audit of any client so that they would be able to detect
any material misstatement or fraud existing within the prepared financial statements of the
client. This portrayal of due care and diligence would avoid any cases of negligence to be
filed on the auditors.
Changes To The Corporate Governance Post The Accounting Scandal
As a result of the frauds committed in the company, there were certain regulatory and
corporate governance changes introduced. These changes were important to ensure
prevention of such frauds in the future and efficient management of resources. Crucial
appointments of key personnel were made as a part of board renewal process with a motive
to incorporate the benefits of skills and experience of a diverse group of individuals.
Appointments of Stuart Black AM as the new Independent Non-Executive director and Chair
of the Finance and Audit Committee was made along with the appointment of Genevieve
Gregor to the post of independent Chair of the board (2021 CORPORATE GOVERNANCE
STATEMENT, 2022, p1(8)). An experienced corporate governance lawyer was also
appointed as the General Counsel and Company Secretary (2021 CORPORATE
GOVERNANCE STATEMENT, 2022, p2(6)). With these appointments the board now is made
up of the majority of independent non-executive directors and is expected to discharge its
duties with integrity and proficiency. The board policies, charters and processes were also
updated which reflected the inclusion of all the imperative strategies and procedures. The
framework supporting the risk management practices and processes also witnessed certain
essential changes which held great importance in tackling the issues prevalent in the
organization (2021 CORPORATE GOVERNANCE STATEMENT, 2022, p2(5)). The changes
also included putting in place an internal audit function and appointment of an internal
auditor having great experience, to the post of head of Internal Audit (2021 CORPORATE
GOVERNANCE STATEMENT, 2022, p2(4)). With the motive of promoting behaviours which
are supremely important for organizational efficiency and to incentivise those achieving the

7. desired goals and objectives which enhance the shareholder value, a comprehensive
framework of executive remuneration was developed keeping in mind both the short term
and long-term implications (Noumi.com.au, 2021, p1). A Risk Appetite Statement was also
developed which would enable the company to assess its tolerance and capacity to take risk
and accordingly get involve into activities with appropriate levels of business risk.
Conclusion
The aim of this assignment is to access the event of fraud being conducted in Freedom
Foods during the last five years that went undetected by the auditor of Freedom Foods.
Freedom Foods is one of the largest manufacturers, distributions and marketers of food and
beverage products in Australia. As portrayed in the aim above, the fraud was carried out by
the executives of the company and such fraud remained undetected by the auditors for the
last five audits and this is why a case of negligence was lodged against the auditors in the
Victorian Supreme Court. The root cause of the issue was fraud being committed by the
executives of Freedom Foods and negligence on the part of the auditor. The audit strategy
that is to be adopted for such kind of an audit is “substantive procedures approach.” Finally,
it can be said that the auditors should follow the fundamental principles for professional
accountants namely the due care and competence, objectivity, integrity and professional
behaviour during the future audits so that the similar kind of litigations could be avoided in
future.
Reference And Bibliography
Abc.net.au (2021), Freedom Foods accounting scandal worsens, with ASIC now
investigating. [online] Abc.net.au. Available at: [Accessed 14 December 2021].
Afr.com (2021), Freedom Foods' accounting scandal is a shocker. [online] Australian
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Almasria, N., Airout, R.M., Samara, A.I., Saadat, M. and Jrairah, T.S., 2021. The role
of Accounting Information Systems in enhancing the quality of external audit
procedures. Journal of management Information and Decision Sciences, 24(7), pp.1-23.
https://www.researchgate.net/profile/Nashat-
Almasria/publication/353702982_The_Role_Of_Accounting_Information_Systems_In_Enhan
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8. Asx.com.au. 2022. ANNUAL REPORT 2019. [online] Available at: [Accessed 24 January
2022].
C-store.com.au (2021), Full scale of Freedom Foods accounting scandal revealed -
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[Accessed 14 December 2021].
Maldonado, I., Pinho, C. and Lobo, C.A., 2019, June. Determinant factors of external audit
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Noumi.com.au (2021), Freedom Foods Home Page. [online] Noumi.com.au. Available at:
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