Class-action law firm Phi Finney McDonald said on 7 September that it was “well advanced in its investigation” into a potential action against Corporate Travel Management (CTM) and its former auditor PwC Australia concerning financial misreporting over several years.
No class action has yet been filed.
According to Phi Finney McDonald, a prospective action would allege that CTM misled investors over a multi-year period up to 2024, in contravention of its obligations under the Corporations Act.
At the heart of the accounting problems was CTM’s UK government accommodation business. In 2021, CTM was contracted to rapidly source more than 1.4 million nights across more than 60 UK hotels as part of a government accommodation programme. By late 2022, CTM had identified a £54.6 million gap between what it had paid hotels and what it had charged the government customer.
Subsequent investigations found instances in which CTM had billed twice in the same month, invoiced for more rooms than a hotel actually had, and charged for exclusive use of hotels where no such exclusivity existed. There were also charges for periods where there was no evidence of a formal hotel contract or corresponding hotel invoice.
CTM later disclosed that agreements supposedly documenting how part of the overcharging would be resolved might not have been authentic. Its subsequent forensic review ultimately concluded that customers had been charged in excess of CTM’s contractual entitlement and that client funds had been retained, forcing the company to reverse substantial amounts of previously recognised revenue.
It would also allege that PwC Australia engaged in misleading or deceptive conduct and made false statements about auditing CTM’s financial reports in accordance with applicable standards.
The class action would be based on the claim that the conduct caused losses to investors who bought CTM shares during the relevant claim period.
Phi Finney McDonald principal lawyer Roop Sandhu said investors had a right to expect listed-company financial statements to be a “true and fair reflection” of performance, and to assume that auditors’ standards met relevant legislative and regulatory requirements.
From audit questions to potential investor claims
The proposed class action adds a new dimension to the scrutiny surrounding CTM’s UK accounting and overcharging problems — and PwC’s audits of the company.
Big4News examined PwC’s CTM audits in June, after questions emerged over the auditor’s handling of accounting and audit evidence connected with CTM’s UK operations.
Further evidence published by the ABC in August showed that PwC was aware of significant issues surrounding the UK business.
By late 2022, CTM had identified a gap of £54.6 million between what it had billed the UK government for accommodation and what it was paying hotels.
During the audit of CTM’s 2023 accounts, PwC gave the company’s audit and risk committee a presentation running to more than 40 pages. Almost six pages flagged UK issues, and the auditors described the accounting for the UK government arrangements as a “significant” risk.
PwC also challenged CTM’s proposed treatment of a £28 million refund obligation.
CTM planned to include the amount within “client payables”. PwC said it did “not agree” with that treatment and considered it more appropriate to put the liability elsewhere in the accounts, accompanied by an explanatory note because of its different nature and materiality.
No such explanatory note appeared in the final accounts, which PwC signed.
The scale of CTM’s problems subsequently increased. The ABC reported in August that the company could reverse up to £128 million of revenue after examining contracts covering 2019 to 2026.
Regulatory scrutiny is running in parallel with the potential shareholder action. ASIC deputy chair Sarah Court told a Senate hearing in May that the regulator had an open investigation examining continuous disclosure and directors’ duties, with a third strand focused on PwC’s audit work over a number of years.
An 85% collapse
The potential class action comes immediately after CTM’s return to the Australian Securities Exchange following a suspension lasting more than a year.
In late August, CTM finally published long-delayed audited accounts, bringing it closer to reinstatement, and trading finally resumed on 3 September.
The market response was brutal. CTM had last traded at A$16.07 before its suspension. On its first day back, the shares fell 85.6%.
That destruction of shareholder value provides the economic backdrop to Phi Finney McDonald’s investigation.
For PwC Australia, the development creates the prospect of yet another form of scrutiny over its former CTM audits. Those audits are already the subject of whistleblower allegations and regulatory investigation.
They could now also become the subject of a shareholder damages claim.
PwC is under legal pressure on several fronts
The Australian development also lands at a particularly difficult moment for the wider PwC network, which is facing considerable legal pressure in parts of the organisation.
In mainland China and Hong Kong, PwC has already endured the fallout from the Evergrande audit debacle: severe regulatory findings, hundreds of millions of dollars in penalties and compensation arrangements, and now litigation carrying vastly greater potential exposure.
A Hong Kong court has refused to remove PwC International from the case at an early stage, finding it at least arguable that the global entity owed Evergrande a duty of care. That does not mean PwC International has been found liable. But it allows litigation to proceed into questions about the relationship between the international organisation and PwC’s national member firms.
That is potentially existential territory for the network model. The Big Four derive enormous commercial value from presenting themselves as integrated global organisations, while their legal structures generally seek to contain liability within separate national firms. Evergrande could test how robust that firewall actually is.
The CTM matter is legally distinct. There is no suggestion that PwC International is responsible for PwC Australia’s CTM audits, nor that the potential Australian class action raises the same global-network-liability questions as Evergrande.
But the juxtaposition is striking.
PwC now has major audit-related legal and regulatory exposures developing across multiple jurisdictions. In China and Hong Kong, the stakes include multibillion-dollar litigation and a direct challenge to the legal separation of its global network. In Australia, a former audit client is under ASIC investigation and PwC faces the prospect of being joined to shareholder litigation arising from financial statements it audited.
Want to stay up to date on all things Big Four around the world?
Check out the News section and subscribe to Big4News for weekly deep dives and briefings.
About the author: Claudine Cassar is the founder and editor of Big4News, covering audit, consulting, regulation and governance across Deloitte, PwC, EY and KPMG.