There’s hope amid the uncertainty for Ernst and Young

Illustration: John Spooner

Until the country gets on top of the COVID-19 pandemic, business uncertainty means companies will be reluctant to make major moves forward, according to Ernst & Young boss Tony Johnson.

The Melbourne-based executive is well aware of the difficulty created by the horrendous infection numbers in Victoria, saying “there is a real fatigue in the system in government and in business”.

He adds: “We need to switch off the daily scorecard and focus on the way forward.”

Johnson says it’s almost like you need one team focusing on the health issues and another ensuring the opportunities are not wasted.

He says the pandemic uncertainty is clearly worse than during the GFC because neither business nor government can safely work forward and there was a real risk of paralysis.

While expressing the wider concerns, the good news from EY’s perspective is this year’s revenue numbers have proved better than feared, so much so that the firm was able to pay staff a “COVID recognition bonus” which went to all staff by way of two days extra leave, and for the 25 per cent of staff who took a 20 per cent pay cut a bonus to cut the impact on their annual pay.

In a prescient note to staff at the end of June, Johnson said while the results were better than expected, “the storm is not over yet — uncertainty remains and we must remain cautious. Our objectives remain unchanged — save lives, save jobs and manage our business for its long term sustainability”.

Business areas focused on deal flow are down, as are those around immigration, for obvious reasons.

Macquarie confirmed this trend at its annual meeting with a soft first quarter and warnings about lower deal flow, which given the uncertainty meant (as it did with its full-year results in May) no earnings forecast was given.

Johnson faces the challenge that 2000 of his 8000 Australian staff are in lockdown while the rest are free to return to the office.

While Sydney and other staff can return, the reality is only 3 per cent of Sydney staff are returning to the office, 4 per cent in Brisbane and 6 per cent in Adelaide.

Office surveys show around 15 per cent of staff are desperate to return, 20 per cent strongly opposed and the rest want to work part time at home and part time in the office.

The same survey was done in May and June and more people were in the latter categories last month due to worries about public transport and enjoyment of the increased flexibility.

Younger people newer to the firm are happier to be in the office than older folk.

Now is peak hour for the audit teams and while last year 100 of the Melbourne staff would be in clients’ offices, with proportional numbers in different cities, now everyone is working from home using Microsoft Teams.

“COVID and its economic impact has meant more time on audits, particularly in assessing liquidity and the valuation of assets and liabilities,” Johnson says.

“There has been more discussions with management and the board, and close consideration and reassessment of the key audit matters described in the audit ­report.

“Communications between staff and client is by email or phone, with the Teams video running all day allowing staff to communicate freely.”

This is the new world of virtual audit and Johnson is confident audit quality will be the same but with more detailed commentary in the wake of ASIC warnings about company disclosure.

Johnson has attempted to minimise the stress on his staff through more frequent communication including a weekly video conference call from his Melbourne home, featuring his dog Lucy.

Lucy the labradoodle has sparked a company-wide rush to share dog photos.

Given Melbourne’s plight, he sent out a care package this week including sanitisers, masks, muesli, recipes and a $50 voucher to spend on well being.

The annual city town hall meetings were replaced by just one broadcast nationally, highlighting the digitisation of business as one of the pandemic’s lasting impacts.

Johnson, who in normal times would spend more time on a plane than he does in Melbourne, is now in his 21st straight week based at home.

Fortescue’s on fire

Superb operational performance and strong Chinese demand have resulted in a 90 per cent total shareholder return outperformance from Fortescue Metals this yea. As of close of business on Thursday the company was the sixth biggest on the bourse, and with a market value of over $54.2bn the most valuable in Perth.

Wesfarmers was languishing in second place on $53.2bn.

Record annual iron ore production of 178.2 million tonnes was matched by another record share price close at $17.55, up 4.2 per cent for the day.

That‘s good news for founder Andrew Forrest, whose 1.12 billion shares are now worth just under $20bn, is that a strong dividend is guaranteed meaning he will collect at least $1bn this year in dividends.

The impressive thing about the 17-year-old company, which has shipped ore to China for the past 12 years, is how operational performance has improved each year.

With Western Australia now free of COVID-19 impacts, its mines have returned to normal shifts, and some delays over its new Eliwana mine are now behind it as the company races to have first ore onto the ships in December.

The mine will start producing 30 million tonnes a year to offset some losses elsewhere but importantly at higher grades, which means better returns while the ore price remains high.

Water torture

The ACCC has slammed governance arrangements for the $1.5bn Murray Darling water trading market but rejected calls by some growers to stop independent traders playing in the market.

The Constitution says inland water is under state control, so the conclusion is this issue will require negotiations between two states and the feds, which tells you a resolution is a while off after the final report is finished in December.

The ACCC draft released on Thursday says it is still investigating claims some traders had manipulated the rules in a way that impeded efficient operations. But it made clear the activity did not breach existing rules.

The problem may be the rules.

The ACCC said the value of water entitlements was $22.7bn, with some like former Patrick boss Chris Corrigan and listed Adelaide-based trader Duxton big owners, along with thousands of retired farmers.

Duxton’s stock price was down 0.7 per cent at $1.39 a share yesterday.

The ACCC rejected calls by some, like Boundary Bend’s Rob McGavin, to block non-land-owning traders from the market.

It‘s a little more complicated given the traders perform a valuable service in providing both value to retired farmers but also hedges and future supplies which would be lost without them.

But still the ACCC noted “the governance, regulatory and operational frameworks supporting water markets have not developed to accommodate the market and are no longer adequate”.

It said: “Water market intermediaries such as brokers and water-exchange platforms operate in a mostly unregulated environment, allowing conflicts of interest to arise, and opportunities for transactions to be reported improperly.”

In practical terms it said “there is a disconnect between the rules of the trading system and the physical characteristics of the river system”.