Next scheduled update of these website Pages in April 2012
& other readers have found it helpful to print the website pages as a guide / map through the text

Firstly please select this file to Download my A340.ON.THE.RECORD.FINAL REPORT 15TH DECEMBER 2009
(The first part of the report contains an executive summary)
The reader can also download and print a 3 page glossary of terms and abbreviations if they wish – click here

This part of our fortfield.com website is at once the story of one of the lawsuits against Magellan Aerospace Corporation (MAC) and its UK subsidiary, Magellan Aerospace UK (MALUK) and the documentary record of what I believe to be the attempt of Magellan Aerospace to mislead the market on the value of its largest contract. I hope you will take the time to study the evidence I have included and form your own views. The case is important to me but I believe the issues it raises on corporate conduct and behaviour are essential to all of us, whether we are investors, employees, regulators or company directors or are just concerned about the standard of ethics in business life.

To open the narrative, I asked an experienced business person uninvolved in the case to summarise the feelings that the material provoked in him. His summary follows immediately and then I ask and answer two essential questions.

I hope you will then be encouraged to read on. Brian Little

"WHO CAN WE TRUST?    When clever, able people join their skills in a common purpose, they can achieve outstanding results - and benefits for others as well as themselves. Such is what we expect in a publicly quoted business. But when these executives do so in order to cover up an embarrassing mistake, engage in a “fraud”, and then get rid of the witness best placed to detect and expose it – their collective skills become focused on destroying that witness.  Woe betide the effect of this on the business, the witness, and on the third parties involved.

This is the story of Magellan Aerospace Corporation and its third highest-ranking executive, Brian Little. In the 3 years since they fired him in September 2006, during which time they have been locked in battle in a Bristol court, the stock market value of the company has indeed collapsed and he and his family have forfeited their family home to pay his legal fees. As if this were not enough, the stress in explaining his story and the facts in the case has rendered Mr Little unconscious with seizures on three occasions in court, requiring paramedic support. Indeed, he is since recovering from a nervous breakdown (Feb 2010) diagnosed as caused by legal abuse syndrome (April 2011).    You may ask ‘Why should this matter to me?’

The answer is – there, but for the grace of God, go I.  If Brian Little was not there to pursue justice, all of us would be worse off because, without people like him, the big corporations would not be brought to account and would simply walk over us.

But, you may say, if there was a misstatement of the accounts by management the external auditors would find it and refuse to sign off the accounts. Could there ever be a situation in which they found deception and still sign off the accounts?  If so, is that not something everyone should know about?

Then you say, surely the shareholders would want to know all about this? Why would any shareholder want it covered up?  What possible interest could that shareholder have?

And even if a shareholder did have such an interest, you may then ask – by what possible means could he and/or others enlist the support of such impeccable institutions as Ernst & Young and PricewaterhouseCoopers?  Because of being able to rely upon the unquestioning support and reputation of the Chairman of the company’s Audit Committee,   who is an internationally recognised authority on corporate governance?

And what sort of pressure could have been brought to bear on the corporation’s UK lawyers PinsentMasons LLP to retrospectively certify crucial Magellan UK written resolutions – involving Mr Little, and pivotal to his UK case as true and complete, when no such Notice of or Board meeting /resolutions took place before his dismissal?

Could all of these icons of respectability have contributed to a cover-up? If our confidence in them were to be so undermined, in whom could we place our trust to regulate the world of business? 
The answers to these deeply disturbing questions lie in the document attached.

Add your own Reader comments / observations / conclusions review at the end of website to those other Reader comments / observations / conclusions

What matters if the truth doesn’t?"
Select page numbers if you wish to print

Part A : P 1-8 Q1 A340 WAS AND IS VITALLY IMPORTANT TO MAC   -   Magellan Aerospace Corporation (TSE : MAL) 
Q2. WHAT HAS BEEN THE PUBLICITY TO DATE?
Part B : P9-14 Brian Little and Magellan Aerospace Corporation (MAC)
Part C : P14-19 Magellan documents referred to by Magellan in their oral evidence and in their March 2007 Representations (Mssrs Neill, Butyniec, Dekker and Furbay) to Ernst and Young {external auditors} and PricewaterhouseCoopers {independent “forensic” investigation}
Part D : P15-27 and now the ONLY (5) A340 Document Exhibits from PwC C$3m+ Final Draft and Final Reports  via Canada Disclosure
Part E : P27-28 Aerospace Industry /Aircelle and expert insights and views - Mark Bobbi - Engine Nacelles
Part F : P29-35 Chief Executive Officer (CEO) - Mr J Butyniec and Chief Financial Officer (CFO) - Mr J Dekker - legal and regulatory quarterly and annual certifications of MAC financial statements.
Part G : P35-52 The Corporate Framework at Magellan
MAC Chairman Murray Edwards (P35-39)
& their auditors Ernst and Young – (E&Y) (P39-47)
and PricewaterhouseCoopers – (PwC) (P47-53)
Part H : P53 Magellan Aerospace Corporation – AGMs
Part J : P53 Whistle blowers normally stand alone :
Mr Little : “  No, I’m publicly whistleblowing <on A340 500/600>.   It’s still wrong and I’m going to give evidence that is the case.” - Stated in March 2009 Hearing
Part K : P54-74

Current status of UK court / Tribunal case and regulatory referrals elsewhere

Part L : P74 Brian Little - My business career and what some prior employers have said about me
Part M: P74-81 Essential reading and listening on Whistleblowing / Corporate Governance
              (including a 4 min. video clip “Truth – forget it” from a former audit partner of one of the “Big Four” global audit firms).


Part A :

Q1 A340 WAS AND IS VITALLY IMPORTANT TO MAC   -   Magellan Aerospace Corporation (TSE : MAL) 

Extract from Magellan Annual Information Form (AIF) for 2001 - from Aeronca section (page 10/11) when Mr Murray Edwards was both MAC Chairman and Chief Executive Officer – underlines are my emphasis

In December, 1998 Aircelle, a limited partnership of Airbus Industrie and Hispano-Suiza, located in Harfleur, France awarded the exhaust nozzle and plug for the Airbus A340-500/600 to Aeronca and Magellan. This program is expected to provide in excess of $30 million in annual revenue at full production rate.

On May 9, 2000 Magellan announced plans for the expansion of its Aeronca, Inc. Division Manufacturing Facility located in Middletown, Ohio. The expansion consists of approximately 60,000 square feet of office and manufacturing space. The total project cost is in excess of $3 million. In addition, Magellan is investing over $7 million for the engineering and development of the new exhaust system for the A340 Aircraft.

and then in the Magellan Annual Information Form (AIF) for 2003  notification of substantially increased A340-500/600 Engineering and Development of over $ 20m investment:

“In December, 1998 Aircelle, now owned by Hurel-Hispano, located in Harfleur, France awarded the exhaust nozzle and plug for the Airbus A340-500/600 to Aeronca and Magellan. This program is expected to provide U.S. $20.0 million in annual revenue at full production rate.  Magellan has invested over U.S. $20.0 million for engineering and development of the new exhaust system for the A340 aircraft.”

Even as early as 2003  the expected maximum annual revenues were reducing ($30m to $20m) whilst the MAC program investment (Engineering : $7m to $20m+) was substantially higher than bid / budgeted.

To put this subject in some further context, from a TSE shareholder/financial markets analyst perspective, please LISTEN to an important question asked by Nick Morton of RBC? and then followed by a Mr Claude Proulx of BMO Capital Markets (a respected aerospace analyst in Canada)  on the subject of Magellan Inventory and third party verification during 5 minutes of the Q3.2006 earnings webcast call in mid-November 2006 and answered by Mr Neill (President and CEO: shortly to retire and be promoted to Vice Chairman)  and Mr Dekker , the current Magellan CFO and Corporate Secretary.  The complete transcript of the Q3.2006 MAC Earnings call on 14 November 2006 (shortly after my dismissal and Mr Dimma’s “own investigation” concluded) can be read here. At p15

“Claude Proulx - BMO Capital Markets - Analyst
And the second question is , I mean, I look at your stock today and it’s trading at roughly 80% of book value. And I always believe that the market to some extent is efficient. And I’m  wondering , to what extent can we trust your book?  I mean, the book is really – that’s its real.  I mean , understand that there is some real estate probably – maybe understate the book. But at the same time, there’s a lot of things in your inventories – engineering , average excess over costs – where it’s going to be more questionable, especially in light of the performance that you are generating these days. Can you talk about this or – interrupts

John Dekker - Magellan Aerospace Corporation - VP-Finance and Corporate Secretary
- Sure, sure. Sorry .. R Neill now interrupts then …….. Dekker returns

Claude, let me try to address the valuations of the inventory. Clearly , if you look at our balance sheet, the inventory is one of the most significant assets we have. That alongside capital assets. And we’ve spoken about capital assets and some of the valuations on the property. So let’s focus on inventory, which is really I think the crux of your question.  We go through extensive reviews of our inventory at any point in time. And I would estimate 80% of the external audit focus at the year end is on inventories. So there is an extensive amount of work done to confirm that those values are appropriate. So we have third party verification of those amounts.

Claude Proulx - BMO Capital Markets - Analyst
I’m just concerned because a lot of it is program-related. And you need to generate some earnings in order to justify the value that is there. And the earnings are not there at this point. So..…..R Neill interrupts

Richard Neill - Magellan Aerospace – President & CEO
Well, we may want to differ with you in opinion on that Claude. Because I would argue that book value is likely higher than what you’re stating right now.  – see remainder of transcript

Claude Proulx - BMO Capital Markets - Analyst
Well, but I’m – what I did is I’m just taking your equity at the end of the quarter .

Richard Neill - Magellan Aerospace – President & CEO
I know what you did. Yes.  I’m just challenging that theory. That’s all.

<For information : Magellan Aerospace Corporation used only a fixed amortization amount of $30,000 per exhaust unit in FY2006  – which if continued at $30000 per exhaust unit would lead to only 65% recovery of the circa C$40m+  (USD 38.25M) inventory on the December 2006 MAC Balance Sheet.  PwC  set this out further in their para 8.117 : Current production costs per unit are such that at present the pre-amortisation margin generated per unit is not sufficient to absorb an amortization of USD 30,000 per unit and still break-even. In order for MAC to report an overall breakeven position, while at the same time amortising NRC inventory, it has been capitalizing that amount of production costs that is necessary to achieve the break-even position each year.  For this reason , “production inventory” for the A340 programme has been increasing”.  If MAC were to maintain the amortization at $30,000 per exhaust system, as in FY2006, only $3.30 million would have been reduced from the total A340 programme asset for the 110 units delivered by MAC in the three years between January 2007 and the end of December 2009/FY2009. (Updated 18 January 2011: With aircraft production exhaust units now all delivered a total of 110 production – to 131 A340-500/600 - production aircraft and 11 spares were delivered by MAC in the four years between January 2007 and the end of December 2010/FY2010, or equivalent to $3.63m).  PwC continues at para 8.118 “PwC believes that MAC’s NRC and production inventories should be considered collectively (for a total inventory of USD 38.2 million) and then amortised from this basis onward. Aeronca should also review the NRC amortization factor.  We believe that this factor should vary with the profitability of each unit.  As increasing labour and material cost efficiencies are realized in the production process, furthermore, the amortization rate should increase.” 

This policy does not appear to be a logical and mathematically sound approach on A340 as PwC recognised earlier in their report at PwC 8.94 – 8.95 that the current escalation formula – under any interpretation – would not  lead to increased profitability per unit once BETA21S materials costs exceeded 31% of the cost.  Those relevant PwC paragraphs are

8.94  The price escalation formula currently in effect (as per the SA dated 11 March 2005 between Aeronca, MAC and HH) directs that the total sales price for exhaust system units will increase by 0.31% for every 1% increase in the cost of Beta 21S.  In effect, MAC is protected for increases in the cost of Beta 21S, providing that the cost of Beta 21S per unit remains equivalent to or below 31% of the total cost of production per unit.

8.95  Given the volatility in the cost of Beta 21S (a titanium compound), there is a risk that in future years the cost of beta 21S could exceed 31% of the total cost of production. Indeed taking into account the existing assumptions in the EAC model , the cost of Beta 21S per unit would represent approximately 35% of the total cost of production per unit by FY2012.

This rising profit/contribution year on year subject is dealt with in some detail at website Exhibit 8.1. PwC failed to apparently integrate and challenge themselves, E&Y and MAC on this varying profit per unit policy in its specific implications for A340 amortisation with the escalation formula in place. I should also add that it has not been my experience elsewhere that such an approach was countenanced either by  management or auditors.

As above MAC continued to add Labour learning costs – after 400+  A340 nacelle sets/5 years of production to production inventory (and E&Y as their auditors accepted the further US $1.5m to US $8.63 million added in the FY2006 Balance sheet to sustain the “break-even” ) whilst the Inventories Exposure Draft (3031) which would end this capitalisation was issued by the CICA in August 2006.   The subsequent introduction of that Canadian Accounting Inventories Standard  3031 in MAC from 1 January 2008 permitted some C$40m of inventory assets to be written off against retained earnings (approx C$10m of which was for these A340 -500/600 program labour learning costs) and the reader can see Mr Dekker’s opening comments at Page 2 and then in his answer to questions regarding Magellan inventory and the new accounting standards from Mr Cameron Doerkson of Versant Partners (p6) and in more detail again by Mr Claude Proulx at Page 8 of the published transcript of that May 2008 webcast for Q1/2008 Earnings.>

Claude Proulx - BMO Capital Markets - Analyst
Thank you, good morning. Just again on that accounting change, if we look going forward, it seems to me conceptually that because you wrote off a cost that your margins will be improved going forward. But at the same time, when you start delivery and probably you brought up like a bonus for the Joint Strike Fighter or 787 or the Airbus A350, the margins will be depressed.  So when we look going forward, like for the rest of 2008, that C$550,000, is that something that we could put in our model for each of the [next three] quarters or – Dekker interrupts

John Dekker - Magellan Aerospace Corporation - VP-Finance
..I guess there is a couple of comments, Claude. First of all, the fact that we had to take that charge against retained earnings does not mean that those were not valuable costs and not anticipated costs. Those were costs that we had anticipated when the programs were originally bid, and we will still get recovery of those costs going forward.  As we sit here at this point in time, very few of our programs going forward will require learning curves with the current programs……

Claude Proulx - BMO Capital Markets - Analyst
Okay. And what about guidance for the rest of the year?   Or it’s impossible for you to give any guidance on that – the impact of the accounting change? 

John Dekker - Magellan Aerospace Corporation - VP-Finance
The impact would have been highest in the first quarter. As we move forward, as I said, with the programs – take?  for the Joint Strike Fighter, most of the programs are well into or through the learning curve phase.  So we should not see any adjustments of any magnitude.”

A340-500/600 was and is vitally important to MAC.   The A340-500/600 project investment/asset was the single largest financial number (>C$40m asset in FY2006) and failure to fully realize the value of the project would, inter alia, bring about the triple consequences of 

     (1) an overstatement in the project / non-recurring costs/engineering development assets of > C$40m .

     (2)  a program gross margin “breakeven”  to actual financial losses and

     (3)  create a future cash deficiency / non-recovery in the internal and public reporting (MAC 5 year strategic planning base -  Sales revenues / cash projections of C$100m +)

One of my colleagues who read the following material interpreted the actions of MAC as “the MAC Directors representing this C$40 million as being part of Magellan’s  accounts receivable /debtors, with that cash being returned to MAC on a timely basis within the contract period".      My aim was of course to demonstrate that C$40m was NO longer justifiable on any business and accounting basis in accordance with our legal reporting obligations.

Mr Richard Stoneman asked this question about the MAC Balance Sheet/Book value in the Q3/2008 earnings call webcast (P10/11) following the public disclosure by MAC of the CDN10.4Million price adjustment set against the NRC/amortization against the A340 and A380?

Richard StonemanDundee Securities Analyst
“Book value per share is about CDN13 a share.  Are you comfortable with that number, and has it been tested over the last 12 months?

John DekkerMagellan Aerospace Corporation – VP-Finance
We have not formally done any valuations to test that number, Richard.

Richard StonemanDundee Securities Analyst
But are you comfortable with it?

John DekkerMagellan Aerospace Corporation – VP-Finance 
Yes

Q2. WHAT HAS BEEN THE PUBLICITY TO DATE?

Although Magellan’s UK counsel (Mr Lynch QC)  has argued that my Protected Disclosures – A340 etc /story is not in the public interest nevertheless since 19 September 2006 MAC and third parties have set out their views publicly through various channels. The following documents/articles have appeared in addition to the UK public court evidence and I include them below.

Additionally, now that the evidence phase is completed in the UK court and for the first time, I am going on the public record in January 2010 through our website.  My account starts in Part B of this material.

1A. Magellan Aerospace Corporation (MAC) - Q1/2007 Earnings release (public - 11 May 2007) and FY2007 Annual Report (public- 31 March 2008) and MAC Board minutes - 10 May 2007

“In addition, administrative and general expenses also contain legal and accounting fees of approximately $3.5m incurred by the Corporation in relation to a wrongful dismissal claim by a former employee and as a result a detailed investigation of concerns raised by a former employee regarding certain accounting issues. The concerns were thoroughly investigated by PricewaterhouseCoopers (“PWC”) who, under the direction of the Corporation’s audit committee, prepared a report for the audit committee on their findings. The Corporation’s legal counsel has advised the Board of Directors that PWC met with the audit committee and the Corporation’s external auditors, and based on the report prepared by PWC, PWC has advised the audit committee that they had not found anything that would undermine the integrity or accuracy of the Corporation’s financial statements.

This matter was also raised in the Magellan Aerospace Corporation Q1/2007 earnings webcast call by the CFO Mr Dekker  (at page 4) and then in a question from Richard Stoneman (p5)

“Richard Stoneman - Dundee Securities Corporation - Analyst
An ex-employee made a complaint that cost the Corporation $2 million. Does the ex-employee have any liability in terms of repaying that money?

(BL See part G - Corporate Framework & M Edwards 16th November 2009)

John Dekker - Magellan Aerospace Corporation - VP of Finance, Corporate Secretary
Richard, this is a clearly sensitive issue, since it's in employment manner and also a legal matter, so I'm not sure it's appropriate”

1B. The “independent forensic” PwC Final Draft Investigative Report into Areas of Concern Raised by Mr Brian Little : Executive Summary circulated to the Board of Directors at MAC – relied on above in the Magellan Aerospace May 2007 earnings statement - at PwC paragraph 2.40 (doc 605/606) recorded

Financial Control within MAC and MALUK in relation to the areas we have examined is poor and needs to be improved: this is particularly acute given that MAC is a public company.

Examples of poor financial control that we identified during our work include;

  1.   Accounting adjustments made with insufficient supporting analysis and documentation;
  2.   Inadequate understanding or documentation of balance sheet provisions and insufficient documentation of  the decision to release certain provisions
  3.  A lack of awareness of the program accounting requirements under either Canadian or UK GAAP….
  4. Poor control over individual projects from an accounting perspective. Project sales volumes, revenues and costs are not reviewed with sufficient frequency or rigour.”

Mr Dimma told the public court in his evidence, that following his own “internal investigation” and report in late 2006 --- which found “the matters you were raising were historic” and that there is “no substance to the purported concerns”      ---      he instructed PwC to carry out an “independent forensic investigation”, after I had met E&Y in December 2006, as in his view  "auditors are extremely risk averse".  It is significant to me and others that despite his apparent dismissal of my views in 2006, Mr Dimma saw fit to personally chair the PwC investigatory process in 2007, described, I remind you, as “independent” in order, I suspect, to retain control over its conclusions.  

The Canada IFA Standard Practices at 600.04 published in November 2006 states that the “IFA practitioners should present their findings and conclusions in an objective and unbiased manner” and at 600.06  “IFA practitioners should consider all relevant information that could impact their findings and conclusions.”

This MAC conclusion on poor financial control only became public following the UK Court Order on 6 June 2007 for the disclosure of the PwC report which MAC had relied and referenced in the MAC public statement at 1A above.

As a matter of record PwC also reported (para  8.58) that at the very time of Mr Dimma’s alleged “internal investigation” the senior Magellan management (Aeronca, Mr Butyniec, Mr Dekker and Mr Neill)  had failed to produce a quarterly A340 Program estimate to complete (EAC) for consideration/inclusion in their Q3.2006 published earnings statement. The reader may also wish to consider the commentary in website Part F (2)  on the Boeing 737 Systems Integrator kits discounts and  Revenue recognition at the same time (Q3.2006) as Mr Dimma’s “investigation” and his report “conclusions” above.

It is significant that this critical comment is totally omitted from PwC’s Final Report in August 2007, supporting my strong belief that this report was in effect an attempt to “whitewash” my concerns and vindicate the position already taken by Mr Dimma and Magellan Aerospace Corporation.


 
     According to “A Guide to Forensic Accounting Investigation” (Golden & others, Wiley 2005) the bedrock of an effective audit are 

                                                               1.  professional scepticism,
                                                             2.  knowledge and experience and
                                                            3   independence and objectivity.


One of our real concerns, from the very outset from the outset of the PwC “independent forensic investigation” (585), the terms of which were set by Mr Dimma, was that it would NOT follow the key recognised standards for a forensic investigation. These were, inter alia, outlined in a Network of independent Forensic Accountants (NIFA) editorial article, published during the time of the investigation on 14 March 2007: “A healthy dose of common sense and scepticism. Does what you are being told tally with other evidence that you have been presented with? One of the key mistakes that had befallen many a forensic accountant is paying lip service to a client’s claim – only for it to slowly disintegrate before their eyes, due to not carrying out some commonsense reasonableness checks.

So, when I use the term “Forensic Deceit” in my Final Report on A340, I mean that it is NOT TRUSTWORTHY, because the intention of the authors PwC and the effect of their less than rigorous investigation or audit standards was to mislead the reader in their “findings of fact” and conclusions from its work.

1C.

1. MAC Promotion and My Current Curriculum Vitae and System of Identified Motivated Abilities (SIMA).

2. Short Brothers PLC / Bombardier Belfast ; 1979 - 1995 - Reference Sir Roy W.R. McNulty and other contemporaneous materials.

3. Harland and Wolff PLC - 1995 - 1997 - References Mr Per Neilsen, Chief Executive and Mr Bill Gallagher - General Manager and the H&W 1996 Annual Report extracts

4. Non executive roles - 30th April 1997       Mr Robert Beckett - Valpar
                                      February 2006        Mr Raymond Semple - Moyola Precision Engineering

5. Selection of 12 Quotes from letters, emails, cards (157) to Brian Little on exit from MAC/MALUK in September / October 2006 -  DIR3   attached for MAC Directors 

With a career-long unblemished personnel record (Magellan doc.533-584) I believe that the reason for my summary dismissal by my superior/CEO Mr Richard Neill on my arrival at Toronto Airport on 18 September 2006, in his conscious contravention of HR advice/corporate and statutory procedure, was primarily as a consequence of my series of recent Protected Disclosures in 2006. These came to a head on 17 September 2006 when I formally requested MAC to commence an internal investigation into whistleblowing concerns I had raised, and was continuing to make, about the operations of MALUK and MAC.  I sent an email on 17 September 2006 (doc.2340) to my superior Rich Neill (the President and Chief Executive Officer of MAC), in which I stated that, if my concerns were not resolved through corporate processes by 19 September 2006, I would escalate them to Murray Edwards (the Chairman of MAC), and in the final event to William A. Dimma (an independent director of MAC and the Chairman of MAC’s Audit Committee) for an investigation to take place, either under the whistleblower or ethics policies or anyway by the Audit Committee.  I believe that the concerns which I was making at that time, and which I had previously made, amounted to whistleblowing and were “protected disclosures” under UK law.  This, of course, was of great concern to me and I expected that my visit from the UK to MAC’s HQ in Toronto on 18 September 2006, to lead a week-long strategy planning meeting with the senior executives of MAC, would provide the time and opportunity to properly deal with these matters, including the creation of an action plan to address these crucially important issues.

The very next day, on Monday 18 September 2006, I was dismissed upon my arrival into Toronto Airport by Mr Neill, accompanied by Ms Jo-Ann Ball (MAC’s Vice President for Human Resources) right after my long flight from the UK.  That instant dismissal decision was taken by Mr Neill (and Ms Ball?) having read the documentation they had been sent, together with the specific advice from the UK about what actions they must take immediately.   As the Judge remarked in the UK case in January 2008 “It was clearly a conscious decision not to follow statutory procedure. It says quite a bit about the allegation of breach of statutory procedure. “

I had requested and expected to meet Mr Neill later that afternoon at MAC’s offices, to discuss my concerns with him.  But I was surprised when Mr Neill and above all Ms Ball met me at the airport at around 3:15pm (Toronto time), just after I had cleared immigration and customs.  Mr Neill told me that they wanted to have a chat with me, and led me into the Sheraton Gateway Hotel in Terminal 3 of the airport.  I hoped that the reason for this impromptu chat was that they genuinely wanted to understand my whistleblowing concerns so that we could move forward together and resolve matters. 

Rather than return home as Ms Ball wished I flew that evening to Calgary, Alberta and Mr Edwards hometown with the purpose of following up what I stated I would do and meet with him during the next few days.  On Tuesday 19 September 2006, after he met with three people from the University of Saskatchewan for about an hour (as a prelude to that University transforming the College of Commerce to the N. Murray Edwards School of Business on 24 July 2007 following his substantial donation) Mr Edwards met with me.  On three occasions Mr Edwards referred the various financial and governance matters I was directly raising with him to Mr Dimma.  Put simply, he did not want to know.  Eventually I was also able to meet with Mr Dimma in Toronto for 80 minutes to discuss my “whistleblowing” concerns and provide him with a covering letter and 18 document dossiers.

In his written evidence to the UK court the current MAC Deputy Chairman, and my former boss President and CEO, Mr Neill (RAN20), stated that Brian was an experienced operator in the aerospace industry, with excellent links with key figures (such as Ken Brundell – should be Brundle at Bombardier– and indeed many others) …and (RAN22) It was clear to me that the Claimant had lots of experience and knowledge of the industry. He had a good technical understanding of the issues, a good grasp of contractual issues (which led me to believe he would be a strong negotiator) and a sound strategic approach

BUT, for the first time in my life read (RAN55) and heard that someone, in this case Mr Neill, believed that Brian operated badly on points of detail…..“ and he believed that (RAN11) “Far from being a financially dubious or badly or carelessly managed group, Magellan was and is a solid performer in an extraordinarily challenged market backed by major shareholders who are involved and patient”……….

As a matter of my normal diligence I have always recorded the key events on an almost daily basis from the time of my termination , from Toronto Airport to the Magellan AGM in May 2007 and the MAC earnings statement public release on 11 May 2007 at 1A. I created a separate document - DIR64 Chronology - external - “process/timeline facts”. This document DIR 64 was provided to each MAC Director on a regular basis as the process unfolded from November 2006 to May 2007. E&Y and PwC were included in the circulation of it from January 2007 to May 2007. This chronology document is now provided by me for the first time now.

 

2A.  Magellan Aerospace UK (MALUK) statutory financial statements for FY2005 (public 12 July 2007) UK Companies House correspondence exchanges and filings,    MALUK General & Special Resolutions – 18 October 2006 and then retrospectively written by Mr Dekker on behalf of Banks/MAC and dated as 28 April 2005 – before my termination.     MALUK documents submitted by Pincent Masons

Extract from Directors Report

“It is a source of disappointment and regret that the directors have not been able to file these accounts in accordance with the statutory reporting deadlines.

The lateness of the filing is a consequence of some concerns raised by a former employee regarding the integrity of the Company’s financial statements. The concerns have been thoroughly investigated by  PricewaterhouseCoopers (PwC) who, under the direction of the audit committee of Magellan Aerospace Corporation , the ultimate parent company, prepared a report for the audit committee on their findings  PwC has advised the audit committee that they have not found anything that would undermine the integrity or accuracy of the Company’s financial statements. No adjustments have been required to be made to these financial statements as a result of PwC findings.

Directors and their interests                  B.Little (removed 15 November 2006)

It is in fact evident from the contemporaneous documentation at 2A that the first draft incomplete MALUK FY2005 statutory financial statements (doc 3548 – 3556) had not been prepared by Mr Smith (the MALUK CFO) and sent to E&Y UK until a few working days before the legal deadline of 31 October 2006 for the public filing of those financial statements with the UK Companies Registry. This was some seven months after the public filing of the MAC Group financial statements in March 2006 in Toronto for the same financial year. As a UK Director with equal legal responsibility for such statutory filings in the UK I asked Mr Smith about this on 17 August 2006 and he and others again on 8/16 November 2006, until I was removed as a UK Director on 17 November 2006.

Also it seems that MALUK Directors Board matters of substance/ importance to ALL the Directors of MALUK were held without Notice and in legal breach of the MALUK Articles of Association para 16.5    “Notice of every meeting of the directors shall be given to each director and his alternate, including directors and alternate directors who may for the time being be absent from the United Kingdom and have given the Company an address within the United Kingdom for service”  by the “Finance/ Company Secretary  –only”  Directors.   Following my instant dismissal on 18 September 2006 one MALUK Board meeting took place on the 29 September 2006 (factoring sale of Airbus Debtors to BNP – finally implemented at end of December 2006) and the other on 18 October 2006 (Issue of Share Capital and Conversion of a £10m loan from MAC to equity) whilst I remained a MALUK Director until 17 November 2006 in both cases the ONLY attendees were Mr Dekker (MAC CFO and Corporate Secretary) and Mr Smith (MALUK CFO and Company Secretary).  Minutes document ref: 20\20920346.1/LA04.    PinsentMasons confirmed in August 2007 correspondence/documents disclosure that Mr Neill (MAC President and CEO) and Mr Underwood (MALUK resident director with functional responsibility for manufacturing operations) also did not receive the legally required para 16.5 Notice of either of these MALUK Board Meetings in September and October 2006 as “No Notice had been issued to MALUK Directors”.

What is also noteworthy is that the Tribunal ordered (Request 22) in CMD4/June 2007 the disclosure of the relevant documents “All Notices to Directors convening and minutes of Magellan Aerospace UK Board meetings between January 2004 and 17 November 2006”  for disclosure during July 2007.  As these documents were being compiled in June/July 2007 PinsentMasons would / ought to be aware of the content of these Request 22 Ordinary and Special Resolutions at the “MALUK Board” on 18 October 2006, whilst they were being concurrently, on 11 July 2007, being requested by their client to certify “identical”  resolutions in documents (see below) for MALUK Directors and E&Y for the statutory FY2005 financial statements as at 28 April 2005.  

Mr Dekker (MAC CFO and Corporate Secretary) was to flout or disregard proper company or legal processes (like Mr Neill and Ms Ball on UK employment law above) by misleading and being untruthful when he had PinsentMasons LLP certify written MALUK Ordinary and Special  Resolutions for the  MALUK business on 18 October 2006 as a “True and Complete Copy of the Original”  resolutions for crucial MALUK Board business matters on loan and share capital that it is wrongly stated by Mr Dekker took place on 28 April 2005. (minutes ref 20\21315831.1/MKA).  No MALUK Board meeting took place by the Directors to resolve an increase in MALUK share capital as per Note 17 and the concurrent conversion of £10m debt to equity Special Resolution on 28 April 2005 was untruthful -  as several contemporaneous  documents in the court bundle demonstrate.  Factually  – the MAC loan to MALUK as at 28 April 2005 was for less than £10m  – it only reached £10m in mid August 2005 after further funds of £406K were received from Canada (doc 1014A-C).  Unsurprisingly no contemporaneous documentary evidence from a  MAC Board Resolution, MAC Weekly Staff meeting or from Mr Dekker of any such communications of these MALUK Ordinary and Special Resolutions or business changes took place with or within MALUK in April 2005 have been provided by Magellan, despite requests.

PinsentMasons have since acknowledged this “very serious allegation against Mr Dekker”  and told me, what we interpret, as their firm/solicitor having no legal duty or ethical/professional responsibility regarding any due diligence on such matters, even when they are relevant to my case in this litigation.  They stated that “ It seems to us that you may have misunderstood the purpose and effect of a Certified Copy stamp.  All that the stamp indicates is that the document with that stamp upon it is a copy, and that it is warranted by the Firm or Solicitor signing it that it is a faithful reproduction of the original.  In practical terms, it means that the Solicitor who affixed and completed the Certified Copy stamp had the original document in their possession and is confirming that the copy is identical to the document that the copy was taken from.  That is all that the Certified Copy stamp can, and does, indicate.  It does not for example indicate (as you suggest) that any checks were carried out as to the contents of the document, or that any representations needed to be made about it by our client before completion of the certification, or that such solicitor was "signing off" the factual contents of the document.  Affixation of a Certified Copy stamp means is that the document is identical to the document that it was copied from - and nothing more.”   

Mr Dekker then arranged to have Mr Phil Underwood (MALUK Company Secretary on 28 April 2005) retrospectively sign and submit via PinsentMasons a Notice of increase in Nominal Capital form (123) dated 28 April 2005 to the Companies Registry on 12 July 2007, shortly after MALUK had received a “query” letter from the Companies Registry on these matters.  As you can read the Companies House printed Annual return (dated 16 September 2006) showed that the public record was for £6.1m in equity in section 4 and NOT £16.1m. with a concurrent swop of the £10m MAC loan to MALUK into ordinary shares.  As a result clearly the position of trade creditors to MALUK under UK law (vis-à-vis Magellan as equity) would be substantially different in any “doubtful solvency” or insolvency processes and any proper consideration of same by MALUK Directors.

PinsentMasons had previously confirmed through correspondence in mid 2007 (relating to the Court Ordered disclosure of MALUK Notices and Minutes of Board meetings –Request 22)  and then following a December 2008 Tribunal Order for Request 4 that a Board Notice and Minutes of a Board meeting on 28 April 2005 did NOT exist – as there was No Board meeting on that date.   It would seem that the shareholders (Mr Dekker only - issued two Resolutions) and that same PinsentMasons “True and Complete Copy of the Original certification” dated 11 July 2007, of the written MALUK Board Ordinary and Shareholder Special Resolutions on 28 April 2005, was then wholly relied upon by E&Y for the accounting, information and notes to the MALUK FY2005 statutory financial statements when signed off and released on the same day, 11 July 2007 – See point 2A. This was despite the fact that E&Y could see that the contemporaneous internal MALUK Board minute book and MALUK accounting records did NOT support either of those Resolutions or transactions.   As a result the draft MALUK FY2005 statutory financial statements submitted by Mr Smith in October 2006 for the E&Y statutory audit for FY2005  were then amended ……

The reader will note that the Note 17  Share Capital  : “On 28th April 2005 the directors resolved to increase the authorized share capital to 36,100,001. On the same date 10,000,000 ordinary shares were allotted to the parent company. These shares were issued on 18 October 2006”   n Note 13  Creditors : The amounts owed to fellow group undertakings was reduced by £10m  and instead now recorded at only £120K.  The amounts owed to fellow group undertakings is a loan due to the ultimate group undertaking. The loan is non-interest bearing and has no fixed repayment date. This loan became interest bearing in 2006 at a rate of 6%.  The directors have deemed the loan to be repayable within one year.”

Furthermore, as my leading Counsel Mr Andrew Stafford QC stated in his Aide Memoire on 19 January 2009, and immediately before my Evidence-in-Chief in the UK, at paragraphs 12 and 13

12. In relation to the E&Y representation letter that document records that specific representations were sought from directors (and given by them) in relation to both bonus accruals and overheads. For an auditor to seek specific representations is akin to saying “there is no evidence to support this but if you give me your solemn word we will accept that”. Bearing in mind the heavy reliance which the Respondents place on the accounts audited by E & Y, those accounts are now revealed to have been in part a series of self-serving statements emanating from MALUK MAC. The true position is not (as the Respondents have been arguing) “We rely on the accountants whose audit lends weight to our position. Rather this late disclosure reveals the true position as “the accountants rely on us.”

13. Bear in mind that this is a case in which the Claimant has consistently complained about the accuracy and reliability of accounting treatment, in which the Respondent has placed reliance upon the audited accounts, in which the personnel involved include directors – precisely those people responsible for the companies accounts – and in which there have been serial orders for disclosure against the Respondents. It is truly astonishing that this document should have remained undisclosed until now.”

< UPDATED 18 JULY 2010 – In an email on 18 July 2010 I asked Mr Dimma about this subject matter – see below. As yet no response or documentation has been forthcoming..

“ You will recall your public evidence on Doubtful solvency / Statutory Supplier Payment Policy (Website Part M.5.B.2.)   Also at the website at Part A  Points2A and 2B I refer to the £10m MALUK debt for equity swop and its significant implications for trade creditors and Directors duties and responsibilities in the event of MALUK “Doubtful solvency”  or insolvency.    You will know that Ms Barbara Hadfield has now retired from E&Y UK in June 2009 and you I think are aware that I worked on a part-time consultancy basis for E&Y UK from 1997 – 2001.

There is no doubt that a number of the statements made in the MALUK  FY2005 statutory accounts were wrong and not supported by MALUK Board minutes or the contemporary MALUK management accounts . Mr Dekker represented to PinsentMasons on 11 July 2007 that Resolutions had been made on 28 April 2005 and on that basis, without any due diligence, they “Certified to be a True and Complete Copy of the Original dated this 11th day of July 2007 “  .   E&Y (UK) relied solely on that solicitors certification before Ms Hadfield approved the FY2005 statutory accounts later that day.

As this is a significant transaction for MAC and MALUK I would expect that there would be written / minuted MAC Board approvals, a record within the contemporary MAC weekly staff meetings or other written records of that MAC decision and transaction.  From all the evidence available to date they do not exist.   At some point in the future I will apply (as PinsentMasons have stated and aware) for the documents disclosure which might add further evidence to that available.  In the meantime you may wish to consider and investigate this carefully as it was clearly an important component in my MALUK solvency considerations in FY2006.   As I was a UK Director at the relevant time my MP intends to write to some of the UK national regulatory agencies on these matters during the summer recess of Parliament.

“ Although a director of MALUK from early 2004 (and should have been fully involved/legally aware), as you know I did not join MAC as a Senior Officer until May/June 2005,

QUESTION 3 :   Were you aware and did you approve this 28 April 2005 Board / Shareholder Resolution (doc 506) before the MAC re-financing was completed at the end of May 2005?   Can you provide for disclosure to me (directly or via PinsentMasons) any contemporaneous documents in April / May 2005 provided by Mr Dekker which would underpin your involvement and approval on 28 April 2005 of those resolutions/ accounting transactions within MAC?”

UPDATED NOVEMBER  2010 :  After several months you may note that my Member of Parliament, Mr James Shannon MP, has since written to Mr Dimma on 17 November 2010 on this and the A340 subject of PwC findings of fact(Q1). The paper copy of these letters were received and signed for in Toronto on 30 November 2010.  No response has been forthcoming, yet>

2B   UK Court evidence/submissions, Late disclosure of Auditors letter from  Ernst & Young UK  to Magellan UK Directors regarding the statutory Financial Statements for MALUK for FY2005 dated 11 July 2007,MALUK Director Representation to E&Y, Engineering Management Bonus Letters from Mr J Butyniec & Ms J Ball

3. Canada Globe and Mail – 16 April 2008 by Brent Jang
Article :  Will Edwards stand by Magellan?         -  in which Magellan disclosed my name within Canada/globally.
(PDF)

Selected Quote “ But 2007 was a particularly rough year for Magellan, when fourth-quarter “accounting errors and misstatements in accounted receivable” related to alleged fraud contributed to its $11.3 million loss, compared with an $8.1million loss in 2006.

Separately, during the first quarter of 2007, Magellan wrote down $2-million in fees to investigate allegations levelled by former executive Brian Little, who claimed that there were accounting irregularities.

Magellan hired PricewaterhouseCoopers to probe Mr Little’s allegations, which were unrelated to the fourth quarter accounting overstatements. PwC experts examined Magellan’s books in early 2007 and “have not found anything that would undermine the integrity or accuracy of the corporations’ financial statements,”  Magellan reported”

4. Aviation Week and Space technology - 18 / 25 August 2008 (doc 3509-3510) by R. Wall and D. Barrie:
Article: Exhaustive Debate - Canadian and French subcontractors haggle over A340 components work.
(PDF)

Selected Quote “ .. The Toronto based company is providing the exhaust nozzle for the Rolls Royce Trent 500 nozzle until 2012. The A340 work is an important element of Magellan’s overall business ; non-recurring costs on the program are believed to be roughly $40m.

Giving evidence at a tribunal hearing, John Dekker, Magellan’s vice president for finance, said the company had made a significant investment in the A340, and there was a “risk” if the aircraft’s production run did not meet initial expectations

Airbus currently has orders for 140 A340-500/600s: 31 aircraft still have to be delivered. Some of the remaining balance may not come to fruition. Out of the total order, 38 are for the -500 and 102 are for the -600. A340 orders had already been lagging under competition with the Boeing 777 ……..  ..   Kingfisher Airlines recently reduced its commitment to the four-engine wide body transport. Virgin Atlantic still has to take its final A340-600’s out of its original order for 20, although there are suggestions that delivery of the remaining aircraft has been “suspended indefinitely.”

Some companies have publicly acknowledged that they  may not break even on the A340-500/600 program.   Matthews (MAC VP Sales)  would not comment on whether Magellan would recover its investment in the A340-500/600.   He suggests that the company was cautious on the original projections, but admits that sales of the aircraft could have been a lot better. When Magellan won the A340 -500/600 business in 1998, orders and options for the type stood at 130.  At the time, it was expected that sales of the aircraft would likely exceed 300.  Delivery of the type began in late 2002.”

5. Canada Globe and Mail - 1 April 2009 (doc 4093-4094) by Eric Reguly
Article : Magellan accused of inflating project size
- (PDF)

Selected Quote “ At a hearing in Bristol, England, Brian Little told Mr Edwards – the company’s chairman and one of Canada’s  richest men – that he thought Magellan management “had misrepresented and misled”  the company’s auditors about  the project. ……..

Magellan expected about S40-milion in development costs related to the A340 project and, in 2006, according to Mr Little, estimated some 275 + of the planes would be bought by airline customers (meaning four times as many exhaust systems would be built, because the A340 had four engines).  Mr Edwards called the contract “a major project”.

Mr Little, however, said he doubted that Airbus would sell that many A340’s.  At the time, the plane was losing market share to the Boeing 777, which was favoured by the airlines because it has two fewer engines and is cheaper to fly.  In his witness statement, Mr Little said that, in early 2006, Airbus’s own internal estimates for A340 program “were for just 75 sales from that time.”   He said he made his skepticism known to Mr Edwards and other Magellan officials.     (G&M referenced BL witness statement para 200 refers as example to email doc 1437 to Edwards et al in Feb 2006).

Airbus’s website says the company has orders for 139 of the new A340 aircraft. Magellan’s own revised sales estimate for the plane, if it has one, is not known, nor is the number of “spares” (replacement parts) it expects to build after the initial production run……

Bill Dimma the Magellan director who is chairman of the audit committee, concluded there was “no substance to the purported concerns” of Mr Little, Magellan said in its respondents’ statement. Magellan then commissioned PricewaterhouseCoopers to conduct an internal probe. Magellan said that the audit concluded the alleged complaints were “without foundation.”….”

 

6. Canada National Post - 12th May 2009 (doc unlisted) by Scott Deveau
Article : Magellan sails into rough seas - stock pops, former executive threatens action
- (PDF)

Selected Quote  “  … 

There will certainly be a lot to discuss at the annual general meeting of Magellan Aerospace Corp. in Mississauga , Ontario, today. Not only have shares in aerospace-parts maker quadrupled in the past month, but the company’s finances have finally been stabilized by a sizable investment by its chairman and controlling shareholder, Calgary oil-sands mogul Murray Edwards , and the Edco Corp last week.

“This is a company that didn’t make money during the peak of the aerospace cycle, and now we’re heading into leaner years” said Cameron Doerkson, Versant Partners analyst, who has a “sell” rating on the stock. “That has to be a cause for concern”.  

Moreover, one of the company’s former top executives , who has been locked in a wrongful dismissal suit , told the Financial Post yesterday he intends to file documents with security regulators and the Royal Canadian Mounted Police by mid-June that he alleges show the company misrepresented to its auditors the value of one of its main programs to supply exhaust nozzles for Airbus’s A340 aircraft.

Brian Little, who headed the company’s European operations until he was fired in 2006 alleges the company ignored his requests for a writedown on a portion of the value of C$40m in deferred costs tied to future sales when it became apparent Airbus would not hit its projected sales targets.

…………..John Dekker, the company’s vice president of finance, pointed to a PricewaterhouseCoopers report commissioned to investigate Mr Little’s accusations that he said “had not found anything that would undermine the integrity or accuracy of the company’s financial statements.” 

(May 2010 Update/Observation;  Mr Edwards did not attend this Magellan AGM in May 2009 -   see Part H. of the website for the Q&A.  The files were not passed to relevant Canadian authorities as further documentary and oral evidence was obtained in the meantime.    My recent ill-health has postponed this further – see Part G on website at E&Y Open Letter etc.)

7. Updated 5th May 2011 UK   Daily Telegraph – 4 May 2011 by Rowena Mason

PwC faces probe over removing client criticism from report

PriceWaterhouseCoopers has been reported to the accounting regulator, after agreeing to remove criticisms about its client from a £1.5m independent report into allegations made by a whistleblower

PriceWaterhouseCoopers has been reported to the accounting regulator, after agreeing to remove criticisms about its client from a £1.5m independent report into allegations made by a whistleblower.Mr Shannon's intervention comes at a critical time for PwC, since it is under scrutiny over its "independent inquiry" into the Royal Bank of Scotland's collapse. 

Jim Shannon, MP, has written to the Financial Reporting Council asking them to investigate a report prepared by PwC in 2007.

The MP's intervention comes at a critical time for PwC, since it is under scrutiny over its "independent inquiry" into the Royal Bank of Scotland's collapse. The "big four" - Deloitte, KPMG, PwC and Ernst & Young - have also been criticised by MPs for "dereliction of duty" during the financial crisis.

Mr Shannon's concerns relate to an independent report that PwC was hired to write for Magellan Aerospace Corporation, a Canadian aircraft parts company. PwC's brief was to look into a whistleblower's claims that Magellan's order book had been inflated.

However, criticism of Magellan's "poor" accounting was left out of PwC's final version – at the request of the client's audit committee.
The MP raised concerns on behalf of the whistleblower, Brian Little, the former head of Magellan's
UK operations. ..etc “

Background:
December 2010  - FSA’s report into RBS merely seals the Regulators fate
FSA’s refusal to publish RBS report <£7.7m forensic report by PwC> just shows how out of touch it is

Mr Tyrie MP, Chairman of the House of Commons Treasury Select Committee 13 Dec. letter to FSA
RBS says it has “no objection to public scrutiny….
“Lord Turner has been criticised for continuing to with-hold the official report conducted by Pricewaterhouse Coopers. The PwC report, which is at the regulator says is protected by confidentiality agreements, has been at the center of a two week row.”

Mr Shannon MP 19 Jan.2011 letter to Mr Andrew Tyrie MP on “independent forensic investigations”

Mr Shannon MP 7 February 2011 letter with six action points from Mr Tyrie MP meeting on 2 February.

Mr Andrew Tyrie MP 14 March 2011 letter to Mr Shannon MP

1 May 2011 FSA fails to publish report into Royal Bank of Scotland collapse      (Computer File extract PwC/Dimma letter - 20 June 2007)

5 May 2011 TSC Press release :  Independent Review of Financial Services Authority Report (forensic investigation by PwC) on RBS

Andrew Tyrie warns FSA not to repeat RBS mistakes with HBOS

UPDATED 25 MAY 2011:  E-mail from Mr Shannon MP to Mr Ian Powell (PwC Chairman and Senior Partner) , Mr Richard Sexton (PwC Head of Reputation), Copy  Ms Rowena Mason (DT journalist) 

TSC publishes terms of reference for Review of FSA’s report into the failure of RBS

Independent Review of Financial Services Authority’s report on the Royal Bank of Scotland – Terms of Reference

Lord Turner letter to Mr Andrew Tyrie dated 28 March 2011 (2 weeks after Mr Tyrie MP letter to Mr Shannon MP)

The RBS report could fatally undermine the FSA’s leadership

8. Canada Globe and Mail – 25 May 2011 by Eric Reguly
Article :  Brian Little’s turbulent battle with Magellan Aerospace

Brian Little’s battle with Magellan Aerospace (MAL-T) has not been kind to the Canadian company’s former senior vice-president in Britain.

Mr. Little, 54, says he has been in a physical, mental and financial nosedive since Magellan, controlled by Calgary billionaire Murray Edwards, fired him as he stepped off a plane at the Toronto airport on Sept. 18, 2006.

To fund his wrongful dismissal case, which accuses Magellan and its auditors of “forensic deceit” in relation to a crucial contract awarded by Airbus, he sold his family’s 400-year-old estate in Northern Ireland for £1.7-million ($2.7-million) in 2008. Unable to afford a lawyer, he has represented himself at hearings in the Employment Tribunals in Bristol, England, where Magellan’s British operations are based. With no courtroom experience, his cross-examinations were often clumsy, even though his files were meticulously prepared.

The proceedings were suspended last year, after the self-described whistleblower had a psychological breakdown akin, he said, to “post-traumatic stress disorder.” His illness made him black out in court three times and kept him out of commission for months.

Now somewhat rehabilitated, the tall, beefy Irishman is preparing to relaunch his fight. “My agenda was to prove that I had reasonable belief that I was right,” he said in an interview in London.

Mr. Little claims he was fired because he accused Magellan of inflating the value of its contract to supply exhaust systems to the Airbus A340 (Series 500/600) long-range passenger jet. Magellan’s lawyers say the A340 program had nothing to do with his firing; he was let go because he was “impossibly rude and disruptive to colleagues,” and sent “abusive e-mails” to employees.

Magellan dismisses Mr. Little’s version of events, and the company’ s auditors say the A340 program estimates were valid. Bill Dimma, the Magellan director who heads the board’s audit committee, said in an interview that “none of his allegations has merit.”

Mr. Edwards, vice-chairman of oil sands giant Canadian Natural Resources Ltd. and co-owner of the Calgary Flames, first invested in Magellan in 1995, when it was called Fleet Aerospace. He is now Magellan’s chairman and, through direct share ownership and convertible debentures, effectively controls two-thirds of the company’s shares. The A340 contract, one of its biggest, helped to secure Magellan’s role as a significant supplier to the top aerospace players.

Mr. Edwards is rebuilding Magellan after a bruising couple of years that saw the share price plunge from $16 to pennies during the financial crisis. It now trades at just under $5, giving the Mississauga company a market value of about $90-million. In 2008, Magellan estimated that the cost of dealing with Mr. Little’s wrongful dismissal claim was $3.5-million, which included the price of an independent PricewaterhouseCoopers (PwC) forensic report into Magellan’s Airbus program. The figure has not been publicly updated.

Mr. Edwards last appeared in the Bristol Employment Tribunals hearing, by video link from Calgary, two years ago, when he said “I take some offence” to Mr. Little’s allegations, arguing that he had trusted the company’s auditors, Ernst & Young and PwC, to provide fair analysis of Magellan’s projects.

Mr. Little studied business and accounting at Ulster University, and ran Mayflower Aerospace, a British aerospace component maker that was bought by Magellan in 2003. He stayed on and soon found himself questioning Magellan’s Airbus contract.

According to summaries produced by Magellan subsidiary Aeronca at the end of 2006, Magellan expected to ship 827 exhaust systems, including spares and repairs, for the A340 jet between 2008 and 2021. The bulk of the production would come between 2008 and 2012, and the total estimated revenue over those years was $176-million (U.S.).

Since an A340 has four engines, the contract implied that well more than 200 of the planes (Series 500/600) would be built. Before he was fired, Mr. Little said he told Magellan the figure was unrealistically high. At the time, four-engine jets were falling out of favour because of their relatively high fuel and maintenance costs. In tribunal testimony, Mr. Little said sales for the plane from 2005 would amount to no more than 150.

Since Magellan would commit more than $50-million (Canadian) in development and labour training expenses related to the A340 project, a significant shortfall in expected sales would mean that the program might not cover its costs. If that were to happen, Magellan would face a writedown

As it turned out, the A340 sold poorly. According to the Airbus website, the 500/600 series generated only 133 orders (of which 129 have been delivered). Airbus spokesperson Marcella Muratore confirmed that no A340s are under construction, though the model could be revived if new orders come in. “It’s a build-to-order program,” she said.

Magellan’s defence is that the A340 program was thoroughly audited by both Ernst & Young, and later by PwC. The conclusion of both auditors was that the A340 program estimates were valid and that Mr. Little’s allegations were unfounded. But Magellan’s finance chief, John Dekker, admits “it’s too early to say” whether the A340 program will be profitable because of its “heavy investment.”

Bruce Gowan, a member of Magellan’s audit committee, said Mr. Little seems to have underestimated the market for exhaust system spares and their repairs. “There is a huge replacement market for these parts,” he said, adding that, so far, Ernst & Young has not recommended a program writedown.

A June, 2007, PwC letter to Magellan’s audit committee examined Mr. Little’s allegations. The letter’s existence was reported in a May 4 story in the London Daily Telegraph and has been obtained by Mr. Little.

While PwC had dismissed Mr. Little’s allegations about A340 program inflation, the letter did say that Magellan’s financial control “in the areas we examined is poor and needs to be improved.” It went on to say that individual projects, which it did not name, suffered from inadequate accounting control. “Project sales volumes, revenues and costs were not reviewed with sufficient frequency or vigour,” it said. The PwC letter also said Magellan had “a lack of awareness of the program accounting requirements under either Canadian GAAP [generally accepted accounting principles] or U.K. GAAP.”

Mr. Dekker said the letter was not included in the final report because it was not relevant to the specific accounting matters that PwC was instructed to review. Its contents, however, were contained in the cover letter that went with the report. “The audit committee received all the information in the final report, including the cover letter on opportunities for improving accounting systems and processes,” he said, adding that “the recommendations were helpful and [accounting] improvements have been made.”

In spite of the publication of the critical PwC letter, Magellan appears to have no intention of settling with Mr. Little and plans to let the Employment Tribunal decide which side has the better case. “We’ve nothing to hide,” Mr. Dekker said.

WHAT THEY SAY

“My agenda was to prove that I had reasonable belief that I was right.”

Brian Little

Former senior vice-president, Magellan Aerospace Corp., about the wrongful dismissal case he has brought against the company.
----------

“We’ve nothing to hide.”

John Dekker

Vice-president, finance, Magellan
----------
“Project sales volumes, revenues and costs were not reviewed with sufficient frequency or vigour.”

Letter from PricewaterhouseCoopers to Magellan’s audit committee. The letter was not part of the final report, though its contents were included in the report’s cover letter


Part B : Brian Little and Magellan Aerospace Corporation

Through this website I am publishing my own account and experiences for the first time, having informed MAC and its advisors that I would do so and having sent them drafts on which they have opted not to comment.

6. Brian Little A340.ON.THE.RECORD.FINAL REPORT 15TH DECEMBER 2009 (PDF)

I asked another detached observer to assess for you the structure of the material so, in his words, this is what now follows:

Foreword

“This account is at once personal, narrative, analytical, and evidential. It is tightly argued in content and aimed at a broad readership, ranging from those who know nothing about the situation, or, indeed, the aerospace industry, to those who were principally involved as main players.  As such, it is set out in levels to allow the reader to be selective or all-embracing, depending on his or her interest in the subject matter, and designed to allow each reader to measure the facts.  It is therefore presented in five sections.

Following Brian Little’s Introduction (Section 1) is the Evidence in Detail (Section 2), supported by a series of attachments (Section 3). This includes witness evidence from the relevant public UK court notes, some documents and then Question & Answer notes from the Magellan AGMs in May 2008 and 2009.

Section 4 provides views from 15 people from all walks of life, who were provided with Sections 2 and 3, and recently asked by Mr Little to review the evidence.                                                                                                          
Finally, Section 5 is a document he created as a Supplementary Witness Statement 2 (SWS2) in January 2009 to provide his perspective on the UK case and its implications for his wider family and this “Director with Character.”

Now finally my initial public response following my AGM May 2009 remarks

Critically, most of the evidential material has in fact already been examined by an outside agency. MAC eventually asked PricewaterhouseCoopers , on PinsentMasons recommendation - at a cost of C$3m+, - to undertake an "independent forensic investigation" into MAC's actions regarding the A340 contract in the light of my protected disclosures.

Although we asked for an invitation to comment on the factual accuracy and conclusions in the PwC Final Draft report, the product of a four month of the seven month exercise undertaken by PwC as a direct response to my whistleblower claims, I was advised that PwC was of the view that this was unnecessary and that Mr Dimma and “the Audit Committee is confident that PwC’s investigation was thorough and competent, and is prepared to rely on PwC’s conclusions.”  PwC failed to record in their Final Report that they had not invited me to make any comments, despite my offer to do so. In contrast unlike the PwC final draft report Brian Little provided Magellan via Mr Dimma (Chairman of its Audit Committee), PwC UK and Canada - instructed on the C$3m+ "independent forensic investigation" report and Ernst & Young Canada (E&Y) their public auditors with an invitation to comment on the factual accuracy and omissions on the contents of this On-the-record A340 Report for some four to six weeks - no response was received from Mr Dimma, PwC or E&Y.

However MAC has asserted, on 26 November 2009 through their UK Solicitors, that there are "many inaccurate and incorrect statements" in my A340 report. Although I immediately invited them to list those inaccurate and incorrect statements, for our proper consideration, some three weeks later all I can say is that they have neither provided a list as a whole or indeed the substantive factual errors or omissions. If you wish you should ask them directly - email : wdimma@brookfield.com - for that detailed page by page list and / or assess for yourselves the credibility of the evidence and analysis contained herein and from your own experience, analysis and research. I will add that Magellan have produced no evidence or contemporary documentation to support those assertions, and simply persist in stating they rely on PwC and E&Y as the experts. As an example please re-read the Canada Globe and Mail's 1st April 2009 coverage in part B.5 above.

I repeated this offer in an email to the MAC CFO and Corporate Secretary Mr Dekker and their UK solicitors in an exchange in April 2010  in which they responded  -   As you note yourself, we have previously stated to you our position on your so called "Final A340 report" and our position on it has not changed.  We will not be debating your conclusions and opinions on that matter for reasons already stated. “   To which I replied “For the record I specifically stated that I did NOT ask you to debate the “conclusions and opinions” on my 15 December 2009 A340 Report. I asked that you advise me in a simple list of any of the factual information in the Report which Magellan have determined to be inaccurate and incorrect and provide the relevant contemporaneous documentation to support that assessment or show me where I am wrong from other hitherto non-disclosed documentation.  Perhaps you could provide only from your assessment a list of the identified “inaccurate and incorrect statements” for the Detailed Report in Section 2 from Pages 23 – 52 so as to provide a focus on the matters.  It is important to remember that it is the Respondents position and that of their legal team, which moved from a position on 3 May 2007 (doc 3196) “At situation is that, at present , there is no issue that arises as to “reasonable belief”,  to the changed position in the Respondents PD schedule of November 2007 by relying on a flawed PwC report/mindset and that despite multiple opportunities since then you continue to oppose (rather than concede and accept as in May 2007)  MY mindset on “reasonable belief” on PD22, PD23 and PD24 on A340 with the consequences on costs, time and your client’s reputation. 

I repeated for the final time this offer in an email which I sent on 18 July 2010 to Mr Dimma in which I asked at Q1 and 2 on A340

QUESTION 1 :   I formally ask you, for the final time, will you and Magellan Aerospace Corporation provide a proper list of what Magellan consider to be factual errors in my attached A340 Final report rather than hide behind legalistic “many inaccurate and incorrect statements” in my A340 report, as recorded by PinsentMasons and included in my website – copy below?

Can you please arrange to provide this by return (say by the end of July)  given that it must have been readily available to you and Magellan Canada to enable PinsentMasons to legitimately underpin such an important assertionThis opportunity for input is of course not what you/PwC did in my case – in a professional  breach of “independence”.    As I said in the concluding paragraph of my email above, if having considered all the factual evidence now available you wish to seek the recovery of £1m + from PwC for MAC shareholders I remain committed, on this final occasion, (when my health fully recovers) to support such a process undertaken by Magellan.

Please advise me formally if you wish to take up my offer of support to Magellan on behalf of all the MAC shareholders?.

UPDATED  NOVEMBER 2010  :  No response was received from Mr Dimma so I sent my email dated 17 September 2010 in which I concluded

I will not follow up this email MYSELF any further directly with you, as it is now a matter of public record on my website. I will now leave it for you to determine what actions you should now personally take/record.  At the very least it would seem to be logical to disclose any documents which would address my concerns in Q2./A340 Protected Disclosures PD22,PD23 and PD24  and Q3. but that is of course a matter for you personally as a further record of your actions/inactions since September 2006.

You, of course given your extensive experience of corporate governance, also fully understand the scope, terms and purposes under which PwC were engaged in your instructions to them on 5 February 2007 and those consequences.

After two months you may note that my Member of Parliament, Mr James Shannon MP, has since written to Mr Dimma on 17 November 2010. The paper copy of these letters were received and signed for in Toronto on 30 November 2010.  No response has been forthcoming, yet.

QUESTION 2 :   To your knowledge was Mr Butyniec’s 11 /14 August 2006 BAFO settlement pricing proposal discussed and/or approved by you or any other member of the MAC Audit Committee or non executive Director?  Was its proposed pricing settlement implications with regard to the A340 unit pricing that had been used by all of us in the Q2.2006 A340 EAC explained to any of you,   in relation to the $5.3m Gross loss etc?

UPDATED 2 AUGUST 2010   As yet no reply has been received from Mr Dimma to my 18 July 2010 email asking these two questions  nor after I sent a further email after the Farnborough Airshow on 23 July 2010 to Mr Dimma in which I asked a further Question 4  (Read Receipt 23 July 2010);

“For the record

Mr Dimma

Farnborough Airshow 2010 – As part of a three day Pearl wedding celebration holiday/visit to London earlier this week I attended for 1.5 days the Farnborough Airshow. During which time I met a large number of people – including two of my usual reliable senior Airbus sources. Substantively the position I stated in my A340 report.15.December.2009  and mid January 2010 and 18 July 2010 website updates has been verified.  I have revised the 18 July 2010 website section B to now include some of the data from elsewhere in the website re E&Y and PwC as a result of some reader initial feedback. The additions will be readily apparent to that sent to you last Sunday evening.

In my email below last Sunday evening I also included a

“Point 3

Since my mental/nervous breakdown in early February 2010 naturally some of my local friends at Bombardier in Belfast have learned of my ill-health. An indirect consequence of that is that as Bombardier were part of International Nacelle Systems until 1997 - a joint venture between Hurel and Bombardier/Belfast - a former senior member of Hurel-Hispano (the predecessor to Aircelle) who I knew reasonably well in the early 1990's has got in touch. It seems he is well aware and was involved in the A340-500/600 exhaust system with Airbus and Magellan from the outset. He tells me it all started at Paris Airshow 1997 when a HH colleague met Rich Neill, who offered to provide a A340-500/600 exhaust system proposal from Magellan/Aeronca.   At the time HH had only one commercial proposal from Astech (now GKN) for $142K per engine unit in 1997 terms.  Magellan/Aeronca then provided its bid for circa $80K. 

We have set a time to meet now and he promises me "chapter and verse" on his perspective on the historical story before my promotion and appointment as Senior Officer in Magellan in June 2005 and the eventual March 2005 Settlement Agreement,  following the legal injunctions in Canada and USA against Magellan in late 2004.   I propose to add some of this Aircelle perspective in due course to my A340 report/website as further prior history in due course.  No action required until I compile this and then of course I will provide you with a draft and  the opportunity for input and where  you can credibly demonstrate that I am factually wrong I will modify it accordingly.

I met and talked to this former HH/Aircelle senior manager too.  It will take a while to compile a summary of that information but I can say now that the Aeronca bid was for $85K (versus the $142K from Astech. No bid was sought from Rohr/Goodrich as they had lost the total nacelle bid as their direct competitor).   Shortly after receipt of the Aeronca bid  Hurel Hispano people (including a member of his staff)  visited Aeronca and met with a Mr Jim Stine? and Mr Brian Latz to enable them to carefully consider their “low bid” and provide the opportunity to uplift it based on relevant information.   These two gentlemen from Aeronca did not take that opportunity and instead stated their confidence in Aeronca/Magellan being able to contract on that basis. He believes from memory (to be checked) that there were minimal , if any, changes to the commercial contract terms finally approved by Magellan and signed by Mr Stein.

 

New Point 6  :  A340 Anonymous whistleblower in 2002 

Arising from Mr Furbay’s termination by Mr Dekker, immediately after his visit to Toronto, on the 23 June 2010, I have received a copy of a letter/information sent by an Anonymous Whistleblower on the A340 Project in  2002 to Mr Edwards – when he was Chairman and CEO/President  of Magellan Aerospace.   Please find attached a scanned copy of the covering letter.  As you can read it sets out this Magellan/Aeronca “whistleblower’s” view  on the A340 -500/600 project :

“Dear Mr Edwards

It is this writers belief that Magellan Aerospace Corporation has a significant long term financial exposure on an A340 contract – stateside – see attached.

The subject contract was grossly underbid. At last count it was also grossly under-costed. I can find no mention of the potential impact anywhere in your financial reporting.  

A conservative estimate of that level of exposure could be $50 Million U.S,

This writer recommends that you task Mr William A. Dimma with an audit of the subject A340 Estimate at Completion (EAC) at your U.S. Subsidiary.,,,,,,,,,,”

QUESTION 4  Can you please confirm when , in your role as Chairman of the Audit Committee, you received a copy of this “whistleblowing”  letter from Mr Edwards?  When you carried out your investigation, at his request, where can we see the public record of the financial implications of that in the public accounts of Magellan since FY2002 or is there none?

As before I look forward to a response to my four questions (and four supplementaries) by the end of July 2010.” 

Mr Dimma  (Mr Dekker as a finance employee and the Fleet-Operations-dismissed Mr Butyniec) are no strangers to whistleblowing within their career/organisations.   A former work colleague in the mid-1980’s in Shorts/Bombardier in Belfast, who subsequently worked in Operations for the Fleet Aerospace Corporation ( the predecessor / founder company of Magellan Aerospace in 1995), on recently learning of my ill-health, sent me a website link to a Canadian public news link ( the Spectator in September 15 / 17 - 1990 headlined “Blowing the Whistle”  by Dave Kewley.). I can see why he considered it very relevant as this is a fascinating article with many substantial similarities in our “whistleblowing” and would have been familiar to Mr Dekker, Mr Butyniec  and Mr Dimma’s experiences.

Nor are “whistleblowers” a new experience elsewhere for Mr Edwards.   I have recently learned that a Canadian “friend” and former CFO within another of Murray Edwards “publicly traded” companies is also involved in litigation in Mr Edwards hometown in  Calgary, Alberta for “a hostile work environment” which was creating a bullying and intimidating approach towards finance, leading to “aggressive revenue recognition”.   He has also suffered serious health problems as a consequence.  PwC have been and are the external auditors of this Calgary-based “public company”.    Naturally the parallels to A340-500/600  “Revenue Recognition Policy” and senior management actions will be apparent to the reader. As I understand it this case will come to a public trial in Calgary within the next 12 months – UPDATED 18 January 2011 -   I now understand that this case has been the subject of an out-of court settlement. 

The following provides you with a series of quick access links to crucial parts of the story contained in my A340 report and the broader situation. I am now moving to the section of my account in which I set out, through various links, my own Public Witness Statements and various pieces of external evidence. However, I would ask you to note, while reading these, that the Magellan Aerospace Corporation Annual Report for FY2006 at page 14 (MD&A/AIF.p12) states

"The Corporation relies on customers' delivery projections as well as external market forecasts to determine the number of units over which to amortize non-recurring costs. Should deliveries not reach the number projected, any unamortized balance that remains would then need to be charged to cost of revenues which could have a material adverse impact on the Corporation."

This was approved by a Resolution of the MAC Audit Committee on 16 March 2007 and a MAC Board Resolution on 30 March 2007 at which the E&Y lead auditor, Mr Don Linsdell, was present.

<BL Observation – it is noteworthy that in the MAC FY2005 Annual Report at P18/19 (as at 17 March 2006), the MAC FY2007 Financial statements (as at 28 March 2008) the MD&A/AIF.p12, the MAC FY2008 Financial statements (as at 24 March 2009) the MD&A/AIF.p12  and the MAC FY2009 Financial statements (as at 26 March 2010) the MD&A/AIF.p15.   MAC now state they rely on customer delivery projections BUT revert to the FY2005 statement which excludes any reference to any consideration/reliance on third party external market forecasts.  Although this MAC statement is not restricted to the A340-500/600 to my knowledge seven third party organisations could have provided such forecasts for the A340-500/600 program quantities/life as at December 2006/March 2007.  Teal Group/Richard Aboulafia, Forecast International, Janes DS forecast, Airline Monitor/Ed Greenslet, Frost and Sullivan, Bank of America/Merrill Lynch, John Walsh Aviation/Consulting. See also the  FY 2007 - 2009 Annual Information Form  text extracts

“Industry Overview

The aerospace supplier industry differs from traditional manufacturing industries in a number of material respects.
An aerospace manufacturer develops relatively small quantities of highly specialized products on a contract basis.
Accordingly, an aerospace manufacturer is more like a contractor, hired to complete a very customized and
specialized project to the specifications of a customer. The up-front costs in developing such products that are
incurred prior to the completion of the first production unit are significant. Up-front costs generally include
engineering, design and manufacture of tooling, and test units required for certification. These up-front costs of
developing products are borne by the manufacturer, and are recovered when the project reaches the production
phase, usually on an amortization basis over the projected program life. See "Risks Inherent in Magellan's Business
– Customer unit deliveries may not reach the number projected when the basis for amortization of non-recurring
costs is established"  - FY2005, 2007, 2008 and 2009 stated below -

Customer unit deliveries may not reach the number projected when the basis for amortization of non-recurring
costs is established.
The Corporation relies on customers' delivery projections to determine the number of units over which to amortize
non-recurring costs. Should deliveries not reach the number projected, any unamortized balance that remains would
then need to be written off which could have a material adverse impact on the Corporation.

Changes in estimates used in accounting for long term contracts could adversely affect the Corporation's future
results.
Accounting for long term contracts require judgment related to assessing risks, estimating contract revenues and
costs and making assumptions for schedule and technical issues. Due to the size and nature of the Corporation's
contracts, average unit cost for products produced is determined based on the estimated total production costs for a
predetermined program quantity. Program quantities are established based on management's assessment of market
conditions and foreseeable demand at the beginning of the production stage for each program, taking into
consideration both customer supplied and independent data. Management conducts regular reviews of its cost
estimates and program quantities, however, changes in underlying assumptions, circumstances or estimates
concerning quantities or change in the market conditions, along with not realizing estimated total production costs,
may adversely affect future financial performance.”>

UK Court Case: My Public Witness Statement (A340 - 500/600 - Pages 61 - 79, paragraphs 187 - 227) (PDF) attached
External Market Reports - para 224.2

(BL Note : My attached public witness statement was amended for the Tribunal with the documents disclosed by the Respondents following the December 2008 Court Order and before my evidence-in-chief in January and March 2009.  However subsequently further crucial documents were disclosed (substantively those requested in Request 16 for CMD4 (see Part K : Current status of UK court/tribunal case: 2) documents disclosure ) in which the Respondents counsel  Mr Lynch QC initially persuaded the Tribunal/Ms Christiansen that these documents would be “more appropriate for a full scale forensic accountancy enquiry”  which was already underway with PwC.  On that basis these documents were not disclosed in June 2007 and before my initial witness statement could deal with these.  A number of these documents were then disclosed from March 2009 and subsequently-  and on which Mr Neill and Mr Dekker gave their evidence –see later.   As the UK legal  test is a threshold of “my reasonable belief”  (see Part K : Current status of UK court/tribunal case) I was not required by the Tribunal to give any further written evidence on these new documents.  So in addition to my attached written witness statement I explain the relevance of these contemporaneous documents in my A340 detailed report and Section C and D of this website.)

My Public Supplementary Witness Statement 1 (my ET-limited 30 page response to their "56" allegations) (Word Doc) attached

(BL Note : I am unable to attach publicly a copy of my initial 235- page Supplementary witness statement 1 - which provided my evidence on the further 46 unpleaded misconduct allegations not included in the ET3  Magellan defence - as it was not admitted as evidence to the court, as the Tribunal considered it too comprehensive etc, and instead asked for my limited evidence for each allegation for a max. of 30 pages as above. Also my Supplementary Witness Statement 2 -  SWS2 dated 15 January 2009 - 3904/3919-  is not included here , which dealt with some of my evidence in support of my Rule 34 Costs claim has not been admitted or heard yet in Court and in any event requires further update following the further March 2009 and subsequent document disclosures.)

3600 - Airbus delivery projections for wing deliveries 2007 - 2009, dated 6th February 2007 (to 135 a/c) (PDF)
Mr Steve Vandersteen, a senior Airbus UK Procurement Manager, and one of his colleagues advised Magellan UK that the A340 600 program was “Trashed” on 15 September 2006 (doc 2291)

2992/3 Published Teal Group/Richard Aboulafia - April 2006 A340 ten year market forecast (total build 135 ac)  (PDF) confirmed typo of 163 Total Aircraft Build "Airbus's Tragic Quadjet"

2998/9 Aboulafia - "DEAD PLANE FLYING"          - April 2007 A340 ten year market forecast (total build 139 a/c)  (PDF)

4083    Aboulafia -  "DEAD PLANE FLYING"         - April 2009 A340 ten year market forecast (total build 132 a/c)  (PDF)

4084 "THE AIRBUS 340 PROGRAMME IS WINDING DOWN"     Published Forecast International Inc. report entitled "Airbus A340", Forecast Rationale and 10 year market forecast dated April 2009      (total build 133 a/c)  (Word Doc)

Aboulafia –  “DEAD PLANE FLYING “ -  March 2010 A340 ten year market forecast (total build 130 a/c) (PDF) 

Latest Information Available

A340 -500/600 December 2009    Schedule from Airbus website entitled “Orders, Deliveries, Operators – Worldwide – total 132 aircraft =132 aircraft Sales Orders : Deliveries =125 aircraft      (and two A340 500 aircraft – MSN0886 / MSN0894 - ex Kingfisher Airlines of India in inventory/storage.  MSN0886 is in external storage at the J.L.LAGARDERE plant at Airbus Toulouse and MSN0894 was ferried to Lourdes Airport–14 Dec 2009–Tunisair resale?)  

Latest Orders and Deliveries schedule at Airbus.com

<BL Observations - 132 aircraft - Iberia Airlines have 2  A340-600 aircraft from their sales option conversion in 2007- which were delivered by Airbus since mid 2009 - of their 15 A340 600 aircraft fleet in storage at Lourdes Airport. These 2 stored aircraft will replace in service A340-300 aircraft on 1 June and 1 August 2010. The remaining Airbus A340 600 order book for 2 aircraft for Iberia are now scheduled for delivery from Airbus to Iberia – MSN1079 (March 2010) -  and MSN1122 (delayed to Sept 2010).   The cancellation of the A340-500 aircraft order from Kingfisher Airlines of India above – since mid 2008 – leaves a further 2 completed aircraft in storage/inventory and they remain the subject of Kingfisher/Airbus resale efforts.  This leaves the 3 remaining sales orders for A340-500   VIP aircraft. Two of which are for the Kuwait Government - MSN1091 (delivery June 2010) and MSN1102 (delivery October 2010).  That third VIP aircraft emanates from an Asian customer order which was placed in Q1.2007 but as yet has not been scheduled for final assembly in Toulouse during 2010 or 2011.>

In fact, Airbus VP-Marketing Andrew Shankland expressed during the Speednews Commercial Aviation annual conference in Los Angeles in March 2009 when he stated that “The A340 is pretty much built to order” while noting “it has found a niche as a VIP airplane”. >

During the 12 January 2010    Airbus Press Conference and website releases     Airbus “effectively” confirmed that they had achieved their  scheduled thirty-two    32    A340-500/600 aircraft assembly programme for 2007 – 2009   (doc 3600)  – delivering 30 aircraft (125 - 95)  and the 2 aircraft in inventory (ex Kingfisher – MSN886/MSN894)  for resale.

The Airbus delivery projections schedule dated January 2010 (adjusted by me for the “formal”  6 Virgin Atlantic  A340 600 cancellation in late Dec.2009 and low probability – 5%- -of two A340 600 options exercise for Iberia)  for A340-500/600 planned Toulouse assembly deliveries for 2010 - 2014            =   4 aircraft 

      
<2010   :  2 a/c   (in build KUW-MSN1102/ IB-MSN1122)    2011   :   0 a/c     2012    :   2 a/c   (-500 -  no orders for these)   2013  :   0   a/c        2014:  None / A350 XWB entry into service > 

<BL Observation – the new A350 XWB aircraft (500 orders), launched by Airbus in July 2006 at Farnborough Air Show, records the A350 -1000XWB – 75 sales orders - and A350 “Prestige” – 8 sales orders - (VIP).  Virgin Atlantic Airways have 2 of their 19 A340-600 aircraft in storage at Lourdes Airport which are available for sale/dry lease since July 2009, Qatar Airways would like to sell /lease their 4 A340-600 aeroplanes and Thai Airways continue to try and sell/lease their 4 A340-500 aircraft without success since June 2008.>

{BL – UPDATED 16 JULY 2010 :  As above Airbus have now delivered the planned A340-500 - MSN1091 to the State of Kuwait on 15 June 2010 for storage/VIP completion and the final A340 600 - MSN1122 was delivered today to Iberia Airlines.  See also latest Airbus O & D website above.   The Airbus assembly delivery projections schedule for 2010 – 2014  has now been formally adjusted  to 2 aircraft in 2010   (the assembly of that Iberia MSN1122 and the State of Kuwait  second A340-500 aircraft - MSN1102 and the last A340-500 complete assembly and scheduled for delivery by October 2010.)   

As the reader can see the Airbus delivery projections schedule has also had the two A340 -500 VIP aircraft in FY2012 removed from my “adjusted”  January 2010 Airbus plan of 4 a/c above and therefore Airbus at present do not plan any further Assembly of A340-500/600 aircraft. This now leaves the two A340-500 (ex cancelled Kingfisher aircraft MSN886 at TLS /MSN894 at LDE assembled in early 2008)  which Airbus are continuing their endeavours to resell – my latest information is to Sonair.  I expect there may be an occasional A340-500 VIP aircraft sold in the next period (largely out of primary parts inventory already within Airbus) but fundamentally the mid-2006/early2007 estimate of approximately 135 A340-500/600 production deliveries and series production cessation in 2010 has come to pass.  For completeness I had not foreseen the A340-500 April 2006 order cancellation by Kingfisher Airlines of India in August/September 2006.  

This effectively reinforces the conclusions of

  1. the aerospace specialist press   -e.g
    Flight International : 1 August 2006 : Airbus offers Emirates A350/A380 mix in place of A340 -600s (discussed/given to Mr Neill by me  – PwC (e)  “Data from other publications” file ?)
    “Habib Fekih, President Airbus Middle East, concedes that the A340 600 order is a casualty of Emirates’ new fleet plan, and he told Flight International , his preferred option is for it to be  replaced by a mix of A380’s and A350s”,     i.e the cancellation of their  18 aircraft after the A350-1000 XWB launch and A340-500/600 “Enhanced” study was dropped by Airbus/RR.

  2. and in the  General Press – e.g. 
    UK Times : 28 October 2006 – Ends looms for Airbus A340 as Emirates cancels $4bn orders
    (to MAC Directors, E&Y and PwC – DIR44 with my 4 Dec 2006 letter)
    and their conclusion that “ The move effectively kills off the A340”.    Ms Barbara Hadfield of E&Y UK confirmed to us that she had also read this article in a 7 November 2006 meeting.Which was in turn provided to E&Y (Canada) and PwC and each individual MAC Director in December 2006.

  3. and Airbus UK Procurement
    (Airbus UK’s Senior Procurement Manager  Mr Vandersteen’s “A340 600 – “Trashed”  noted briefing/conclusion to my former colleague Mr Phillip Underwood on 15 September 2006)
    (In his evidence Mr Underwood told the Tribunal that PwC discussed various matters raised by me on tape with him during their early 2007 investigation  ---    Not in A340 PwC report) The next three-year production delivery projections provided to Magellan by Airbus UK also showed declining A340-500/600 production rates (also given by MAC/me to PwC and E&Y -  e.g.doc 3600 link above)

  4. and  six out of seven external market forecasters
    (e.g. Richard Aboulafia of Teal Group – March 2006 above  – 
    “Airbus’s Tragic Quadjet” with his A340-500/600 market forecast of 135 a/c . By the time of the PwC investigation all six forecasters had released their forecasts to a total A340-500/600 Production Build of between 130 a/c – 150 a/c with a consensus of circa 135 a/c.  Richard Aboulafia had now entitled his annual summary update for the A340-500/600 – see link above - as “Dead Plane Flying”.  Both of his Teal Reports on A340 were available within PwC (Mr Hoon Lee) via their annual subscription to Teal Group Aerospace publications.  I expect that PwC forensic staff would also have had access through their Global Knowledge Management internal processes to some of the other external forecasts too, though none of these are referenced or Exhibited either in their seven month investigation/Report.)

  5. AND my own “reasonable belief” / A340-500/600 Protected Disclosures < (PD22,PD23 and PD24) / Q2.2006 EAC and quarterly certification qualification / Butyniec’s  BAFO pricing settlement 11/14 August 2006 letter to Aircelle > within Magellan to Mr Neill, Mr Edwards and Mr Dekker in August and September 2006. These followed  the crucial Airbus decisions made before and announced at or shortly after the Farnborough Airshow 2006 -  all months before Magellan’s Q4.2006 EAC for A340-500/600 was compiled using  the quantities specified in the updated “gross margin breakeven” representations to E&Y and PwC’s “Forensic investigation” in 2007 commissioned by  Mr Dimma– see also Parts C, D ,E and F on this website. As recently as yesterday I read an email following Magellan instructions in which they still do NOT concede my reasonable belief again on these A340-500/600 aspects of the case.

As you will read later in the website at Part K - the Respondents (Magellan) position was on the record from Mr Lynch QC in the UK court/tribunal on 16/19 November 2007, as “It is right to say that, prior to the receipt of the PWC report, the Respondents envisaged that the issue of reasonable belief might not be a live issue. PWC concluded that the view adopted by the Respondents as to the treatment of those costs and likely sales of the A340 formed no basis for criticism.” As the reader will recall earlier in this website the UK court-ordered disclosed report from PwC also stated on this subject matter at para 2.40 “that Financial Control in MAC was Poor and at 4. Poor control over individual projects from an accounting perspective. Project sales volumes, revenues and costs are not reviewed with sufficient frequency or rigour."

As one would reasonably expectthe MAC FY2006 Annual report clearly sets out its reliance on customers’ delivery projections and external market forecasts for the amortization and recovery of NRC assets. Despite this and in the face of all the “available” oral, written and public evidence available to the “Number 1 global auditing firm”, PwC,  went on to independently calculate, at para 8.75, that a further    2040      A340-500/600 exhaust system units would be required for production (468 - to a total Airbus production series build of 220+  A340-500/600 aircraft, far exceeding the 130 - 150  total aircraft build series from six of the seven external market forecasters ) and full replacement spares (and repairs, which were not appropriate for accounting NRC recovery as per PwC para 8.72) from FY2007- FY2021.

For completeness, Magellan have stated in May 2009 that MAC"s public auditors Ernst & Young (E&Y) were "satisfied" with the quantities of 833 by FY2012 in Magellan's submission/representation in their Q4.2006 EAC during their year-end audit testing.  It used a quantity of 701+ units  for future aircraft production (a total Airbus production series build of 284 – 291  A340-500/600 aircraft) and Spares / Repairs of 92 - 172 units (about 10% of the 31 December 2006 “estimated” production volumes / typical aerospace “norms”)   from January 2007 to December 2012, which at that time was the end of the current commercial contract with Aircelle.

I have also recently learned that Mr John Furbay (the Magellan/Aeronca CFO, including the A340-500/600 EAC accounting role) was dismissed by Mr Dekker and escorted off the Aeronca site by the General Manager at the end of June 2010/Q2.2010.  In the same 2007-2009/2010 calendar period as Airbus reliably predicted in their customer delivery projections documents above those 32 + 2 aircraft deliveries (136 production nacelle unit deliveries) Aeronca/Magellan delivered some 121 production AND spares units. This compares with Magellan submissions to E&Y and to PwC of 366+ production/spares and the use of 439 units in the CFO/Finance Program EAC used by E&Y for their Q4.2006 audit testing for the same 42-month period from January 2007. An increased Magellan factory A340-500/600 production rate totaling 296 was then estimated in the remaining 18 months for production and spares (H2.2010 and FY2011) for that Magellan strategic 5 year planning period. 

A further example of that misleading representation to PwC and E&Y.  For this current year (FY2010) MAC had projected in the documentation provided to E&Y and PwC – in diametric opposition in mid-2006/2007 to the “known documented reality” (a production rate of about 10 a/c per year and an identical MAC production budget for FY2007)  of reducing Airbus-customer delivery projections AND a declining Airbus A340 order book and airline sales campaigns -   that some 30+ aircraft (127/116 units - doc 3605,3605C/D) AND 80 Spares and Repairs (doc 3605H) would be built in Aeronca in FY2010 – a total of approximately 200  A340-600 exhaust system units in FY2010.

I believe that those “quantities” representations would NEVER have been allowed to happen if Larry Winegarden AND I had led, in my MAC strategic planning SVP functional role as planned, those FY2007-FY2011 4 day strategic planning sessions within hours of my no-warning firing on arrival in Toronto Airport by Mr Neill on Monday 18 September 2006. For me, and us, to enable and permit that would have been basic professional negligence and a fraudulent representation of the realistic/most likely A340-500/600 outcome in meeting our MAC business/legal obligations.

in effect, as I stated earlier, “A340-500/600 was and is vitally important to MAC. The A340-500/600 project investment/asset was the single largest financial number (>C$40m asset in FY2006) and failure to fully realize the value of the project would, inter alia, bring about the triple consequences of

(1) an overstatement in the project / non-recurring costs/engineering development assets of > C$40m .

(2) a program gross margin “breakeven” to actual financial losses and

(3) create a future cash deficiency / non-recovery in the internal and public reporting (MAC 5 year strategic planning base - Sales revenues / cash projections of C$150m +)”

Although, obviously by comparison a secondary matter, after the normal cycle/flow time adjustment this lower actual -121 - Magellan delivery number (-15) to that - 136 - properly and credibly planned in Airbus/Aircelle in that 42-month period is not surprising. I believe this difference was largely because I witnessed in FY2006 the COO Mr Butyniec pressing his Operations staff in Bristol/Aeronca for more A340 deliveries to Aircelle than budgeted (to achieve 80 versus the budget of 64 units). In large part this was because he was trying to improve the factory overhead recovery rate to meet the approved MAC 2006 budget  (although this action was at the detriment to his Aircelle 14 August BAFO settlement letter with a lower price for FY2006/Q2.2006 EAC) and therefore Aircelle are likely to have had a surplus of perhaps 10-16 completed exhaust system units at “2006” prices in their inventory/stock by December 2006.  On all the evidence and industry experience I doubt whether MAC will even deliver / sell another 15   A340-500/600 exhaust system units for replacement spares in the next 18 months / by the end of that five-year strategic planning period in FY2011.

Notably, and only very reluctantly disclosed by Magellan in December 2008/2009, as a result of almost continuous UK Tribunal/court intervention at my QC and my request, the A340-500/600 production delivery and spares projections / other documents (3605/3597 series) which provided the A340 quantities stated for the 42- month period above, and which the senior Magellan management represented to their auditors E&Y and PwC on 1/14/22 and 29 March 2007 (for the audit of MAC FY2006 financial statements and the PwC C$3m+ “independent forensic investigation” ), have belatedly been the subject of some further oral evidence in the UK by the MAC Vice-Chairman, Mr Neill (July 2009) and MAC CFO, Mr Dekker (June 2009) and is recorded/addressed at this website parts C,D,E & F

{BL – UPDATED 18 JANUARY 2010:
Oral evidence of Mr Neill (President & CEO) in UK court in November 2007 (p.437+)

Judge

Airbus now more confident?   (In A340 -500/600 – Feb2007.153 sales orders)  

 

Mr Neill 

It’s very technical – aircraft can fly anywhere.

 

Mr Stafford QC

When did you have that discussion?

 

Mr Neill

Q1.2006 and Q3 and another one just a month ago.  (BL which was at:Airbus.30Sept2007:138 orders) and
(BL. Airbus latest Orders & Delivery)

 

Mr Neill  

One of many

 

Mr Stafford 

Said it was pessimistic and as events turned out proved to be pessimistic?

 

Mr Neill

Yes

 

Mr Stafford

Document 2998/9  Dead Plane flying – April 2007 – over page . They have said that the forecast now 139 not 163  
(BL Note: confirmed typo by Mr Aboulafia: in fact April 2006 = 135 – see doc 2981)

 

Mr Neill 

Yes

 

Mr Stafford

Still predicting low forecast?

 

Mr Neill

Yes

 

Mr Stafford

Belies the optimism you just stated

 

Mr Neill

Moved the number up by 3 – Phased out by 2010 – do not hear Airbus saying that.

 


18 January 2011
: Factually Magellan Aerospace have delivered   121  units (30.25 aircraft sets from January 2007 to 31 December 2010 which completes Airbus Toulouse aircraft production (at a total build of 131 A/C) as per the Airbus schedule below and which produced only 11 units for Spares in the four year period from 2007 - 2010.         

I also draw your attention to my PwC.A340.Forensic.deceit report paragraph 9. 2 (pages 17+18) and paragraph 9.9 (pages 30 - 40) which is supported by the factual analysis in paragraphs 9.3 – 9.8             (pages 18 – 30).>

Airbus Production Plan 2010 - 2014 Showing the A340-500/600 Series production cessation in 2010

My witness statement in 2007 (A340 paragraphs 187-227) sets out, at paragraph 224.2,  the third party consensus forecast of 135 aircraft, similar to my guidance to PwC in early 2007, <only 4 more than the final 131 above>  and a further reduction from the 150 aircraft – subject to no A340 engineering upgrade, confirmed in July 2006- - which I advised MAC’s  Mssrs Edwards, Neill, Dekker and  Butyniec on 19 Feb. 2006 (w/s paragraph.200) and reiterated on 8/9/10 Aug.2006 (PD22/23) & 14 Sept. 2006 (PD24).  

EADS/Airbus released their Q3/2011 financial results on 10 November 2011 in which they formally confirm A340 program termination – 

               Equivalent to         131       actual  A340-500/600 production series aircraft.

Q3/2011 EADS webcast :  EADS/ Airbus financial director Hans Peter Ring said the company had decided to abandon production of the A340, admitting: "We have accepted reality. We have not sold any A340s for nearly two years."               FYI:   EADS financial statements are audited by E&Y LLP and KPMG LLP

LastScan.bmp

Mr Neill 

Mr Stafford

Oral evidence in UK court – 14 November 2007 (p439+) continued

Accounts are based on pessimistic

 

Mr Neill

No – realistic! 

 

Mr Stafford

Where are accounts placed

 

Mr Neill

Between the two

 

Mr Stafford

Where is it now?

 

Mr Neill

Lower than 300 -  probably between 250 and 300 aircraft

( increased from 284a/c on 16 February 207 to a MAC 1 March 2007 document subsequently disclosed on 8 June 2009 which shows 291 a/c – 3605C/D – as MAC representation to PwC & E&Y)

 

Mr Stafford

There was a meeting in Toronto on 8th August 2006 – which was attended by Mr Little and you. Whilst there he discussed with you his concerns of the balance sheet treatment of the A340 NRCs

Mr Neill 

Correct

Mr Stafford

He said to you – there was an arbitration going on regarding the way the price increase worked. He said even if arbitration goes in our favour – still have to write down some of our profits

Mr Neill  

Agree that he discussed the write down of profits – would add that uses a very specialist titanium alloy. We had agreed with them that they would pay the full price of increased in Aluminium price.  I said to him that we had ignored the spares. Also agreed how long these planes would last. I said that the anticipated sale – there is absolutely no question we would cover all of the costs…. PwC go into this.  We looked at this very seriously – before we came to that conclusion
Already had a plan from Airbus – that is higher than that briefing. <not true from 3600>

Mr Stafford

Volume 5/2006 – the sub certification for Q2.2006 – see 2 items here – “A340 – Aeronca to discuss”. On an important document – the issue of NRC – clearly formal concerns expressed by him.

Mr Neill

Yes

Mr Stafford 

You would have been clear that it was NRCs that he was referring to

Mr Neill 

Yes

Mr Stafford

Given that you had a discussion on the 8th – and he signs certificate with qualification – must have been clear that BL not entirely comfortable? 

Mr Neill

Correct  But his experience with airframe – more with engine and spares – parts wear out and are replaced more frequently than wings- so a difference in our experiences

(See Brian Little CV – Shorts/Bombardier had a nacelles business employing 800 people with some 100+ engineers. In the 1990’s they were in the Joint Venture  International Nacelle Systems with what is now part of Aircelle -  Magellan’s customer for the A340. Additionally I have experience of the “complete aircraft marketing/sales – delivery – support cycle with Shorts and Bombardier aircraft products. Furthermore I spent several weeks within Boeing on the Boeing 7J7 and “Boeing 777”  market research / sales processes whilst on a secondment from Shorts in 1989)

 

Mr Little

John Dekker : Magellan VP of Finance/ Corporate Secretary– oral evidence – April 2008(p.167+).

A340-500/600 aircraft programme was the largest product except the super jumbo Airbus A380 ?

Mr Dekker

It is one of the largest

Mr Little

In terms of the MAC Balance Sheet, C$40+?

Mr Dekker

Approx that yes

Mr Little

This is probably the biggest single item to be a management issue from the inventory?

Mr Dekker

I don’t think I can dispute this                         and shortly thereafter

 

 

Mr Dekker

I’d go through with Mr Neill the certificates and identify remarks of that nature. We need to be sure we’re fully versed. I saw this (referring to document 2006) and Mr Neill said he’d talked to Mr Little already. Issue re enough product from Aeronca.    It was not my expertise. I’d just leave that to him.

Judge

What he wants to know is did you have a discussion with Mr Little?

Mr Dekker

It was noted

 

Mr Dekker 10 June 2009 (p145)

   
Mr Little Now, three things I would like to say, that schedule still shows spares at 166, so the view was that spares were still 166,<at 1 March 2007>  plus the circumstances at that point in time, that was what you   were using, and including what Mr Neill was considering, that’s what it says?
Mr Dekker That’s what it says
Mr Little It’s also correct, isn’t it, that the contract was not a whole life contract, it did in fact   terminate in 2012?
Mr Dekker The contract will---- it runs to 2012, that’s correct.
Mr Little And it is also correct that we were about to embark, on litigation led by myself, on the price arbitration issue, which was likely to bring this into a dispute with our friends in Aircelle?
Mr Dekker In ……  yes , yes that’s the time frame
   

Mr Dekker evidence on 10 June 2009 (p160)

   
Mr Little In the disclosure , you gave them the production programme for the wings at ten aircraft a year type process.  Do you recollect any discussion with Ernst & Young on it?
Mr Dekker Well, when you say when you gave them, are you talking about Ernst & Young or are you talking about PricewaterhouseCoopers?
Mr Little I’m told that the document was given to both of them, for the programme , at 3600  ..  interrupts
Mr Dekker Okay, if you’re talking about that document , I did not provide that to them, John Furbay did, again, PricewaterhouseCoopers moved three people into Aeronca for three weeks, and they just descended on that team and asked whatever questions they needed to ask , so I don’t know what was provided to them
Judge Okay
Mr Little Okay, so you were not involved in any discussion on the programs and volumes conversations, per se?
Mr Dekker Not per se.
   

So I am now in the process (slowly) of preparing a three part Application to the UK Tribunal to again seek Affidavits (previously 2 July 2007:Tribunal CMD5) from the Directors of Magellan – Mr Edwards and Mr Dimma.

My Application for an Affidavit on this occasion will request that Mr Edwards and Mr Dimma certify

  1. The A340 quantities produced and delivered by MAC in the four year period from 1 January 2007 – 31 December 2010.   
    Quantity of XXX units   ( Factually I believe 121 exhaust units)

  2. Given that MAC will also have considered and approved their FY2011 budget for A340 the budget quantity for FY2011 should be stated   Quantity of Y? ? units   (with document)                                            ( I believe 8 units in FY2011. On 1 and 14 March 2007 MAC projected 198 units (P=108 and S=90) for 2011.  2011 would have been the final year of the five year MAC strategic plan  which I was/would have been responsible for coordinating from September 2006  -  i.e FY2007 – 2011.)  

  3. The MAC FY2011-FY2015 strategic plan will also have been produced and submitted to the MAC Board in late 2010. The Spares quantity – not repairs- which is stated and has been included in that MAC five year plan from FY2011 – FY2015 should be stated.  
    Quantity of ZZ? ?  units

( My forecast was and is for approximately 58 replacement  spare units of the 100 by FY2021 will be required from 2011 – 2015.  MAC projected 379 units would be required for Spares, (886+ by FY2021) in their 14 March 2007 schedule,  as to quote Mr Neill in his email (doc 3597) dated 29 March 2007, “To attempt to explain the terminology “Spares and Repairs” generally if an exhaust achieves its predicted and recommended life it will be taken out of service and a new one will replace it”.

As you can see these are all simple requests and readily available within the MAC senior management.

The fourth element (d) of the Application for an Affidavit will be from Mr Dimma and if granted would require him to obtain from PwC the documents log / index produced by PwC during the period January 2007 – August 2007 disclosing which documents PwC received, obtained and considered in producing their findings of fact and conclusions on A340 in their 2007 report. As you can read in Part D of my website ONLY 5 documents were Exhibits in both of the PwC A340 reports.  This log and document index record should be part of the PwC internal Guidance procedures to underpin the minimum operating standard practices for Investigative and Forensic Accounting engagements in Canada (CICA.IFA) in order to protect the public published in November 2006.

As above It is my information and belief that factually Magellan Aerospace have delivered   121 units (30.25 aircraft sets from Jan. 2007 to 31 December 2010 (which completes Airbus Toulouse aircraft production at a total A340-500/600  build of 131 aircraft) and therefore during that entire 4 year  period ONLY 11 Spare exhaust systems have actually been delivered by MAC. The reader can also now see by clicking Airbus that all the 110 exhaust system units for the Aircelle/Airbus assembly line production have been installed and delivered in the final A340-600 - Iberia Airways - aircraft (MSN1122) on 16 July 2010 and the VIP A340-500 State of Kuwait (MSN1102) on 7 December 2010>

Part C  Magellan documents referred to by Magellan in their oral evidence and in their March 2007 Representations (Mssrs Neill, Butyniec, Dekker and Furbay) to Ernst and Young {external auditors} and PricewaterhouseCoopers {independent “forensic” investigation} 

MAC A340 forecasts - Aeronca Inc Aircelle A340 Program - Actual / Estimated Quantities
          (Engine Sets) - 1 March 2007 (UK document 3605B/D to E&Y for FY2006 audit)
                                   (and to PwC for "independent forensic investigation" - 3605 E/G) - Disclosed 8th June 2009
                                   see also A340 my On the Record Document pages 98 - 99

1 March 2007    - (MAC Projected sales and build of almost 300 production A340 -500/600 aircraft through to FY2016: of which the MAC Production Plan for 2010 = 29 aircraft or 116 engine exhaust systems) . The lower schedule (1831A) is the representation made by MAC to E&Y in the Q4.FY2006 Estimate at Completion (EAC). As per the PwC report para 8.61 “The Q4 FY2006 EAC was also used by EY for year-end audit testing purposes.”  The Estimate at Completion (EAC) process/documents are the MAC management  “most reasoned view and likely outcome – oral evidence :Dekker”  and showed in this Q4.2006 EAC submission to the auditors E&Y and PwC an improvement over Q2.2006 to a miniscule  $0.1m gross profit on $250m program revenues

Quantities specified in the updated “Q4.2006 gross margin breakeven”  as the A340:Summary of Best Information Available for Production and Spares/Repairs at 31 December 2006.   The column on the right are the quantities (and prices) used in the Q4.2006 EAC. whilst  the reader will observe in Mr Dekker’s schedule under the left hand column heading  % of Units Justification  the “identical” quantities  information from FY2007-FY2021  for Trent 500/A340  Production of  60 + 661 = Sub-total = 721   and Spares and Repairs =   6 +166 = Sub-total = 172  to that contained and submitted to PwC and E&Y  in the Aeronca document 3605 dated 16 February 2007 referred to above was then to appear in May 2009 (See my A340 Written and oral evidence at Report:P79-80 in April 2008 and further A340 document (doc3605A) – in May 2009 – with a comment from the Magellan UK solicitors in which they state………

PinsentMasons, on behalf of Mr Dekker, the MAC Chief Financial Officer described this document /schedule for production and spares on 5 May 2009 as
At a glance the assessment that would have been carried out by the auditors in order to satisfy themselves that the accounting on this matter was appropriate.

MAC A340 forecasts - Aeronca Inc Aircelle A340 Program - Actual / Estimated Quantities
       - 14 March 2007 with inflated spares prediction (PwC for "forensic" investigation - 3605H -
Disclosed 27th Aug 2009
       see also A340 my On the Record Document 3597 / p. 67 and Attachments C & D pages 56 - 97.
14 March 2007 – (MAC projections of a likely minimum of 886 “spares”  (replacement parts) - based on 40,000 flying hours exhaust useful life, which was to provide a margin of safety in those estimates by Mr Neill , the current Vice Chairman- through to FY2021: of which the MAC Spares Plan for 2010 = further 81 engine exhaust systems)

<BL Observation – Despite their centrality neither of these documents are Exhibits in the PwC report. Based on these crucial March 2007 documents therefore the manufacturing volumes projected for 2010 in Magellan’s plant Aeronca Inc was now for some 116 production (reduced from 127 as at 31 Dec.2006/page 3)  and 81 spares (was 8)= 197 engine units (or almost 50 aircraft sets).   As the contracted pricing was identical for production and spare engine exhaust systems the A340 program revenue projections for 2010 would be for some C$47m–C$50m with the attendant NRC and cash recoveries in the MAC strategic planning and financial budgeting/reporting processes.  I believe it was predictable then, and will actually be now, some 90%+ lower i.e less than C$4m. MAC publicly reports these Revenues through its Aeronca facility and the United States line in their quarterly earnings statements - see example extract in the Q4.2009 from MAC Earnings statement.   The historical position reported by MAC from 2006 -2009 is --   


U.S. operations 

2009 2008 2007 2006
Total revenues  $200,525 $245,455 $188,330 $186,597
Number of principal customers 1       (Boeing) 2         (Boeing, Aircelle) 1     (Boeing)   3   (Boeing, Aircelle,  )
Percentage of total U.S. revenue from principal customers  35% 50% 39% 58%

You will note in Part G, and specifically in my 27 November 2009 letter to the MAC Directors before their December 2009 MAC Board meeting, that each Director has been invited to look at these very carefully for the FY2009 financial audit by E&Y and when reviewing the FY2010 MAC budgets for approval at that December Board meeting – you will see this in part of my letter when I said:

Part of my team role, as both a MAC Senior Officer and with functional responsibility for coordinating the MAC strategy, was to identify these major matters and have them addressed by us all within management.  Mr Dekker’s comment to the Judge that I had simply a different point of view about the A340 -500.600 in August 2006/September 2006 is very far removed from the truth.   This week you will be approving the MAC budgets for 2010.  Look specifically at what those MAC budgets include for the A340 production units and spares.

As you know from my MAC Board May 2006 presentation, there is a typical three year lead time from aircraft wide body sales campaign to delivery.  MAC represented in March 2007 to PwC and E&Y that in 2010 some 116 units/28 production aircraft (1 March 2007: doc 3605B/D to E&Y and 3605E/G to PwC) would be built and projected a Spares build of 81 units (14 March 2007: doc 3605H/red Tab page 68) – a total manufacturing requirement in Aeronca of some 200 x A340 units in FY2010.

My view, by February 2007, was that we would be more likely to be facing the production case shown by MAC at document 3605H dated 14 March 2007 /Page 68 (total production build of 135 aircraft) whilst back in Aug /September 2006 MAC would be lucky to still be building at a rate of 10 aircraft per year by 2010 with the termination of meaningful series production of the A340-500/600 very probably imminent. Even now Mr Neill would, it would appear; based on his July 2009 evidence to the court does not admit that.

I believe instead you will read in those submitted MAC budgets for 2010 A340 production = 0 and Spares (rotables and replacements) of 8 – 10 units.  This was predictable and indeed predicted by six external market forecasters, and almost everyone else with experience in the industry from mid 2006/early 2007, except those MAC Senior Officers on this the largest cash recovery/asset in the MAC Balance Sheet/Strategic Plan.  I understand that the Program EAC is not just about volumes, prices and costs matter too, and those were and have been carefully considered then and now by me. See my A340.On the Record.Final.Report.”

As further background the former President and CEO Mr Neill in his written evidence to the UK court (RAN20) stated that Brian “was an experienced operator in the aerospace industry, with excellent links with key figures (such as Ken Brundell – should be Brundle – and indeed many others) …and (RAN22) “It was clear to me that the Claimant had lots of experience and knowledge of the industry. He had a good technical understanding of the issues, a good grasp of contractual issues (which led me to believe he would be a strong negotiator) and a sound strategic approach” but, for the first time in my life read (RAN55) and heard that Mr Neill believed that Brian  operated badly on points of detail…..“

Mr Neill :  Extracts of Witness Evidence on A340 Att C pages 57 - 64 and D p 72 -78 and then Attachment J

Former President and CEO Mr R Neill (now Vice Chairman) - his oral evidence on 14 November 2007 (p436+)

Mr Stafford There was a meeting in Toronto on 8th August 2006 – which was attended by Mr Little and you. Whilst there he discussed with you his concerns of the balance sheet treatment of the A340 NRCs
Mr Neill  Correct
Mr Stafford He said to you – there was an arbitration going on regarding the way the price increase worked . He said even if arbitration goes in our favour – still have to write down some of our profits   <please read MAC CFO cross-examination Oral evidence from Mr Dekker on 10 June 2009 (p152+) to support and explain my analysis>
Mr Neill  

Agree that he discussed the write down of profits ………….I said that the anticipated sales – there is absolutely no question we would cover all of the costs.  PwC go into this. We looked at this very seriously – before we came to that conclusion

Already had a plan from Airbus – that is higher than that briefing {RAN referring to 2993-       Teal Group April 2006 forecast of 163/135 aircraft}

   

Judge

Mr Neill  It’s very technical – aircraft can fly anywhere.
Judge You did not share the pessimism. Your cynicism about that pessimism has been vindicated because you have sold more?
Mr Neill Correct.  I chose to call the suppliers and discussed with them how they saw the future- they said the estimate in the journal (BL Note: referring to Teal) was extremely pessimistic.
Mr Stafford  When did you have that discussion?
Mr Neill

Q1.2006 and Q3 and another one just a month ago.    (BL:Airbus.30Sept2007:138 orders) and (BL. Airbus latest O&D)

Mr Stafford You could see what forecast said and spoke to RR    (Mr Neill had referred to the retired RR COO -  Mr John Cheffins)
Mr Neill   One of many
Mr Stafford  Said it was pessimistic and as events turned out – proved to be pessimistic?
Mr Neill Yes
Mr Stafford Document 2998/9  Dead Plane flying – April 2007 – over page . They have said that the forecast now 139 not 163      (BL Note: confirmed typo in fact April 2006 = 135 – see doc 2981)
Mr Neill  Yes
Mr Stafford Still predicting low forecast?
Mr Neill Yes
Mr Stafford  Belies the optimism you just stated
Mr Neill

Moved the numbers up by 3 – phased out by 2010 – do not hear Airbus saying that. Latest Airbus 2010 - 2014 Schedule

(On 15 September 2006 Mr Steve Vandersteen, a senior Airbus UK Procurement Manager, and one of his colleagues advised Mr Phil Underwood,  the Vice President and General  Manager of Magellan UK,  that the A340 600 program was “Trashed”  (doc 2291) during an important meeting in which they also discussed  Mr Vandersteen ‘s third written complaint in August 2006 about the manufacturing delivery performance etc in MALUK.   He also had prior Complaint 2:    28 June 2006 in red narrative  and Mr Underwood response/Mr Butyniec court evidence  and his Complaint l:    23 November 2005)

   
Mr Stafford The fundamental is – even if pessimistic – the sales were never going to reach the 300 aircraft originally projected
Mr Neill We had projected 1200 production nacelles sold – we have now added to that the number to be sold through spares – that takes the number up to 1500 -1600  Significantly in excess of that needed in the EAC.  To the original EAC’s we have added in the line for spares – and looked at the total number that will be sold.  Either way it exceeds the number.
Mr Stafford Ignoring spares – concentrating on the number of new aircraft – has MAC ever  reduced its expected number of sales from 300 aircraft
Mr Neill Yes the pessimistic scenario
Mr Stafford Accounts are based on pessimistic
Mr Neill No – realistic 
Mr Stafford Where are accounts placed
Mr Neill Between the two
Mr Stafford Where is it now
Mr Neill

Lower than 300 -  probably between 250 and 300 aircraft (291 a/c – 3605C/D)

(BL – external market forecasters are all A340 phased out by 2010 for airlines ,for example Forecast International link / Airbus “latest” delivery projections - 2010 - 2014, Part B above)

     and then in Mr Neill’s oral evidence on “A340 Spares and Repairs”  -  27 July 2009 (p112+)

Mr Little

3597 and 3598.    (Pause). 

Mr Neill This is a memo from me to Pricewaterhouse.
Mr Little That's correct, and I'm just going to let the tribunal read it first of all, and yourself, to remind you, and then I have four or five questions I want to ask.   (Pause).
                    (BL note :   Requested that the reader familiarise  themselves with this email)
Mr Little All right?
Mr Neill   Yes.
Mr Little  So this is from yourself, copied to John Furbay, noted at the  end of March, essentially,  as distinct from what we saw earlier.
Mr Neill  Yes
Mr Little  And this is coming off the back of what Dr Thamburaj <of MAC> has done in the middle of March 2007 for yourself, on the useful life <referring to PwC Exhibit 8.5/Part D>
Mr Neill Correct.
Mr Little And this refers to a spares requirement in excess of 800 units to 2007 to 2021 as opposed to the 1572 calculated by PwC?
Mr Neill If you make the assumptions for the forecast that we've just agreed on, then the numbers will generate whatever the numbers are, and if it's 800, it's 800.
Mr Little Okay.  Oil' now –
Mr Neill We're not building -- go ahead.
Mr Little No, you go ahead?
Mr Neill I was going to suggest that the 800 was likely over the life of the programme, and it was well in excess of the numbers that, at that point in time, we needed to recover all of the costs.

earlier in evidence (p60+)

Mr Neill

It is an estimate of the service life that we use to make the forecast.

Mr Little Okay, can I try and go back to the mathematically and logically, if we go back to the   8.75.       This calculation here is predicated on a replacement of 40 thousand hours, - is it or is it not?  That's the logic of PwC.
Mr Neill I would assume so, but it doesn't actually say this --
Mr Little Just up to 8.74 –
Mr Neill I would assume so. 

Mr Little

Rich, just so we're both on the same wavelength, the evidence you've given is that the PwC table (their calculation of 1572 Spares and Repairs in para 8.76.see PwC extract in my report.page 62), you didn't correct, and both of us believe that it's probably wrong. 

   
 

You've said independently in this email (doc 3597. my report.page 67) that you've done a calculation that suggests 800+ units on a replacement basis on 40 thousand flying hours is what is in the EAC (Note: MAC disclosed document 3605H dated 14 March 2007 and which had been sent to PwC at the time. This document was disclosed after his oral evidence on 27 August 2009) and what I'm saying is, if that is true and everything has changed at 40,000 hours, purely for spares, that would meet the 1247, which is your point, but it's only in that situation that everything is getting replaced at 40 thousand hours without exception.   

No repairs, nothing, straightforward replacement. That's what your emails are saying??

   
Mr Neill  : I think we're losing sight of the purpose of this email (from Mr Neill to PwC – see doc 3597.my report.page 67) The numbers stacked up to justify us getting more than 1247 units that had been used at that time in the EAC. I must admit I didn't go back and check in detail every calculation that followed that.  All I was saying was that if you took Dr Thamburaj's 40 thousand hours it would generate a significant number which, on top of the production, would easily exceed the 1247 numbers needed to amortise out the recurring costs. That's what I was trying to say in the opening paragraph.
   
Mr Little I've heard what you've said, we have your evidence. Earlier in this afternoon's evidence, you made a remark too, this is our worst case scenario, and is for the hot and high and damaged products.  Was where the 40 thousand hours came from, okay?
Mr Neill Yes.
Mr Little So what you're saying is you've taken the worst case scenario of 40 thousand hours and assumed that all 800 units will require to be replaced by 2021.  Is that correct?
   
Mr Neill

If you want to assume 800 units are needed (doc 3597 / doc 3605H) then you have to assume that the whole fleet will need that kind of replacement and that will occur if airlines operate in difficult situations or conditions where there's significant deterioration. 

However, to get beyond the 1247, which was the amount needed as I understood it at that time to amortise out, you only needed 190 units and the point I was making to PwC was that to exceed 190 units should be something that is quite credible, because now you no longer have to rely on the worst case condition you can look at other events occurring, like we've seen in the past two years, that would suggest that they will be the repairs and spares bought to support the fleets.

   
  earlier in oral evidence
(p55+) 
   
Mr Neill    : 

Since facts are and last year the Aeronca shop received units in total from Lufthansa and Lufthansa Technik for heavy repair, four were extensive to the tune of a hundred thousand dollars, significant profit margins for Aeronca, every year since 2006 we have delivered somewhere between $350-$650 thousand dollars' worth of spare parts, which airlines would use to refit the exhaust nozzle and the likes to the engines in question, we also had conversations with the Virgin Atlantic maintenance repairs specialist, Mark Stocks, about what was happening in his airline, and at that time, we made a proposal to him for a number of replacement units, so while it is true that the engineering life was 80 to 100 thousand hours, there is significant wear and tear on the units in service that do require maintenance and repair.

   
Mr Little :   

Right, so that there's absolutely no doubt for everybody else, Rich, in my mind there is no argument that there is at least 100, 130 units in spares and repairs here on a On Condition basis, that's not in dispute. 

What I'm disputing is PwC and yourselves coming to a conclusion that there is a demand for 1572 units which are both mathematically and logically wrong, and I want to pursue that subject, if I may, as well as, if there is no mandatory 40,000  replacement , then it's not surprising that the airlines, Airbus, and the other parties, don't see eight to ten times the volume as against an On Condition position. And it's certainly no surprise now to me that the only people that make this material <TIMET> in the only plant in the world which is in Toronto in Ohio, don't have orders for more than 11 sets of this material from yourselves, if it were a mandatory requirement, you'd now have been positioning over a hundred units to be replaced.

<BL Observation -  the reader will observe that Mr Neill concludes his 29 March 2007 email with “The Forecast International data assumes Airbus will be unavailable to further improve the a340-500/600, and yet history has been the opposite and the example I would use is the a300 which first entered service in early 1970’s and production is only now ceasing”.  I believe that Mr Neill was again misleading PwC as to the probable production life of the A340 when he was well aware from the trade magazines etc and multiple discussions with myself that the last fundamental  A340 product improvement review took place between November 2005 and May 2006 within Airbus.  This included major upgrades to the engines (daubed the Trent 1500 –see below) and both Airbus and Rolls-Royce internally concluded in May/June 2006 that they could not provide the necessary collective product/performance improvements to substantively close the gap with the Boeing 777 two engine models and their major customer (such as Emirates and Qatar) performance demands.  Hence the A350 XWB public launch at Farnborough Air show in July 2006. 

Wikipedia -  “Trent 1500    A Trent 500 replacement engine, known unofficially as the Trent 1500, has been proposed for the Airbus A340-500/600, to help the aircraft compete with the Boeing 777-200LR/300ER.[26] However, the announcement of the A350 XWB, which covers the A340 market, will most likely prevent the Trent 1500 from ever becoming a reality.

The Trent 1500 would retain the 2.47-metre (97 in) fan diameter of the current Trent 500 engine, as well as the nacelle, but incorporate the smaller, more advanced, Trent 1000/XWB gas generator and LP turbine, suitably modified.”

Mr Neill would certainly have been aware of these Airbus/RR decisions as an avid reader of the trade publications (Aviation Week, Flight International, Air Transport World etc) and his senior contacts within one of his former employers- Rolls Royce. We certainly had both read and discussed ” (doc 4270) which documented the major A340 product development study being undertaken by Airbus/Rolls-Royce in early December 2005. This concluded unsuccessfully the Flight International article Exclusive on November 2005 “ Enhanced A340 to take on 777 as above in May/June 2006 with the resultant announcement of the new product A350XWB-1000 in Farnborough 2006. Even Wikipedia as quoted above knew. Whilst PwC would know Emirates new fleet plans as their auditors and their public order book in early 2007 as well as my product development briefing at the initial January 2007 PwC interview. 

It is my belief that Mr Neill endeavoured to perpetuate his March 2007 email with his “A340 product life longer story” in his further evidence in July 2009 to the Tribunal when he referred to an Airbus briefing (which he did not attend and I did) in which Alan Pardoe of Airbus referred to further A340 product development / performance improvements.  What Mr Neill failed to tell the Tribunal members (who have no aerospace business experience) was that these engineering investments were approved within Airbus because they could affect the cost and performance of the in-service A340 fleet – such as improved maintenance check intervals and a retrofit capability of a revised belly fairing – that is existing airline customer maintenance contract cost guarantees.   The specific examples used and the emphasis of Mr Pardoe’s comments were correctly reported as part of an article by the same Aviation journalist, Mr Max Kingsley-Jones, in the Daily Flight International magazine at the Paris 2009 Air Show that week.

What is now equally revealing is Mr Neill’s commentary on 15 August 2006 during the Q2.2006 earnings webcast –pages 1 & 2  after my A340.PD22 and PD23 but before my termination) in which he set out his perspective in what we heard /can read ..

Mr Neill:   Thankyou, Michelle, thankyou for the introduction and for all these words that the lawyers carefully crafted that you should read off.  We of course, underwrite the words that were said, that we are trying to share as much as we can legally do and be as open as we can, and we hope when we get to questions and answers, you can see it that way.

Just to quickly recap some key points happened in quarter 2 that may reflect in our numbers and give you an understanding of where the sector is at this point – going through the big people in the commercial airplane business , Airbus and Boeing – in Airbus, of course, the key thing was the announced delays on the A380 program where it’s not only affected them but affected the whole supply chain, and some of it washed through into us as well. 

On top of that, there was the indecision that we had around the whole A350 program, and then the final decision to go with what is now known as the A350XWB as a competitor to Boeing latest product.  They took pains in getting there and, in doing so, they sent a number of concerns back not only through the investment community but through the supply chain as well, especially for those who had already started working on the A350 program.

In Boeing’s case  -- different story. The story of the quarter was the strength of the order book for the Boeing 787 that built through that period but also for the Boeing 777 as well. Boeing won the bulk of the orders for twin-aisle airplanes and had, for the first time, some success that they could boast about.  We saw that at the Farnborough Airshow.” >


Part D : and now the ONLY (5) A340 Document Exhibits from PwC C$3m+ Final Draft and Final Reports via Canada Disclosure

Exhibit 8.1

Settlement Agreement between Hurel Hispano, Aeronca Inc. and MAC dated 11 May 2005          {849 – 879}  - Engine Exhaust System - Production and Spares selling price : $165,499 per engine nacelle 

As you will see in this 2005 Settlement agreement at page 3 / H) arose as a result of Mr Butyniec decision to breach the contract, (in Mr Neill’s absence due to illness) pursuing what was colloquially described within Magellan Canada / Aeronca as a “”Pay us the money/prices or come and take your tools away” and more formally recorded in this Settlement Agreement as “ On Friday, October 15,2004, in response to MAGELLAN’s announcement that it would cease production under the agreements , HUREL-HISPANO sought temporary restraining orders against AERONCA……..and then at , before the Court of Common Please, Butler County, Ohio, and against MAGELLAN, as well as Magellan’s subsidiary Bristol Aerospace Limited (responsible for the manufacturing of part of the exhaust system) , before the Ontario Superior Court of Justice” …….   and  “on the same day , both courts granted the orders sought by HUREL-HISPANO and ordered Magellan and Aeronca “ to continue to supply exhaust systems and the components parts pursuant to the terms of the Nacelle Supply General Terms Agreement  etc etc.

Since 18 October 2004 the Parties continued negotiations with the aim of achieving an amicable solution to their differences, and to agree on revised prices for the exhaust systems at issue.   This Settlement Agreement dated March 2005 and revised FY2005 A340-500/600 pricing with its escalation formula was that outcome.  I had no involvement in any of this process as I did not become a Senior Officer of Magellan until May 2005.  Obviously in my new role my knowledge of these documents and my involvement would arise thereafter.

<BL observation – My A340 Report only addresses one of four pricing concerns (Q2.2006 – Q4.2006 Revenue increases of $8.47m – see Exhibit 8.3 below) and one of three costing concerns  (the implications of the 0.31 ceiling for BETA21S in the escalation formula/settlement agreement) and PwC report paragraphs 8.93-8.95 = {697} -  short extract follows. Also on pricing the reader should note that the Magellan Canada team had accepted a lower base in Mr Butyniec’s Best and Final Offer (BAFO) FY2006 price settlement letter proposal to Aircelle on 11/14 August 2006 than we had all used in the Q2.2006 Estimate at Completion for the Q2.2006 quarterly accounts – see detail at (c ) CD2 extracts below.

Oral evidence from Mr Dekker on 10 June 2009 (p152+).

   
Judge Okay
Mr Dekker

That was the – that’s how I interpreted the rationalization for why that Q2 might not be an issue.

Mr Little

Obviously I don’t, sir.  This next but, though, is absolutely critical, because it goes exactly to that price escalation subject. If you go to document 698 and read 8.94 and 8.95, please. This again goes to my reasonable belief and I’ll endeavour to try and demonstrate why

Mr Lynch Page 698 and ?
Mr Little

7 and 8 and the paragraphs I’d like people to read are 8.93,94 and 95. (Pause)

extract from PwC report para 8.93-8.95 referred to above –

8.93  The material “BETA 21S” constitutes used  40,554 (or 23.2%) of the total cost of production per unit (USD174,840) that is projected for FY2007. The cost of this material is expected to increase at 10% annually, averaging USD 54,393 for FY2008 to FY2012.  This represents 30.7% of the future projected total cost of production per unit from FY2008 to FY2012.

8.94  The price escalation formula currently in effect (as per the SA dated 11 March 2005 between Aeronca, MAC and HH) directs that the total sales price for exhaust system units will increase by 0.31% for every 1% increase in the cost of Beta 21S.  In effect, MAC is protected for increases in the cost of Beta 21S, providing that the cost of Beta 21S per unit remains equivalent to or below 31% of the total cost of production per unit.

8.95  Given the volatility in the cost of Beta 21S (a titanium compound), there is a risk that in future years the cost of beta 21S could exceed 31% of the total cost of production. Indeed taking into account the existing assumptions in the EAC model , the cost of Beta 21S per unit would represent approximately 35% of the total cost of production per unit by FY2012.

Mr Little

The question here, Mr Dekker, is in the first few years because the BETA21 was a small proportion, 31% of the formula, there was a bigger jump in the gain that we got on the selling price, is that correct?

Mr Dekker  In the early part of the programme
Mr Little

I mean from 2005 to 2008, because the proportion of BETA21 materials cost was much less , 23% rather than the 31%, a big jump in that BETA21 price gave you a multiplied jump in your selling prices.

Mr Dekker I think I agree with you…
Judge So, because the material had simply increased it allowed you extra profit on the sales.
Mr Dekker  Contractually , but the customer was denying that , yes that’s correct
Mr Little So when you go to arbitration, you get a big jump and the argument becomes , that’s not justifiable. But it’s also true Mr Dekker and this is the second part of the question, that once you go beyond the 31% , i.e from 2010 onwards , it’s actually then starting to reduce your recovery……interrupts
Mr Dekker But you get the compound of each year on the base, I mean the base increases , and you get your incremental mark up each year, you do the price escalation calculation , based on prices quoted at the end of the year.
Judge  Your evidence is that the price was going to keep increasing and your profit on it was going to keep increasing
Mr Little  Are you suggesting, then , that PwC in Para 8.95, and what they say as a conclusion impact on 8.94, is therefore  incorrect?    (Pause , Pause)
Mr Dekker  I’m not sure I’ve developed a view on that. I’d have to look at it a little more closely, I  had not thought of it in that light.

I reflected this in my discussion with Mr Neill on 8 August 2006 as per his evidence (p436)

Mr Stafford He said to you – there was an arbitration going on regarding the way the price increase worked. He said even if arbitration goes in our favour – still have to write down some of our profits
Mr Neill Agree that he discussed the write down of profits ………….I said that the anticipated sales – there is absolutely no question we would cover all of the costs.  PwC go into this.  We looked at this very seriously – before we came to that conclusion
   
and which was dealt with in 10 June 2009 evidence from Mr Dekker (p156)
   
Mr  Little

When we spoke on the telephone on 14 September, this was a part of what I was discussing with you, about the arbitration and needing to discuss further next week?

Mr Lynch It must be a question
Mr Little

Yes it is , sorry, do you recall this was an element in the discussion that we were having about the arbitration and the BETA pricing and how it was working for us but then going to go against us and the arbitration issue about what the letter of the law was, do you remember that discussion.

Mr Dekker I do not remember that discussion at all, no, not that aspect of the discussion
Mr Little Do you remember the discussion about the arbitration and the issues around what the implications for that would be at all, around pricing?
Mr Dekker I’m having great difficulty remembering very much about that call (29 minutes) at this stage ,   unfortunately, I’ve put much of it out of my mind.>

<BL Observation – As Mr Dekker did not attend the MAC weekly staff meeting teleconference on Tuesday 12 September 2006 I discussed Mr Butyniec’s BAFO settlement pricing offer dated 11/14 August 2006 letter (which he had approved and was below the Q2.2006 EAC) and exactly this final evidence/PwC 8.93-8.95 point as part of my Protected Disclosure (PD24) with Mr Dekker in our telecom on 14 September 2006. It was at this juncture when Mr Dekker indicated he would have terminate our 29 minute call as he had other matters to attend to – I believe a meeting within Head Office with Mr Neill for their preparations for a bank meeting next day?.   Effectively I had told Mr Dekker that when we pursue arbitration (which both I and Mr Furbay advocated again at the MAC staff meeting on 12 September 2006 – Mr Dekker and Mr Butyniec ( who was at Haley and, as Mr Neill described to the meeting, “we had another bad week for deliveries and our customer Pratt and Whitney Canada is ballistic” were not there – and those present, including Mr Edwards, agreed that we now needed to “start the wheels turning” on an arbitration process) we had to be mindful that whilst in my view Magellan would very likely secure higher initial pricing for 2006 – 2009/2010? (than Mr Butyniec had proposed in his 11/14 August 2006 BAFO settlement letter to Aircelle -see (c ) CD2 extracts below) BUT that after this 0.31 BETA21 fixed point in the existing application of this escalation formula that higher initial pricing from FY2006 success would start to work against us in future years in reduced profits and contribution and when combined with the production volumes reduction in my Airbus Toulouse discussions  would now inevitably mean a substantial write-down in Magellan’s Balance Sheet.  We needed to properly handle that next week in our strategy / Head Office discussions and in Q3/2006 financial reporting and certainly by Q4.2006. To demonstrate this Deloittes LLP and I have subsequently set out the impact of this Higher pricing by $50K+ ea over FY2005 (with Top price scenario of $218148 ea/Q4.2005 EAC for FY2006 price and 0.31 BETA21S ceiling) in a number of slides within this Excel workbook -  which Mr Dekker was also sent.>

   

Exhibit 8.2

Schedule from Airbus website entitled "Orders, Deliveries, Operators - Worldwide dated 31 January 2007 (UK document 2813 - 2817) (PDF) - 153 aircraft sales orders

<BL: Including Emirates - 18  A340 600 a/c (ordered 2003) and Air Canada 3 A340 600 a/c (ordered 1998)  -  which were effectively cancelled and which was well known within the aerospace industry and on multiple websites.   As subscribers to the annual A340 Teal report PwC would also have read Richard Aboulafia’s remarks in April 2007  re Emirates “Whilst Airbus’s published order book still has them as firm orders, they have been cancelled. Those three Air Canada orders should probably be removed, too.”  Furthermore this was also stated in the Forecast International A340 external market report included in Significant News “Emirates Cancels Order for 18 A340’s”  - as {3612} /PwC provided, without comment, in their reports at Exhibit 8.4 below. 

PwC are also both airlines public auditors. Therefore this information was known to PwC and in any event publicly available in their Annual Reports from mid 2006/early 2007  - in the Emirates Annual Report:doc {3604A/B} and Air Canada Annual Report:doc {3605C/E} . Also note that Air Canada was and is audited by the PwC Montreal office from the same location as the PwC staff (Ms Leblanc and Mr Moore) who carried out the A340 “forensic investigation”.   I also understand that PwC were the public auditors of Aerolineas Argentinas (Marsans Group) who had a further 6 A340 600 a/c (ordered 1998) on “indefinite hold” with Airbus since FY2000, and which were also formally cancelled before the Final PwC report was provided at the end of August 2007.

And to put this “Airbus Order Book” matter beyond any doubt, PwC (and E&Y) were provided by me with the letters and DIR files sent to each MAC Director.   With the 4 December 2006 letter to each MAC Director a dossier which contained DIR44 – UK Times article – 28 October 2006 “End looms for Airbus A340 as Emirates cancels $4bn orders” {2642/2643} was included.  These files were also provided to E&Y Canada and UK, whilst Ms Hadfield of E&Y UK confirmed to us in our meeting on 7 December 2006 that she had also read that UK Times article a month earlier.   I also referred to the Emirates A340 600 cancellation in my 29 January 2007 taped interview with PwC at the outset of their “investigation”.  

PwC refer to none of this in their C$3m Report.>

   
Exhibit 8.3

Estimated Average Cost to Completion (EAC) prepared by MAC for the periods ended Q4.2006, Q2 FY2006 and Q4 FY2005  {1831/1831A, 1830/1830A, 1829}

<BL: The Q2/2006 EAC showed a Gross loss of $5.220m and by the Q4.2006 EAC had been uplifted to a miniscule Gross Profit of $0.137m for >$185m in future revenues . Crucially there was an addition to the PwC Final Report in August 2007 at para 8.61 {691}
“The Q4 FY2006 EAC was also used by EY for year-end audit testing purposes.”>

That move from a Gross Loss of $5.220m at Q2 is analysed by PwC at para 8.62 - in an increase in revenues in Q4.2006 by $8.47M over the life of the programme.  PwC para 8.62(b) {692}, in referring to the Table at 8.62, and the increase in revenues to $8470K states thatThe increased revenue for the remainder of the programme was due to management’s assertion that a higher percentage of future sales will be generated in later years, when MAC can expect to benefit from the impact of compound price escalation. This has the impact of increasing the weighted average future sales price. This also meant that unit sales in the immediate future (2007) are projected to be lower……..”

8.3 Part A :   Oral evidence from Mr Dekker on 10 June 2009 (p149+)

Mr Little Is it also correct , Mr Dekker , and we need to go to a schedule here on pricing, quickly, document 692B………   PwC report Paragraph 8.62B, I’d like you just to read that   (Pause)  ………..average future sales price. This also meant that unit sales in the immediate future (2007) are projected to be lower……..”
   
 

It says management asserts future sales, whatever, there’s no reference to any change in assumptions and selling price, when it’s worth $6m - $7m, based on the figures I was given this morning {1830A) …  Pause

Mr Dekker That would certainly be an interpretation of what they’re saying.
Mr Little For fear of making a comment, and consulting speak, when I say management assertion, that’s what they were being told. Can you confirm that there was a change in the selling price assumptions made between Q2 and Q4?
Mr Dekker There’s evidence in the bundle, we have two different schedules that show the breakout  for the Q2.2006 and Q4.2006 numbers that the selling price for each quarter was different, the Q2 price was lower than Q4.
Judge  

It doesn’t look as if they’ve brought that into the equation in terms of the report?

Mr Dekker They certainly haven’t documented it in that fashion.
Mr Little

And that’s substantive in terms of reasonable belief, the documents are 1830A...interrupts

Judge  You say it’s important in terms of reasonable belief. Are you asserting that you had no expectation of price increases.
Mr Little Yes , the critical issue here, is that the ultimate driver of that price range was the materials escalation on BETA21 and I'm going to go into that and explain why I have no expectation of that , in my witness statement there was quite a bit of work done before arbitration on the pricing, also , critically...
Judge You were aware of the pricing, the hope, expectation of price increasing from that source/ the arbitration?
Mr Little  Yes .......... <but critically see Exhibit 8.1 :peaking/reducing contribution/profit>
Judge  But not, of course, Dr Thamburaj’s .. 
Mr Little No, that was March 2007 <which is the Exhibit 8.5 information>
Judge Yes

(p151)

Mr Dekker  Just as a matter of comment on the question that was raised about paragraph 8.62B, when I read that with a different interpretation than what is being suggested here, which could also be an interpretation
Judge How did you read it?
Mr Dekker When I looked at that, I took it within the context of the next section, which is the number of units, where they’ve rationalized that we will be providing spares and repair units the future , and if you look at 2012 as you last year of deliveries, your price is frozen at the  2012 level, but if those units actually bleed out into future years, you would get a 5 and 6 percent price lift each year as you roll out , compounded so  an unit that might have been sold at 2020 and the price may be $40,000 or $50,000 higher, exponentially, it could be higher , which would give a higher revenue base, that’s how I read that paragraph.


<which is rubbish as you can read as it specifically sets out to explain the 8.62 (b) table and the $8470K  and documents the Management assertion – presumably now from  Mr Dekker? – for the increase in FY2007 – FY2012 revenues (8470K) between the Q2 and Q4.2006 EAC’s – more deceit and cover-up and then does not mention that the contribution / profits will peak and then fall _ see Exhibit 8.1>


Judge Okay
Mr Dekker That was the – that’s how I interpreted the rationalization for why that Q2 might not be an issue.

 

<BL observation    The schedule referred to in the oral evidence that 10 June 2009 morning (Q2.2006.doc 1830A, after I had completed my own evidence in March 2009) allowed me to confirm what we instinctively and numerically knew (now factually precisely), which was that PwC had the basic information AND document readily available to enable them to FULLY recognise that management were being “untruthful”,  as reported by PwC in their assertion, at para 8.62b above.  Aside from the obvious fact that PRICING was overwhelmingly the primary reason for the  “move to a positive gross profit” in the Q4.2006 EAC  the reader should bear in mind that these are reputedly “forensic” accountants and naturally would themselves know (for a logical and numerically trained specialist person),that the “management assertion” (Mr Dekker?) which they reported at Para 8.62 was untrue. 

It is insightful to also know that to those with forensic knowledge and experience when a remark “management asserts” is written in that way in such a Report it is “consulting-speak-code” for the writers understanding (PwC) that the assertion is wrong and they already have access to multiple pieces of information to conclude  that. That was and is our view.  In the A340 Section 8 PwC report PwC refer on two occasions to this “consulting-speak-code” Management asserts” – in PwC para 8.62b pricing comparisons between Q2.2006 and Q4.2006 (i.e as set out above) and then again from Mr Neill , in PwC para  8.72 – “ Furthermore, management asserts that the requirement for spare units will support and exceed the total number of units projected in the EAC. “  I return to this later in the website and A340 Report.

My A340 Report only addresses one of four pricing concerns (Q2.2006 – Q4.2006 Revenue increases of $8.47m – see Exhibit 8.3 below) and one of three costing concerns  (the implications of the 0.31 ceiling for BETA21S in the escalation formula/settlement agreement) and PwC report paragraphs 8.93-8.95 = {697} -  short extract follows. Also on pricing the reader should note that the Magellan Canada team had accepted a lower base in Mr Butyniec’s Best and Final Offer (BAFO) FY2006 price settlement letter proposal to Aircelle on 11/14 August 2006 than we had all used in the Q2.2006 Estimate at Completion for the Q2.2006 quarterly accounts – see detail at (c ) CD2 extracts below.

In fact on PRICING when we had this data it took just a few  minutes to produce the Excel spreadsheet WB1A.Q2.Q4 revenues comparing the changes in revenues and their reasons to demonstrate the precise pricing numbers and Revenues impact from Q2 to Q4.2006. As the reader can see in this spreadsheet $761K (ONLY 9%) of the $8470K increase in the A340 EAC revenues from Q2. to Q4. 2006 were attributable to the management assertion of a deferral in the schedule to later delivery years.   

Additionally the A340-500/600 pricing calculations made for the Q4.2006 EAC themselves were WRONG, when documented by PwC at para 8.79 -  obviously multiple numeracy errors as above the stated 10% BETA21 cost increase assumption by some $4.4m in unsubstantiated revenues.     Indeed it would have been self-evident to a numerate accountant in looking at the escalation formula (Appendix V1) together with the stated identical % cost assumptions for each year from FY2007 that the table prepared by Aeronca and reported by PwC at para 8.79 for year – on –year price increases of 6.4% to 5.4% could not have been mathematically correct – it should have reflected a consistent circa 3.9% increase per year from the FY2006 assumed price in the EAC. Furthermore there was no justification for the Q4.2006 + 10% BETA21S materials cost assumption, in the form of procurement documentation ex TIMET, sought by PwC for inclusion in their Report. 

Crucially, of course, Mr Dekker, Mr Neill and the MAC Audit Committee and all the MAC Board had the opportunity to “correct” any of these “findings of fact” in the PwC report and the management “assertion” when they read the Final Draft Report from April-August 2007.  THEY DID NOT.  We were denied that input by Mr Dimma / TORYS LLP – see evidence at Exhibit 8.3C below.   

The reader will already have noted that it was the impact of this MAC inflated pricing in Q4.2006 by more than the MAC-assumed +10% in their escalation formula which “enabled an outcome” of a $137k gross profit in the submitted Q4.2006 EAC to E&Y/PwC. Furthermore, neither Magellan senior management nor PwC provided any documentary evidence ( and in my experience could not)  in these Document Exhibits on future materials quote pricing to justify the change in materials pricing assumptions (particularly on BETA21S from TIMET)  used in the EACs between Q2.2006 and the inflated Q4.2006.  Given the centrality and materiality of this change in moving the EAC from a C$5.5M loss in Q2.2006 to a C$137K profit over the life of the contract in Q4.2006 this would be a natural change to have been investigated for documentary evidence by E&Y (as part of their audit testing) and PwC (as part of their forensic investigation”)  to sustain any credible professional opinion.

These are just some of the examples in the body of evidence which leads to my conclusion of PwC “forensic deceit”. 

Furthermore, as the reader will also have noted the Respondents UK legal team challenge my “reasonable belief” as at August/September 2006 by reliance on PwC ---   yet PwC do NOT deal with “my reasonable belief” at all.   In fact PwC record that they reviewed some 2000 GB of data and 21,500 documents (para 3.10) but nowhere do they mention or Exhibit Mr Butyniec’s 11/14 August 2006 BAFO settlement offer (and its written approval by Mr Edwards and Mr Dekker) which contained a pricing counter-offer on behalf of MAC which was LOWER than that contained in the Q2.2006 EAC etc etc Both Mr Edwards and Mr Dekker pointed in their oral evidence to the EAC being “the most reasoned view and most likely outcome”  based on quantities , pricing and costs – See Dekker Part D Exhibit 8.3 Part B below.   If that is so then their written approval and acceptance of Mr Butyniec’s 11/14 August 2006 BAFO pricing to Aircelle, in relation to the Q2.2006 EAC pricing, is clearly relevant to “my reasonable belief in August/September 2006” and what they were prepared to accept.   Although these documents were readily available to PwC from multiple sources, during their own searches on the MAC servers and the laptops, my UK solicitors also provided all of them on CD2, after the supply of a forensic copy of my PC files in mid April 2007, directly to PwC.

For completeness , COSTS – throughout my attendance at the FY2006 MAC weekly staff meetings which Mr Edwards attended (e.g 25 April 2006, 1 Aug. 2006, 15 Aug. 2006-2021, 12 Sept. 2006-2179) we discussed on multiple occasions that Mr Butyniec and we were failing to meet our operational budget/EAC targets in FY2006 in the factories. Unsurprisingly therefore following an examination of the 2006 costs and Q4.2006 EAC PwC record their analysis of further increases in cost for FY 2007 and subsequently in (para 8.62 (c ) “The increased costs for the remainder of the programme result from increased investment in tooling and development initiatives ( approximately USD940,000) aimed at reducing the unit costs of production and the application of a higher overhead absorption percentage (approximately USD1,860,000).”

In the Table prepared by PwC at para 8.62 (c ) showing that $2,734k increase in costs over the Q2.2006 EAC PwC should also have properly adjusted for the costs of the 843 (in Q2.2006 EAC) versus the 833 projected delivery of units in the Q4.2006 EAC.  Had that adjustment been recorded then this would have further increased the PwC projected costs of $2,734K over the Q2.2006 EAC by approx $1,700K to an increased costs total of circa $4.5m over the Q2.2006 EAC from January 2007/FY2007 for the remaining 833 units represented by MAC for delivery by FY2012.>

Part B : Oral evidence from Mr Dekker on 10 June 2009. (p133+)

Judge

If the Q4 2006 EAC had continued with the underlying gross loss of 5.22 million <as per the Q2.2006 EAC> and the further £2.734 million costs increase by Q4 2006 had been recorded at circa $10 million loss, would MAC senior officers have recorded from that EAC a circa $10 million plus loss in Q4 2006 earnings and then stated that in the FY 2006 published accounts?

Mr Dekker Yes.
Mr Little  Right
Mr Dekker But --
Judge  But --
Mr Lynch  Yes, please.
Mr Dekker  But it's based on a lot of presumptions.
Judge Right.
Mr Dekker The final question is, would we post the accounts correctly, of course we would, if that was truly a loss we would post the accounts correctly and record a loss.
Mr Little Can I just clarify something now, if we just look at document 1831 in the bundle, what you're saying, John, then, is, and this is for everybody else, if the number do you know here, $137172, which is the very bottom of the sheet, marked D, I think, sir.
Judge Yes….. we have it
Mr Little So, Mr Dekker, if D was minus $10 million,I think you've just told the tribunal that you would then be posting 10 million loss to the accounts?
Mr Dekker If you're asking me if this schedule generated the number of minus 10 million in the bottom of the programme total, would we record it that way, no.  Not solely on the basis of this schedule.  This schedule is an estimate at complete, and each quarter we do various scenarios of this schedule, there are three major variables that affect the outcome of this schedule, sorry to bring it to such basic levels, but it's number of units, times revenue per unit, and the cost.  If our best view, our -- let me identify best, our most reasoned view and most likely outcomeshowed a 10 million loss, yes, we would post that loss. Each of those three variables has a habit of changing on us. And as such, this schedule will change each time we do it.  We also have uncertainty about the future, so our view as to what's going to happen into the future will also affect how this schedule is completed.
Mr Little But the core question is, if as a result of doing all of that, that number became minus 10 million, would you be posting minus 10 million to the accounts? (BL : Note also the relevance to the Q2.2006 A340-500/600  EAC of ($5.2m) etc etc)
Mr Dekker If our best view, our -- let me identify best, our most reasoned view and most likely outcome showed a 10 million loss, yes, we would post that loss.
Mr Little And it is correct, Mr Dekker, that this document is the primary document which Ernst & Young would use in their audit process?
Mr Dekker We would give them this document in the audit process, plus the supporting detail, I can't say that this is the primary document but I have to believe it's one of the key ones.
Mr Little  Right, and in the audit testing processes, which we're both familiar with, in terms of the primary part of their job, for want of a better word, that's what this Excel work sheet will become, and its backing paper, what they use to do their calculations of mathematics on.
Mr Dekker I believe so, I'm not present at each of the business units when the auditors are in but certainly that would be a logical assumption, I would expect nothing different.
Mr Little Right, and sir, just for factual record, in the final report at paragraph 8.61, PwC, it confirms that this was the document used for year end audit testing purposes.

Mr Dekker 10 June 2009 (p138+)

Mr Little When did you do your review with Mr Furbay and check the A340 schedule to make sure the units and revenues were correct to the best information at the available time before the EAC was given to Ernst & Young?  Do you want me to do that again?
Mr Dekker

I’m trying to understand which time frame you’re talking about.

Mr Little This is for 2006, Q2, and the same again—sorry, you’re right   Q2.2006  and also for Q4.2006
Mr Dekker Okay
Mr Little I should have been explicit
Mr Dekker We would have --  we do EACs , or estimates at completes, on a monthly basis, throughout the year, and will constantly be assessing the impact of adjusting any one of the three variables <quantities, prices and costs> to see if there’s an impact on the bottom line.  So the EAC or the estimate at complete for June 30 2006 in outline would have been completed some time in July 2006.  And the estimate at complete, at the year end, is done more thoroughly, to ensure that we have adequate documentation for the auditors as well, and that would have been prepared throughout January, February and timeframe in 2007.
Mr Little And you would do that review directly with Mr Furbay at some point in that , roughly that calendar period yourself, given the size of the project  <A340 largest project – C$44+m >
Mr Dekker I would ---  the review that I participate in is not at the basic level, we have a summary level, we would receive the EAC, and essentially look for net changes and reassure ourselves that there has not been anything significant that has changed in the instance, for year end , Mr Neill became actively involved , as we’re all aware, in the quantities question, and looking at spares and repairs in particular.
Mr Little Could we turn now to document 1830, which is the quarter 2 2006 EAC.  Quarter 2.  That’s volume 5. The bottom of this it’s showing a loss of $5.2m
Mr Dekker That’s correct
Mr Little Okay, and obviously that was assessed and reviewed at the end of quarter two , that was not posted as a change in quarter two, in terms of losses, was it?
Mr Dekker Okay.  Go ahead
Mr Little So ought it to have been, or what would be the reason as to why it wasn’t.
Mr Dekker

Well, the reason is, as I laid out earlier, <in website part C:  Exhibit 8.3 – B  or pages  133-136> each, periodically , we will assess the individual variables to see what happens to the results, should certain events occur, we were in the midst of price negotiations with our customer, at that point in time, while there was a contract in place that gave us reasonable certainty of the prices we should receive , under the terms of the contract, the customer was resisting price increases

<but contradicted by final counter offer from Magellan/ Mr Dekker on 12 August 2006 for lower prices than in Q2.2006 EAC only worsening the A340 gross losses to MORE than $5.2M and before the stock market release of the Q2.2006 financial results> 

and again, when PricewaterhouseCoopers came in to review the information we just opened the books, and they took one of our “what if scenarios” which is what this was, what if we don’t get the price uplift, and of course, we showed them everything we had, and they then queried this particular document <Q2.2006 EAC.1830>.  And then , of course we had to explain to them why we didn’t make the adjustment , and they were content with that explanation.
Mr Little None of that is covered in the PwC report, what you’ve just said in your evidence, is it?
Mr Dekker Well, again, I didn’t control the PwC report, and I didn’t control the document flow to them.  So I can’t take any ownership of any of the…  interrupts
Judge No
Mr Little

You recognise it was this document that gave rise to part of my conversation with Mr Neill on the 8th and the certification on the 9Th

Mr Dekker Sorry, the 8th of what?
Mr Little August, sorry 8th August <2006>
   

Mr Dekker 10 June 2009  (p145)

Judge For pricing?
Mr Dekker Yes, in particular, when we were in the midst of the negotiation, and if you look at one of the two schedules, 1830, which is the June cost to complete  those the $5.2m loss, and the 1831, which was the December 31 2006, that showed close to break even, these were taking into consideration some flexing that might occur – the price was reflected, flexed to look at different outcomes.
   

<which is rubbish as the only Q2.2006 EAC (1830)was compiled by Mr Furbay and was grounded on the discussions and written notes etc. with Aircelle at the end of June 2006. In fact the final counter offer sent by Mr Butyniec on 12- 14 August 2006 (with the written approval of Mr Dekker and Mr Edwards)  was proposing prices which were lower than those in the Q2.2006 EAC and would have worsened the $5.2 gross losses reported in the Q2.2006 EAC – more cover-up and deceit>

   
Mr Little The one used for the audit testing was the worst position, the pessimistic, you had to be above the zero at d to be okay for them, although you looked at the better positions, the one they used for audit testing was the pessimistic one?
Mr Dekker

Sure, you’d push as hard as you could, and as long as you were more than break-even there would not be a provision required.    Subsequently, the pricing was agreed with Aircelle, and the lift was beyond that we had anticipated in these schedules, so that gave us more head room, moving forward.  <but read Exhibit 8.1 evidence and the counter-offer from MAC on 12/14 Aug 2006 for lower prices than Q2.06 EAC to settle >

 

<BL Observation 1 from oral evidence above

Mr Dekker             “…..  This schedule is an estimate at complete, and each quarter we do various scenarios of this schedule, there are three major variables that affect the outcome of this schedule, sorry to bring it to such basic levels, but it's number of units, times revenue per unit, and the cost………..  If our best view, our -- let me identify best, our most reasoned view and most likely outcome showed a 10 million loss, yes, we would post that loss.

It is neither rational nor credible that in the face of the following contemporaneous documented facts  that, in short,  Mr Neill and Mr Dekker had any legitimate basis for making a decision through “Management override”  to move to an undocumented “A340 -500/600 EAC program break-even” as, to quote Mr Dekker above, the “most reasoned view and most likely outcome”. 

(1)

Number of units  :  production volumes were reducing in the near term – FY2007 - FY2009 , a A350-1000 XWB product had just been announced by Airbus in July 2006 at the Farnborough Airshow, (with no A340-500/600 orders) which would effectively mean the end of the A340-500/600 product life/series production was now certain within five years.  (Mr Vandersteen of Airbus UK – recorded - A340 600 “Trashed”). With these facts and my Protected Disclosures on 8/9/10 August 2006 (PD22&PD23) how could Mr,Neill, Mr Dekker and MAC rationally and reasonably believe that it was appropriate simply to defer the A340-500/600 volumes and revenues in to later years so as to still complete the amortization quantity (843 units) by the end of the current Aircelle commercial contract in FY2012?  What is equally revealing is Mr Neill’s commentary on 15 August 2006 during the Q2.2006 earnings webcast –pages 1 & 2  after my A340.PD22 and PD23 but before my termination) in which he set out his perspective in what we heard /can read on the Boeing success – “In Boeing’s case  -- different story. The story of the quarter was the strength of the order book for the Boeing 787 that built through that period but also for the Boeing 777 as well. Boeing won the bulk of the orders for twin-aisle airplanes and had, for the first time, some success that they could boast about.  We saw that at the Farnborough Airshow.”

 

 

(2)

Prices per unit      :  Mr Edwards (12 Aug) and Mr Dekker (11 Aug)  had just approved Mr Butyniec’s BAFO for settlement with Aircelle on 11/14 August 2006 which had LOWER pricing (e.g. $179,623 in FY2006)  than in our Q2.2006 EAC ($181,170 in FY2006) and which would lead to a reduction in revenues of $5.2m - $8.9m and further increase the $5.2m gross losses. If internally Magellan were satisfied with this documented BAFO pricing settlement for A340 - and Aircelle had indeed accepted this Magellan final offer - how could Mr Dekker and Mr Neill rationally and reasonably believe that this lower pricing would have more than set off the A340-500/600 $5.2m gross losses in our Q2.2006 EAC document and was in the best interests of non-management MAC ordinary shareholders.< Read here my analysis on A340 management assertion on pricing/revenues at Q4.2006>

 

 

(3)

Costs per Unit      :   By that August 2006 re Q2.2006 we faced actual costs on A340 which were escalating further and further away from our FY2006 Budget/Program EAC. Throughout my attendance at the FY2006 MAC weekly staff meetings which Mr Edwards attended (e.g 25 April 2006, 1 Aug. 2006, 15 Aug. 2006-2021, 12 Sept. 2006-2179 we discussed on multiple occasions that Mr Butyniec and we were failing to meet our operational budget/EAC targets in FY2006 in the factories. Why would those documented cost facts not have led anyone to the view within Magellan that our A340 gross losses would be reduced and not increase further beyond the $5.2m gross losses in our Q2.2006 EAC document. <Also by the Q4.2006 EAC the costs had risen by C$2734K>


This Neill/Dekker Management over-ride”  decision of “zero losses” was then published in the Q2.2006 earnings statement on 14 August 2006 to the TSE etc and in subsequent financial statements.   Which themselves were then certified in Mr Neill’s Q2.2006 and Mr Dekker’s Q2.2006 quarterly certificates when publicly filed with SEDAR – public securities documents within Canada. 

 

On the basis of the late July - mid August 2006 contemporary information and documentation available the “diametric opposite” was the case – the documented A340 Program Q2.2006 EAC $5.2m gross losses were set to deteriorate based on the available information.

The MAC Audit Committee minutes on 10 August 2006 (which I did not attend) for that Q2.2006 meeting also record at Point 5 in the Private Session with Ernst & Young “ .. that Mr Linsdell of E&Y had …”only received the financial statements and the MD&A at the meeting”.

PwC correctly recorded in the Final Draft report at para 8.61 that “Brian Little stated in the E&Y presentation that his concerns regarding the treatment of the A340 NRC were raised following Q2.2006.” and as you can hear on the audio tapes (Tape recording - Part 1 (16 minutes) and then Part 2 (7 minutes) ) I stated “And the fundamental issue here, which we have to come to terms with, is that this product is a product that has not only got a cost/price problem but it’s now also got a programme volume one!

<BL Observation 2: as per this oral evidence there was an addition to the PwC Final Report in August 2007 at para 8.61 {691} which stated that E&Y $137K gross profit assessment / representation reliance –   The Q4 FY2006 EAC was also used by EY for year-end audit testing purposes.”  The Estimate at Completion (EAC) process/documents are the MAC management  “most reasoned view and likely outcome – oral evidence :Dekker”  and showed in this Q4.2006 EAC submission to the auditors E&Y and PwC an improvement over Q2.2006 to a miniscule  $0.1m gross profit on $250m program revenues

Mr Dekker also disclosed in May, June and August 2009 doc 1830A,1831A and the 3605 document series (3605A, 3605B-G – 1 March 2007 , 3605H  - 14 March 2007 in Part C - - - NONE of which appear or were mentioned in the PwC report) which had been provided to both E&Y and PwC in March 2007 as one of the key Representation documents in which he asserted–

 “At a glance the assessment that would have been carried out by the auditors in order to satisfy themselves that the accounting on this matter was appropriate

Separately Deloittes and I have produced working schedules which extended this “At a Glance” for the A340 Program Q2.2006 and Q4.2006 EAC together with the underpinning numeric Quantity/Number of Units and prices analyses & stated cost assumptions which enabled an overall A340 financial summary/outcomes.

8.3 Part C ; oral evidence from Mr Bill Dimma (Chair : MAC Audit Committee)  4 June 2008

Mr Little Was I asked to make amendments about factual accuracy?   Vol 8/3002  Sent by independent lawyers working for the Audit Committee. I asked to make comments as I had been advised to do so by Deloitte. I asked if I could be invited to comment on the factual accuracy – it was denied
Mr Dimma You met with PwC during the investigation?
Mr Little  These are specific questions I asked if I could make comments. This opportunity was denied.
Mr Dimma In the view of the Audit Committee, PwC is a reputable audit firm, a first class UK forensic accountancy team, capable of getting all the facts for a sound report. They did so. There was no need for other parties comments.
Mr Little Why allow the Magellan management to comment on that PwC report and not me? It now takes longer for me to bring up factual issues.
Judge You don’t have to. Not sure Mr Dimma can help on factual issues. Try a couple.
Mr Little Major concerns about A340, C$40m plus on Magellan balance sheet               (True and Fair View)
Mr Dimma Yes
Mr Little Significant challenge to inventory value, significant impact on future asset value and cash recoveries
Mr Dimma  Yes
Mr Little EAC – estimate at completion document – did the Audit Committee look at this regularly?
Mr Dimma  Yes
Mr Little  I raised the issue about this in Q2.2006
Mr Dimma Yes
Mr Little Vol 5 /1830  A340 Estimate at Completion  June 2006   Q2.2006
Mr Dimma Yes
Mr Little Gross profit / loss was a  $ 5m+ loss
Mr Dimma Yes, I see the number
Mr Little That didn’t appear in the accounts at Q2 when reviewing the certification documents. I put a note on 9 August 2006; Please discuss A340, Boeing Systems integrator kits.  I had a discussion on my return on 8 August about that.  Did Mr Neill tell you I had that discussion?
Mr Dimma I would like to make a general comment before going into this level of detail
Judge Are you struggling to answer?
Mr Dimma The Audit Committee looks at things from a different level of detail. We looked very, very carefully at the draft and final PwC report, but we didn’t get into the exquisite level of detail that Mr Little is now pursuing and Mr Dekker would have been involved with.
Judge Once you received the PwC report, the Audit Committee looked at it but didn’t investigate the factual issues on which the conclusions were based?
Mr Dimma The Audit Committee read the report, discussed it, but focused principally on the conclusions and no exquisite details at the bottom of the numbers
Judge I’m not sure you’ll get more than that?

< BL Observation  : 

Point 1 : You will note above that Mr Dimma gave sworn evidence that the MAC Audit Committee looked at the major program EAC’s regularly. As one would reasonably expect they ought to as part of their MAC Audit Committee governance.  Mr Dimma recognised that I raised this during and after Q2.2006 in his oral evidence above and yet during the period of Mr Dimma’s alleged “internal investigation” (in October/November 2006) PwC report (para 8.58) that NO A340 program EAC was produced by Magellan for Q3.2006. I think that an “informed” reader would also agree that reviewing and considering the “reasoned view and most likely outcome” involving the assumed quantitities, pricing and costs in the largest program EAC / Balance Sheet item in Magellan would be a basic foundation of any Audit Committee member assessment  AND NOT the “exquisite level of detail” to which Mr Dimma unjustifiably refers to in his evidence. Indeed as you can read in the final parts of his oral evidence he relies on Mr Dekker.  Of course Mr Dimma having himself concluded in his “investigation” in late 2006 that he had no concerns about the matters I raised then proceeds to consciously and deliberately chair an “independent” ? review by PwC from January to August 2007. Furthermore I wrote to Mr Dimma (and Mr Edwards) in September 2007 setting out a few illustrative examples on A340 outlining my concerns over the PwC “findings of fact”.   The reader can draw their own conclusions from all the various evidence on PwC’s  and Mr Tracey’s probable “independence” in such circumstances.>

UPDATED JULY 2010 -  a further related example was included  in an email which I sent on 18 July 2010 to Mr Dimma when I asked him at Q.2 on A340

QUESTION 2 :   To your knowledge was Mr Butyniec’s 11 /14 August 2006 BAFO settlement pricing proposal discussed and/or approved by you or any other member of the MAC Audit Committee or non executive Director?  Was its proposed pricing settlement implications with regard to the A340 unit pricing that had been used by all of us in the Q2.2006 A340 EAC explained to any of you,   in relation to the $5.3m Gross loss etc?”

<This Butyniec FINAL counter-offer for settlement to Aircelle, which had the written approval of Mr Edwards and Mr Dekker after the MAC Board Meeting, would as you can see includes A340 pricing which was lower than that MAC had used in the Q2.2006 EAC and consequentially would mean even greater  Gross losses” than the $5.3m in the Q2.2006 EAC, but not publicly recorded>

Point 2 :  Separately I (with the working assistance of Deloittes)  replicated the Estimate at Completion (EAC)  financial modelling for various A340 scenarios.   The Summary Excel spreadsheet – 4242A.    Case 5F were the production and spares volumes used in our assessment with some higher pricing expected through arbitration.   Since then new Canadian inventories accounting standards on labour learning costs from Jan 2008 has allowed MAC to write off a further approx C$10m on the A340 -500/600 – the value of that as a cash deficiency for shareholders will of course remain unchanged.  

As at today from the documents/information available I believe the MAC Balance Sheet continues to be over-stated by in excess of C$10m on an equivalent basis, a “material” value in every sense of the accounting standards and reality. >

 

 

   

Exhibit 8.4

Report issued by Forecast International Inc. entitled "Airbus A340", dated April 2007 (UK document 3606 - 3616) (PDF)

<BL: Forecast international of the USA – PwC used this as the solitary A340 external market 10 year forecast report of the, at least, seven available.

Although MAC/Aeronca and Mr Neill responded to PwC Canada at Q4 (3598A) on 22 March 2007 that “We are unaware of other sources beyond Forecast International……” That response, at least for Mr Neill, was certainly not true. You will have read this already in his oral evidence in Part C above/restated below. Furthermore Mr Neill could not recall whether the documentary information on the Teal Reports was included in the “Data from other Publications file” he provided to PwC Canada.

Mr Neill’s oral evidence

Mr Stafford

The only trade estimates referred to by PwC – are Forecast international.  Did you provide Teal?

Mr Neill 

We gave everything we had to hand – included the plan for production. Did not include the International – I think it included Teal – but cannot recall.

Judge

Did you provide data from other publications?

Mr Neill

Yes>

The Teal Group A340 market forecasts reports were in fact already available to PwC. The  March /April 2007 Teal Group A340 external market forecast annual report (2998/9) was headed  “Dead Plane Flying  (April 2006 - Airbus’s Tragic Quadjet)  and was at least one of perhaps the other six “market consensus- 135 aircraft” forecasts available within PwC London for this forensic investigation.  I was totally unaware until late 2008 that these Teal Reports were already freely available within PwC via their annual subscription, throughout the entire 7-month period of the PwC Independent Forensic Investigation, to support exactly these types of audit/ investigatory work through their knowledge management processes for the global PwC firms.

I told PwC UK (587 and audio tape) on 29 January 2007 “ I suggest what you do is you get two or three analysts to give their view, probably the guy who is best in the market is TEAL group,  a guy called Richard Aboulafia , and everybody, all the others , may have different views but he is worth reading and getting.  It would cost you a couple of thousand dollars but he is usually not that far away from reality.    I think most people see it like this – this is the end of the line.”  

Although in common with all the other third party market forecasters Forecast International of the USA identified in its written April 2007 Forecast Rationale (3616) the four main decisions which had been made and would lead to a wind down in the A340 programme for an unknown reason (the author has since died) the HIGH CONFIDENCE numerical forecast was for 41 aircraft deliveries for 2007 – 2009.  
This 41 aircraft, in a precedent for third party aerospace market forecasters, was almost 30% HIGHER than the planned Airbus delivery plan for 2007 -2009 (doc 3600 = 32 a/c) provided to the Airbus supply base. Furthermore the Airbus planned production rate of approximately ten aircraft per year was obviously documented (doc 3600) and known to Mr Neill, Mr Butyniec (which he confirmed again in his oral evidence : see later in Part F) , Mr Dekker, MAC/MALUK, E&Y and PwC.

PwC could have had the external forecasts from Teal and the other five third party forecasters from mid 2006 to early 2007.  These were for a total production build of 130 -150   A340 -500/600 aircraft with a market consensus – excluding this Exhibit 8.4 from Forecast International – of 135 Aircraft>

 

   

Exhibit 8.5

Internal Engineering Report entitled "Durability analysis on Aircelle A340-500/600 Exhaust system by Dr Ray Thamburaj (Director at AMES) and accompanying email dated 14 March 2007 from Rich Neill to Stephen Moore (PwC) (UK document 3617 - 3624) (PDF)

PwC report para 8.72   “It is of note that the internal report (Dr Thamburaj) also makes reference to the requirement for repairs in its conclusion and not explicitly to the need for spares or replacement units. Management acknowledges the unpredictability of repair work and has appropriately chosen not to consider repairs in its EAC analysis. .. “                        

Separately I advised PwC on audiotape on 29 January 2007 (doc 586) “..there isn’t that many volumes of spares or production based on full spares” and then PwC recorded this in their report paragraph  8.5 as “… Brian Little explained to PwC that the allegation was mainly about production units since the volume for spare parts is not significant.”

Mr Neill oral evidence from 27 July 2009 P57+)

Judge  You are not asserting that there is a mandatory requirement --
Mr Neill Correct, correct.
Judge  Yes.
Mr Neill  It is an estimate of the service life that we use to make the forecast.
   
Mr Neill

Going back to the reports I referred to earlier, we had a damage tolerance report that said a hundred thousand hours is the design life, when they did the damage tolerance report they built into it a scatter range of 5, because the engine time between overhauls was 20 thousand hours and therefore the belief is that nozzles and plugs could start returning or needing repair from service from 20 thousand hours on, we thought 20 thousand hours was much too low a number to use for this calculation, and at the same time, given the amount of wear and tear that we knew that would occur, based on our experience, a hundred thousand hours was too great a number.  So we had as it were a floor and a ceiling.

We made the decision to base it on 40 thousand hours, based on the work that Dr Thamburaj did, that said that if any units are exposed to heavy use in a number of hot and high airports and marine environments, corrosive elements in the air, et cetera, et cetera, there's every likelihood that we'll start seeing heavy repairs from about 35 thousand hours on, and we chose the 40 thousand hours based on that fact, there was no other science behind the 40 thousand hours.

   
Mr Little Okay, can I try and go back to the mathematically and logically, if we go back to the  8.75.   This calculation here is predicated on a replacement at 40 thousand hours, is it or is it not?  That's the logic of PwC?
 
Mr Neill I would assume so but it doesn't actually say this --
 
Mr Little Just up to 8.74 --
Mr Neill  I would assume so.

This reference in evidence was that PwC had calculated, independently of MAC, an expected demand of 1572 spare and repair units, as set out in paragraph 8.75.  The number was based on some basic logic and maths errors – inflating potential revenues by perhaps $100m. As I stated in my witness statement as part of para 224.4  “… I considered the mathematical spares calculation included in the report to be at best, misguided.”

It was also not consistent with the much “lower spares numbers – “886” ” in a schedule provided by MAC on 14 March 2007 to PwC (doc 3605H). This MAC schedule representation was NOT mentioned or included amongst the 5 Exhibits (8.1-8.5) in either of the PwC reports.

 

Mr Neill oral evidence from 27 July 2009 (p121+)

Mr Neill  : I think you want me through the ... to show you that there was an error in the second line of their (PwC) calculations which would reduce the number, so on the basis of that's what they did, you've interpreted it that way and I would have to agree with you right now, but it still doesn't change the overall basis of the EAC, that we had more than the necessary 1250 or whatever the number was mentioned in this email to get all the amortization completed.
   
Mr Little : Rich, just so we're both on the same wavelength, the evidence you've given is that the table, you didn't correct, and both of us believe that it's probably wrong.  You've said independently in this email that you've done a calculation that suggests 800 units on a replacement basis on 40 thousand hours is what is in the EAC and what I'm saying is, if that is true and everything has changed at 40,000 hours, purely for spares, that would meet the 1247, which is your point, but it's only in that situation that everything is getting replaced at 40 thousand hours without exception. No repairs, nothing, straightforward replacement. That's what your emails are saying?
   
Mr Neill  : I think we're losing sight of the purpose of this email. At that point in time, PwC were trying to understand how the numbers stacked up to justify us getting more than 1247 units that had been used at that time in the EAC. I must admit I didn't go back and check in detail every calculation that followed that.  All I was saying was that if you took Dr Thamburaj's 40 thousand hours it would generate a significant number which, on top of the production, would easily exceed the 1247 numbers needed to amortize out the recurring costs.  That's what I was trying to say in the opening paragraph.  (of his email dated 29 March 2007 at document 3597)
Mr Little No, I'm suggesting to you you're lying, because that says to anybody, a replacement.  The calculation of 800 stacks together with that, it only makes sense in that context.  It can't mean anything else, and they then go off and say that's how they've done their calculations, but can't even get the maths right. (overspeaking)
Judge Wait, please. You're suggesting he's lied in the email?
Mr Little Yes, he's deliberately lied and given that impression.
Judge In the email.
Mr Little  In the email relating to the 800 and he then conditions --
Judge No….
Mr Lynch Wait.
Judge In the email, what you're suggesting is that he's lying to PwC.
Mr Little He's deliberately given the impression of that 40,000 hours replacement.
Judge  I hear what you say but I want to make a note of it.  I suggest that you are lying in the  email.  Not anywhere else, but in that email. That's what's been suggested to you, I think.  That that's a lie.
   

and Mr Lynch QC (Magellan Aerospace) counsel in his cross-examination of Mr Bobbi (8 June 2009) (with Mr Lynch QC interpretation and his client/MAC instructions re Mr Neill’s 29 March 2007 email –doc.3597-which is also consistent with 100% of a sample of ten readers in 2009 who also read Mr Neill’s 29 March 2007 email. They were a mixture of aerospace & non-aerospace people)

Mr Lynch

We have Mr Neill's email to Mr Moore of PricewaterhouseCoopers.  I know it’s a bit compressed in its typescript. Tribunal, of course there is a bigger version in the bundle, if that's a bit small to read.  (Pause). 

 

Mr Bobbi, you can see, can't you, looking at the two substantive paragraphs -- it actually is a feature of both those paragraphs -- that Mr Neill makes it expressly clear that Magellan is simply basing its calculations for accountancy purposes on spares or replacements, he's not included anything to do with repairs.

Mr Bobbi

That's right.

Mr Lynch

Good.    

 

 

Mr Lynch

…  But do you agree that it is certainly right that if Magellan sells a new unit, whether as part of a new aircraft or as a new replacement unit, a spare, then they would all count for EAC purposes?

Mr Bobbi 

Of course.

Mr Lynch

Right.  So it's plain, isn't it, that PwC did indeed examine and accepted, for accountancy purposes, the validity of incorporation of Dr Thamburaj's calculations, yes?

Mr Bobbi

That was the only information that they had.

Mr Lynch

Right.  And that information would indeed, because it related to lifespan, that information would  indeed provide the basis on which PwC could rightly conclude that indeed these would involve new units that would be sold, that's right, isn't it?

Mr Bobbi  

No, that's not.  Because a component has a "lifespan" does not mean necessarily it will be replaced by something new, it can be repaired.

 

 

Mr Lynch

Yes.  Well, no, I think the whole point is this, it's not, Dr Thamburaj's point was not a question that they will need repairs after that period, Dr Thamburaj's point was that around 40,000 flying hours was indeed the lifespan of the unit.  That after that, its lifespan was spent and should be replaced.  That was the point.

For information  :  Dr Thamburaj is the Manager of Advanced Engineering Services at MAC and was neither interviewed by PwC during their independent forensic investigation nor either member of the UK legal team.
Furthermore the MAC/Respondents’ UK solicitors (PinsentMasons) are  “On the record” stating 

in PinsentMasons letter extract dated 27 August 2009 In regard to the likely need for spare exhaust parts, the Respondents case has always been (and remains) that Dr Thamburaj’s work gave rise to a calculation of the likely life span of the parts. This allowed an estimate to be made as to the likely demand of such parts. Dr Thamburaj’s work concerned this and not some regulatory, mandatory requirement, that the parts be replaced after 40000 flying hours.  Indeed, Mr Neill made this expressly clear in his email to Mr Furbay at pages 3597/8  And then in PinsentMasons letter extract - 14 September 2009 – “As you well know, our view is that Magellan’s position on the likely, predicted need for spares (based on Dr Thamburaj’s research) is clear and consistent.”And then in PinsentMasons letter extract – 29 September 2009 “The Respondents’ views as to the need for potential spares and replacements has not changed”  And then in PinsentMasons letter extract  – 6 October 2009“That case is and was that Dr Thamburaj’s research allowed MAC to make commercial predictions as to the likely need for replacements.”   Given all the evidence and the continuing position stated in correspondence I wrote in an unprecedented action directly to Mr Lynch QC as a litigant-in-person on 30 September 2009  – see subject 2 on pages 5 – 10 and specifically the warning on page 8.

{BL Observation :

  1. Subsequent to the October 2009 Tribunal hearing (after Magellan’s legal team reluctantly agreed to disclose the complete contents of doc 3597/3598 at that tribunal hearing)  to disclose the PwC Questions and Magellan answers (Mssrs Furbay and Neill) document in late March 2007 (see doc 3597-3598/3598A-3598B) before the FY2006 Financial statements were published the reader will note Question 5 posed by PwC  “The engineering report prepared by Dr Thamburaj makes reference to repairs being required (not necessarily spares). What is management’s view on the distinction between spares and repairs and the implications for future revenues / costs? ….  etc.  PwC then proceed at PwC para 8.75 to falsely calculate a likely demand of 1572 Spares and Repairs by FY2021– see my A340 report and website parts D&E.

  2. Separately I would record - as per my witness statement - that the Magellan estimate of an average of 5000 flying hours per aircraft per year over the life of an A340 -500/600 is excessive.   Factually as at 31 December 2009 the total A340 500 aircraft had flown a cumulative  616K flying hours (66K flight cycles) and the A340 600 total fleet had flown  1841K flying hours  (217K flight cycles). In calendar year 2009 the combined fleet flew approximately 4200 flying hours per aircraft.}

 

 

Despite this being the single largest project MAC asset at >CS40m earlier I asked you to note that PwC at para 2.40 had stated

Financial Control within MAC and MALUK in relation to the areas we have examined is poor and needs to be improved: this is particularly acute given that MAC is a public company.
Examples of poor financial control that we identified during our work included at Point :

4.    Poor control over individual projects from an accounting perspective. Project sales volumes, revenues and costs are not reviewed with sufficient frequency or rigour.

and also while reading through the website, that the Magellan Aerospace Corporation Annual Report for FY2006 at page 14 states

"The Corporation relies on customers' delivery projections as well as external market forecasts to determine the number of units over which to amortize non-recurring costs. Should deliveries not reach the number projected, any unamortized balance that remains would then need to be charged to cost of revenues which could have a material adverse impact on the Corporation."

This is crucial as you can read and see in Figure 2 at Page 6 in the Canadian CICA document “CEO and CFO certification – Improving Transparency and Accountability” produced in 2004, to support the Canada Bill 198 provisions following Enron, where it shows that the Management Discussion and Analysis (MD&A) statements are an integral part of the quarterly certification process / law.

As the reader will have noted in the Exhibits above PricewaterhouseCoopers (PwC) in their seven month investigation and “independent forensic investigation” report excluded the key MAC representation documents at Part C  AND will now see from the following DID NOT action/ignored, and certainly did not include, a number of relevant emails from CD2, key documents and suggestions from me – for example, the

(a) Airbus delivery projections schedule for production in 2007 – 2009 <see 2007-2016 at (d)>
<This Airbus schedule was for a total of 32 aircraft, which is equal to what Airbus did produce -32- and delivered – 30 - in the three year period ending December 2009.  Two “finished”  Aircraft - MSN 886 and MSN 894 – ex Kingfisher Airlines of India are in storage since mid 2008 at Toulouse and the subject of resale efforts.

What is also very clear is that, despite PwC stating in Paragraph 8.73 of their report that “While the MAC’s EAC projects production and deliveries to FY2012other MAC prepared volume projections show continued deliveries through until FY2021 …… ” ,  PwC then fail to include these documents in their Exhibits.  We now know through late disclosure and Court Orders that these were

  1. An Aeronca document dated 16 February 2007 (doc 3605).  Quantities specified in the updated “Q4.2006 gross margin breakeven”  as the A340:Summary of Best Information Available for Production and Spares/Repairs at 31 December 2006.  The column on the right are the quantities (and prices) used in the Q4.2006 EAC. whilst  the reader will observe in Mr Dekker’s schedule under the left hand column heading  % of Units Justification  the “identical” quantities  information from FY2007-FY2021  for Trent 500/A340  Production of  60 + 661 = Sub-total = 721   and Spares and Repairs =   6 +166 = Sub-total = 172  to that contained and submitted to PwC and E&Y  in the Aeronca document 3605 dated 16 February 2007 referred to above was then to appear in May 2009 (See my A340 Written and oral evidence at Report:P79-80 in April 2008 and further A340 document (doc3605A) – in May 2009 – with a comment from the Magellan UK solicitors in which they state………

PinsentMasons, on behalf of Mr Dekker, the MAC Chief Financial Officer described this document /schedule for production and spares on 5 May 2009 as
At a glance the assessment that would have been carried out by the auditors in order to satisfy themselves that the accounting on this matter was appropriate.
      
2.    An Aeronca document dated 1 March 2007    - MAC A340 forecasts - Aeronca Inc Aircelle A340 Program - Actual / Estimated            Quantities
          (Engine Sets) - 1 March 2007 (UK document 3605B/D to E&Y for FY2006 audit)
                                   (and to PwC for "independent forensic investigation" - 3605 E/G) - Disclosed 8th June 2009
                                   see also A340 my On the Record Document pages 98 - 99

(MAC Projected sales and build of almost 300 production A340 -500/600 aircraft through to FY2016: of which the MAC Production Plan for 2010 = 29 aircraft or 116 engine exhaust systems) . The lower schedule (1831A) is the representation made by MAC to E&Y in the Q4.FY2006 Estimate at Completion (EAC). As per the PwC report para 8.61 “The Q4 FY2006 EAC was also used by EY for year-end audit testing purposes.”  The Estimate at Completion (EAC) process/documents are the MAC management  “most reasoned view and likely outcome – oral evidence :Dekker”  and showed in this Q4.2006 EAC submission to the auditors E&Y and PwC an improvement over Q2.2006 to a miniscule  $0.1m gross profit on $250m program revenues. )

In reviewing both of these documents two facts are evident and would have been clear to PwC in their assessment (and then consciously ignored by PwC in their findings and Exhibits)

(a)

Both these Aeronca forecast documents for FY2007 – FY2009 show projected deliveries that are substantially higher than those planned and published by the customer, Airbus for 32 A340-500/600 aircraft deliveries.  The Aeronca 16 February 2007 schedule was almost 50% higher whilst then being revised upwards to almost double (+100%) the published Airbus plan in the 1 March 2007 schedule to 62 aircraft.  This was and is unprecedented for any other third party forecaster in the aerospace industry.  Furthermore from 2010 +  production deliveries were forecast to exceed A340 -500/600 annual production levels never before achieved by Airbus when their order book was actually facing multiple cancellations and no airline sales campaigns.  What credence could either E&Y or PwC therefore have in both the short term (3 years)  and long term (3+ years) forecasts presented to them by Mr Neill and Aeronca? even before they commenced any of their own audit testing or third party verification processes.

(b)

Both the  Aeronca forecast documents on 16 Feb 2007 and 1 March 2007 for the period FY2007 – FY2021 forecast a total of 172 Spares and Repairs.   Within days this would be increased on Mr Neill’s instruction to 500%+ (886+) on 14 March 2007 from that original number of 172 , a number which had relied upon for years in MAC strategic planning documents. Another  document (3605H), which was again not included in the PwC report,  showing A340 production cessation in 2009 – as I had stated as very likely in my interview in January 2007 with PwC http://www.fortfield.com/images/tape-symbol.gif   Airbus A340 series production in Toulouse is complete - was completely excluded from the PwC “independent” report and forensic analysis. 

(b)  External A340 market reports – Richard Aboulafia/Teal Group - 10 year market forecasts
<Although I had heard Mr Aboulafia of Teal Group speak at the AIAA conference in Toronto in late September 2005 (with Mr Neill et al - he confirmed in his oral evidence in Part C  that he was aware of the market information from the Teal forecasts) I had never seen any of his Teal Group market forecast reports for A340. I was sufficiently impressed by him generally then, to tell PwC in our 29 January 2007 meeting, during their question about outside of MAC market expertise and knowledge  (7 minute audio tape and extract document - 587) “ Just to deal with the outside of him – referring to John Furbay – I suggest what you do is you get two or three analysts to give their view, probably the guy who is best in the market is TEAL group,  a guy called Richard Aboulafia , and everybody, all the others , may have different views but he is worth reading and getting.  It would cost you a couple of thousand dollars but he is usually not that far away from reality.   I think most people see it like this – this is the end of the line.”

I did not see any of the A340 Teal Market 10 year forecasts until 3 July 2007 (doc 2981), which I obtained following the UK Court Order for disclosure of the PwC final draft report in June 2007. I did this as their final draft report had only one market forecast (Forecast International) and Teal was not included amongst the three suggested, despite my specific recommendation to PwC in January 2007.

I was also totally unaware, until September - December 2008, that these Teal Group market reports were already freely available within PwC via their annual subscription, throughout the entire 7-month period of the PwC Independent Forensic Investigation, to support exactly these types of audit/ investigatory work through their knowledge management processes for the global PwC firms.

The A340 external market forecast reports from the six other market forecasters were not considered by PwC or certainly included as Exhibits in PwC’s report - there was a market consensus of a production build of 135 aircraft and none exceed a forecast production build of 150 aircraft. These “end of the A340 500/600 production line”  were centred around the four crucial decisions /outcomes in the last year – all of which had also been identified and documented by Forecast International in their April 2007 Forecast Rationale but inexplicably were not translated into their 10 year numerical forecast.

(c ) CD2 extracts from my PC 

<Including (1) email from Brian Little to Mr Rich Neill and Mr Murray Edwards dated 19 February 2006 (copy Mr Butyniec and Mr Dekker) in paragraph headed A340 with my “informed” projection for a total A340-500/600  production build of 150 aircraft …(75 + 75)   ………..>

As you will also see later in the oral evidence in Part K :  Ms Ball

Mr Little     And Mr Little asked for it to assist with the PwC report on 11 January 2007
Ms Ball       He asked for it on many occasions. I didn’t want to relinquish it ………..
Judge        All he wants to know is if the PC was requested before 11 January
Ms Ball       I can’t remember, we didn’t want to release it

Although PwC had access to my PC via Mr Dimma from January/February 2007 when PwC finally provided to us “forensic CD copies of my PC contents” in mid April 2007 I extracted a substantive number of emails / folder files (CD2) and we provided these to Mr Edwards and Mr Dimma for delivery to PwC (due to the specific terms of a Legal Undertaking demanded by PinsentMasons in April 2007.doc.3188/9) within 48 hours.  A month later, PwC UK advised us they had still not received the CD2 –  Both Mr Dimma and Mr Edwards had clearly failed to forward that CD2 to PwC.   A further CD2 copy was then sent directly by my solicitors, on my instruction, to PwC UK and PinsentMasons in May 2007.doc3207A refers to that.

NONE of the contents of those CD2 emails/folder files are mentioned or Exhibits in either of the PwC Reports. The reader will have noted that the Final PwC report was published at the end of August 2007 after the seven-month C$3m “independent forensic investigation?” was commissioned by Mr Dimma.  I wrote specifically about this crucial subject and the broader PwC Final report to both Mr Edwards and Mr Dimma on 11 September 2007 (Read receipt from both).   (A few examples of those crucial omissions -  

(1) my 19 Feb 2006 email above --  on probable A340 -500/600 production build projections of 150 aircraft  <also see my witness statement at paragraph.200>   or

(2) Mr Butyniec’s Best and Final Offer (BAFO) 11 August 2006

Dear Vincent commercial letter to Aircelle re A340 Pricing with his proposed 8.7% price increase for FY2006 etc etc (which was LESS THAN than the FY2006 price we had used in the Q2.2006 Estimate at Complete.EAC for the Q2 quarterly earnings) after his Farnborough Air Show negotiations in late July 2006, following which, as you will have noted, he gained Mr Edwards approval { "Letter looks fine to me. Let's hope this puts this issue to bed."} Mr Dekker "clerical edits" and therefore "authorization of his settlement terms” immediately after the MAC Board 10 August 2006 meeting. I never saw anything in writing from Mr Neill at that time ( I had on 22/23 February 2006 when Mr Furbay emailed us that “our true impact is 9%” etc and Mr Neill had initially stated that he considered that “10% seems reasonable”  but subsequently understood that by 15 August 2006 that Mr Neill had rescinded his subsequent 23 February 2006 written instruction to Mr Furbay of “..   Walkaway has to be around 15%.” and was supportive of the written “settlement terms” in Mr Butyniec’s BAFO counter-offer proposal to Aircelle – “ V. Lafond expects a counter offer. Letter sent by JSB to V Lafond.” – MAC staff meeting minutes on 15 August 2006 (doc2021).

Whilst I accept Mr Neill’s written evidence (RAN22) that I can be a strong negotiator (as for example in his email exchange with Airbus UK at that same time in early August 2006 in securing the contract price increases for 77 parts at 100% of the price we requested in May 2006 and worth C$4m+ per year to FY2010 with £200K retroactive for FY2006- see further info in Part K) - in my Magellan roles I was personally dismayed and disappointed to learn - after both that MAC Board 10 August 2006 meeting and I had left Toronto Head office on the 11th - as I was unaware of any discussion or approval or Mr Butyniec’s/Mr Dekker’s BAFO proposal to the preceding MAC Audit Committee or during my attendance at the MAC Board (nor is it minuted) - that Mr Butyniec in his 11 August 2006 letter was prepared to settle, on behalf of MAC, in his Aircelle settlement discussions for a price increase of only 8.7% in the MAC commercial agreement for A340-500/600.

This was instead of pressing for at least the “low teens /12.3% +” as a FY2006 pricing/baseline for the budgeted 64 {operations planned more/actual 81} Exhaust system deliveries in FY2006. This “pricing deficit” alone would cost MAC at least C$0.5m in additional revenues/gross profits/cash in FY2006.   I believed then that we had a very sound business and legal /arbitration “case” for 12%+ (an additional $6000+ per exhaust unit) and up to perhaps theoretically 32% for FY2006, although the escalation formula challenges for MAC would really come within our strategic planning horizon in 2009+.  Astonishingly --- and I could never understand why {given Mr Butyniec’s “tough” vocal and written position within Magellan in the past (e.g. his email in January 2006- {…. My concern is that we keep changing the numbers until they look like we need them to be ……….We need a real offer in writing from them now. We are negoitating with ourselves and have been for months…… I want a deal like anyone else, but one that provides a profit”} and Airbus Toulouse Nacelle Procurement / Aircelle’s February 2006 complaint about Magellan behaviour}  Mr Butyniec’s BAFO FY2006 price of $179K per unit – 8.7% price increase etc etc as requested by Aircelle as the MAC basis of a settlement (his term : “stopping negoitating with ourselves”) was then WORSE /LOWER than had already been secured by Mr Furbay/us in Aircelle commercial discussions in late June 2006 (doc 1790- 23 June 2006) > It was on that June 2006 Aircelle “agreed” 9.7% price increase basis that a minimum $ price number of $181K per unit for production/spares was derived and all of us submitted in the Q2.2006 EAC/financial reporting  for the A340-500/600 programThe net effect of Mr Butyniec’s final “real” offer was to inevitably increase further the Q2.2006 EAC gross losses of $5.3m on the A340-500/600 program.

Against the difficult Q2.2006 Magellan liquidity/financial results < caused by our failure to meet our Gross margins in our operational budgets across MAC (C$7.5m lower gross margin – 23% - due to operational inefficiencies and a failure to contractually secure the Aeronca budgeted price increase of $1036K  from January 2007) - as per the recently circulated 8 August Board Gross  margin reconciliation documents by Mr Steve Groot >   Mr Butyniec  proceeded, without a MAC Audit Committee discussion on 10 August 2006, with a “lower” Aircelle A340-500/600 pricing offer proposal on 12-14 August 2006.    I told Mr Butyniec, just before the formal start of the 15 August 2006 MAC weekly staff meeting.doc.2021, that his BAFO A340 pricing “settlement” offer of $179,623 per unit was just TOO LOW for FY2006 etc   and subsequently

(3) the MAC staff meeting email trails  re Aircelle Negotiations – August/12 September 2006 (25kb)   record some of that subsequent interaction/outcome

In particular after I had told Jim Butyniec on 15 August 2006 that his final settlement offer of 8.7% for  a reduced price in FY2006, the subsequent base value etc  (in his letter sent on the 14 August 2006)  was LOWER than had been previously agreed with Aircelle ( the 9.7%/12% reported in June 2006 email above)  he seemed shocked / perturbed and began to back-peddle – subsequently I believed pushing the responsibility back again to Mr Furbay et al.    You can read this as part of the email trail and specifically relevant is his email shortly afterwards on Friday 18 August 2006 (2179B) where he states to all of us – in particular to Mr Furbay -   “Thanks, we can talk more about this in a few days.  John, I do not want Nicky to think there is hope that a call from Rich to Pascal or vice versa will bring a settlement at less than the 10% or 12% needed to close the issue. As she stated the offer from Vincent was a take it or leave it one, that also applies to them with ours.”   Note Mr Butyniec’s back-peddling out of his formal A340 pricing counter-offer to Aircelle to the minimum 9.7% /10%  we all thought had been secured in June 2006 when reported through Mr Furbay’s email dated 23 June 2006 and which we (in particular CFO Mr Dekker and CEO Mr Neill) had used as the basis of the A340 EAC for Q2.2006.

The net effect of this intervention by Mr Butyniec was that prior to his direct involvement we had secured in late June 2006 a price increase of 9.7% - 12.0% and a higher subsequent base, which we had used in our pricing assumptions in the Q2.2006 EAC.  His “approved” counter offer would result in a lower price increase of only 8.7% and higher gross losses in the A340 Program (only worsening the C$5.2m+ gross losses calculated in our Q2.2006 EAC)  rather than the management override to a “A340 program break-even”, as determined by CFO Mr Dekker and CEO Mr Neill and which was the basis of the MAC Consolidated Accounts/Q2.2006 Earnings release on 14 August 2006 to the TSE.

It would be a matter of speculation on my part, but it may have been that in approving this 11/14 August 2006 BAFO Mr Butyniec had persuaded himself , Mr Edwards and  Mr Dekker that this MAC final, final  offer “almost recovered” our “true impact of 9%.”    Mr Butyniec never did explain to the full team the precise reasons as to why he did what we did; we in fact now seemed to be  “negotiating with ourselves” with a consequent negative effect.   I related these A340 points, amongst others, to Mr Dekker in a 29 minute telecom, only days before my visit to Toronto to lead our MAC Group 5 Year strategic planning sessions, and before my instant dismissal on arrival at Toronto Airport.

Furthermore one of the points, identified as part of Exhibit 8.3A above, was PwC para 8.62 and the “management assertion” regarding the Q2-Q4 revenues increase being caused by the higher pricing achieved in later delivery years due to the deferral in deliveries.  The primary reason, in my view, that PwC deliberately failed to state the true reason (changes in pricing used) was that even an accounting novice would be professionally required to understand and therefore explain the basis of the commercial logic as to why these changed between Q2 and Q4 and satisfy themselves in that regard.  Also the inflated pricing in Q4.2006, predicated on the stated FY2006 assumptions are wrong whilst no documented basis for the increase in BETA 21 materials price assumptions in the face of information to the contrary within Magellan (Mr Hahnelt) was revealed by PwC .  PwC had the information (certainly from my PC and CD2 files to see quite clearly from the 11/14 August 2006 BAFO letter above that Mssrs Butyniec, Dekker, Edwards (and Neill) were prepared to accept lower pricing (than in the Q2.2006 EAC) in order to settle without recourse to arbitration.  None of this information/analysis appears anywhere in the PwC report written by reputedly “forensic accountants”  - that is not on “oversight”  – from a “professional” firm …..    that is “forensic deceit”   as per para 9.1 in my PwC.A340.Forensic deceit report.      As stated earlier at Exhibit 8.3A -

Judge  

It doesn’t look as if they’ve brought that into the equation in terms of the report?

Mr Dekker

They certainly haven’t documented it in that fashion.

In time Magellan did file and pursue the Arbitration route - See Website Exhibit 8.3A above and Part F – although my information from Safran sources is that the Arbitration case was never heard as the pricing and terms were “settled” by Safran Group/Aircelle and Magellan before proceedings began.

BL UPDATED JULY 2010: I have now learned that Mr John Furbay (Aeronca CFO throughout the A340-500/600 contract period from 1998) and the author of a number of emails etc in this CD2 folder was fired by Mr Dekker and escorted off the Aeronca premises by the General Manager on Wednesday 23 June 2010.  By then Magellan had shipped only 121 A340 production and spares units from January 2007 to the end of that month (June 2010).

(d) shortly after my termination and referring to 10 August 2006 meeting -

<An email  from Brian Little to Mr Rich Neill and Mr Murray Edwards
, dated 16 October 2006 (copy Mr Butyniec, Mr Dekker, Ms Ball), in second paragraph re Airbus internal strategy A340 min. (as above = 150 a/c) to a max (195 a/c) market forecasts for production in ten year period from 2007 to 2016. This effectively confirmed part of my protected disclosure in my 10 August 2006 post-MAC Board meeting with Mr Neill and Mr Murray Edwards - the Protected Disclosure (PD23) A340 market and financial information.

PwC asked Magellan a question (Q3) on 22 March 2007 (just days before the MAC FY2006 Financial statements were approved by the MAC Board and public released) ---

“On what basis does management’s judgment on the volume of units to be used in the EAC going forward differ from the estimate used in the EAC at 31-Dec-06? What new information has become available to management today which was not available at 31-Dec-06? 

Mr Neill forwarded the answer “ Management’s judgment does not differ from the estimate used at 12/31/06.  Any alternative projections produced were at the request of PwC or E&Y and were provided for reference purposes only. New information that has become available has not changed our well established and consistent estimate and is therefore not pertinent.>”

This PWC/Magellan seven question and answer document (3597/A-B) was only disclosed after a reluctant commitment by Magellan’s counsel to the Tribunal to do so after the final hearing in Bristol In October 2009, whilst Magellan’s solicitors only disclosed one of those alternative projections (for similar production volumes to what I had stated and included in my witness statement – circa 135 a/c – see doc 3605H ) after Mr Neill had completed his evidence for the second time in July 2009. That disclosure only because Mr Neill had mentioned it in response to a question in his July 2009 cross-examination.  There is NO reference to or inclusion of either of these documents as Exhibits in either of the two PwC “independent forensic investigation?” reports.     As the reader will note had PwC properly done so they would have had to reconcile Magellan’s new representation from 190 Spares and Repairs by FY2021 in February/early March 2007 to the 886 units on 14 March 2007 with their own “flawed”  forensic April/August 2007 report conclusions at para 8.75 of a   1572  Spares and Repairs volume by FY2021.

Furthermore they are both self-evidently relevant documents and should have been disclosed some 30 months earlier by Magellan in accordance with the Tribunal Court Order from CMD1 --   “By 4 April 2007 the parties are to mutually exchange lists of documents”  ---   particularly with the document creation dates in March 2007 as, not least, they would had “only recently been in Mr Neill’s and Mr Dekker’s mind” and we have been told PinsentMasons explained the rules for documents disclosure to Magellan Canada in February 2007 and they would have been wholly aware that they are central in this part of my case.

e) also noteworthy from Mr Neill in part of his A340 oral evidence, as he quite clearly recalled in response to the final question from the Judge in the UK court in July 2009 where he had provided PwC with a file with Data from other publications  –

Former President and CEO Mr R Neill (now Vice Chairman) -14 November 2007 (p438+)

Mr Stafford   The fundamental is – even if pessimistic – the sales were never going to reach the 300  aircraft originally projected by MAC
Mr Neill       

We had projected 1200 nacelles sold – we have now added to that – the number to be sold through spares – that takes the number up to 1500 – 1600.    Significantly in excess of that needed.  To the original EACs we have added in the line for spares – and looked at the total number that will be sold....  Either way it exceeds the number

Mr Stafford  Ignoring spares – concentrating on the number of new aircraft – has MAC ever reduced its expected number of aircraft sales from 300?
Mr Neill         Yes the pessimistic scenario... 
Mr Stafford  Accounts are based on pessimistic
Mr Neill    No realistic
Mr Stafford   Where are accounts placed?
Mr Neill        Between the two
Mr Stafford 

Where is it now?                          (BL – Mr Stafford question is effectively as at Q3.2007)  

Mr Neill        Lower than 300 – probably between 250 and 300
Mr Stafford    MAC had downgraded the number of aircraft to be sold
Mr Neill Yes
Mr Stafford  When ?
Mr Neill Each quarter end – look at likely sales – we do it at the quarter end
Mr Stafford 

When downgrade?

( Later disclosures :MAC production representation to EY/PwC on 10 Feb 2007 for 283 a/c and then increased in their schedule on 1 March 2007 to a 291 aircraft production build).

Mr Neill Each quarter end
Mr Stafford  When start?
Mr Neill        Q4/2006
Mr Stafford  The meeting on 8th August – you agree that Mr Little raised the concerns – you agree that he explained what about.   You did not share anything with BL about the reduction of service life
Mr Neill I showed him a copy of the work done regarding the expected life of the plane – there was some certainty based on the research carried out in Canada.

Mr Stafford

Volume 5/2006 – the sub certification for Q2.2006 – see 2 items here – “A340 – Aeronca to  discuss”. On an important document – the issue of NRC – clearly formal concerns expressed by him.

Mr Neill Yes
Mr Stafford  You would have been clear that it was NRCs that he was referring to
Mr Neill  Yes
Mr Stafford Given that you had a discussion on the 8th – and he signs certificate with qualification – must have been clear that BL not entirely comfortable? 
Mr Neill

Correct.   But his experience with airframe – more with engine and spares – parts wear out and are replaced more frequently than wings- so a difference in our experiences

(See Brian Little CV – Shorts/Bombardier had a nacelles business employing 800 people with some 100+ engineers. In the 1990’s they were in the Joint Venture  International Nacelle Systems with what is now part of Aircelle -  Magellan’s customer for the A340. Additionally I have experience of the “complete aircraft marketing/sales – delivery – support cycle with Shorts and Bombardier aircraft products. Furthermore I spent several weeks within Boeing on the Boeing 7J7 and “Boeing 777”  market research / sales processes whilst on a secondment from Shorts in 1989)

Mr Stafford

Volume 6 document 2115 – will see dated 7 September 2006 – An Airbus document – move forward to 6/2117.   3rd box down – A340 – 500, A340-600
(BL note- MAC provided both E&Y and PwC with Feb 2007 version from Airbus (doc.3600).   

Mr Neill Assuming also 7th September
Mr Stafford These are the projections?
Mr Neill Plan for production.
Mr Stafford It does not look healthy for 2006 – and appears to be diminishing from 2006 – 2008
Mr Neill Yes
Mr Stafford Aware of this at the time
Mr Neill Yes
Mr Stafford There was pessimism from Airbus at the time?
Mr Neill Yes
Mr Stafford The only trade estimates referred to by PwC – are Forecast international.  Did you provide Teal?
Mr Neill  We gave everything we had to hand – included the plan for production. Did not include the   International – I think it included Teal – but cannot recall.
Judge Did you provide data from other publications?
Mr Neill Yes

and in 27 July 2009 UK hearing (p46+)

The Judge is accessing his notes from the evidence at P441/442 by Mr Neill on 14 November 2007 following Mr Lynch QC’s second challenge to our junior counsel’s record of that UK court evidence during 27 July 2009 (40-43)
         “Did you provide Data from other Publications?”  –     Mr Neill   -  Yes

Judge

My notes say that he was aware of a production plan, and the pessimism was shared and reflected in Teal Group forecasts. And he mentions that Forecast International is referred to in PwC, we provided all the information to PwC which included all the plans from Airbus, and we didn't give them Forecast International. They had to obtain them.   We also provided data from other publications.      

Judge From my note it looks as though it was the evidence that further documentation was provided.  (Pause)
Mr Little Okay, so on that basis, sir –
Mr Neill Do you want me to add, sir?
Judge Yes, please.
Mr Neill Judge?
Judge Yes.
Mr Neill  Yes, it's now two years since this happened but I recall quite clearly, and Mr Little knows this, that it was my practice to keep copies of all trade publication articles, documents, as well as any forecast that we would make, this would be, the trade publications would be Flight International and Aviation Week primarily, but other things, such as Air Transport World and the likes. What I did was I handed the file, with as much of that data in it that I had, I gave it to Pricewaterhouse.  And I do not recall if the Teal presentations that I referred to earlier were in that file or not.

As you have just read Mr Neill’s clear recollection of this “Data from other publications”  was that in March 2007 he provided PwC with his file of A340 press articles etc retained from Flight International,  Aviation Week and  Air Transport World publications and perhaps others.(c) He could not recall whether he provided the Teal Group external market presentation information. These naturally gave a sense as to the A340 market/sales etc. at the relevant times (e.g. November 2005 = 4270), and (e.g. January 2006 = 4272-4)  and (1 August 2006 = 4279 – part of conversation re PD22 with Mr Neill on 8 August 2006) whilst he provided his general aerospace industry perspective each quarter in his briefings during the Earnings webcast calls – e.g. Page 2 of the Q2.2006 – 15 August 2006 where he briefed the industry equity analysts  

“On top of that, there was the indecision that we had around the whole A350 program, and then the final decision to go with what is now known as the A350 XWB as a competitor to Boeing's latest product. They took pains in getting there and, in doing so, they sent a number of concerns back not only through the investment community but through the supply chain as well, especially for those who had already started working on the A350 program.

In Boeing's case -- different story. The story for the quarter was the strength of the order book for the Boeing 787 that built through that period but also for the Boeing 777 as well. In fact, Boeing won the bulk of the orders for twin-aisle airplanes and had, for the first time, some success that they could boast about.  We saw that at the Farnborough Air Show.

I know he did retain such a file in his office as on regular occasions we would discuss articles and subjects which we had both seen or read – including the two referenced here.   I also used articles from publications regularly in my December 2005, March 2006, and May 2006 Magellan Aerospace Board presentations.  

PwC do not mention any market data/articles from any publications in their C$3m+ report.  Although a “forensic” investigation PwC were also unable; recently, to retrieve Mr Neill’s “Publications” file and return it to MAC when requested (4294A/G). This was to enable its contents for the period September 2005– March 2007 to be a matter of court record. I have been able to obtain all the relevant A340 articles directly from the Publications mentioned by Mr Neill on 27 July 2007 for that period.  Those articles (c).  that I recall that Mr Neill and I had read separately and discussed (mostly Flight international) are annotated accordingly now in the UK court bundle and feature in my A340 Report from pages 26 – 29 at the relevant timelines in 2005 – 2006. I also remember picking up a copy of Business Week in early November 2005 (whilst in North America) and reading the article Boeing Roars Ahead” which included the remarks  “the A340 is going the way of the dinosaur from Ed Greenslet of Airline Monitor, one of the other external market forecasters.  I remember discussing and leaving that Business Week magazine (4296/A) with Mr Neill – it would probably have been in this Publications file – certainly he was well aware of the A340 subject matter from our multiple discussions.
Furthermore with my 4 December 2006 Letter to each MAC director a dossier which contained DIR44 –UK Times article– 28 Oct. 2006 “End Looms for Airbus A340 as Emirates cancels $4bn orders” was also provided by us to PwC UK , PwC Canada , E&Y UK and E&Y Canada.  As you can read the Times headline sufficiently sets out the basis of this general press article AND was  available to E&Y Canada before their A340 audit testing for MAC FY2006 between January 2007 – March 2007 and the PwC C$3m+ “forensic investigation” from January 2007 – August 2007.

Updated 9 May 2011   Finally as regards the separate Magellan UK accounting issues raised by me it is abundantly clear that the PwC “Final” Report in August 2007 disclosed to the UK Employment Tribunal case (and their Final report on 20 June 2007 as disclosed in May 2011) did NOT include ANY of the findings of fact, observations or conclusions of the relevant contents of the E&Y letter dated 11 July 2007 in relation to the Magellan UK statutory accounts for FY2005 which would be the hawlmark of any true “independent”  forensic investigation and professionalism.  

 


Part E : Aerospace Industry /Aircelle and expert insights and views - Mark Bobbi - Engine Nacelles

August 2007 report (UK document 3015-3025) - Jan - March 2009 report (UK doc 3890 - 3890XX)

“In August 2007, I performed a study of the A340-500/600 for Mr. Brian Little.  The results of that study are found in the referenced document 3015-3025.  The essence of that report was that the A340-500/600 was a market failure, generating far less orders than anticipated in the 1990s by its maker, Airbus.  In fact, total orders and options for the A340-500/600 were unlikely to exceed 130-135 which, as I am now aware, is approximately 150 /175 less than MAC’ amortization figure for the A340 NRC…….

……Therefore, I find it impossible to believe MAC’ spares/repairs forecast is based on any rational market assessment and runs completely counter to my and others career-long experience together with the detailed communications I undertook with the maintenance people in the airlines flying the -600 aircraft

MARK BOBBI - WITNESS STATEMENT (W/S) TO UK COURT - EVIDENCE GIVEN ON 8 JUNE 2009

UK Court oral evidence – 8 June 2009.  Transcript/Notes of the UK public hearing by WordWave International Ltd (A Merrill Communications Company)  - Official Shorthand Writers to the UK Court of Appeal
            

Mr Lynch We have Mr Neill's email (Doc 3597) to Mr Moore of PricewaterhouseCoopers.  I know it’s a bit compressed in its typescript. Tribunal, of course there is a bigger version in the bundle, if that's a bit small to read.  (Pause). 
  Mr Bobbi, you can see, can't you, looking at the two substantive paragraphs -- it actually is a feature of both those paragraphs -- that Mr Neill makes it expressly clear that Magellan is simply basing its calculations for accountancy purposes on spares or replacements, he's not included anything to do with repairs.

Mr Bobbi

That's right.

Mr Lynch Good.    
  And then again shortly later
Mr Lynch But do you agree that it is certainly right that if Magellan sells a new unit, whether as part of a new aircraft or as a new replacement unit, a spare, then they would all count for EAC purposes?
Mr Bobbi  Of course.
Mr Lynch Right.  So it's plain, isn't it, that PwC did indeed examine and accepted, for accountancy purposes, the validity of incorporation of Dr Thamburaj's calculations, yes?
Mr Bobbi That was the only information that they had.
Mr Lynch Right.  And that information would indeed, because it related to lifespan, that information   would  indeed provide the basis on which PwC could rightly conclude that indeed these would involve new units that would be sold, that's right, isn't it?
Mr Bobbi   No, that's not.  Because a component has a "lifespan" does not mean necessarily it  will be replaced by something new, it can be repaired.
   
Mr Lynch Yes.  Well, no, I think the whole point is this, it's not, Dr Thamburaj's point was not a question that they will need repairs after that period, Dr Thamburaj's point was that around 40,000 flying hours was indeed the lifespan of the unit.  That after that, its lifespan was spent and should be replaced.  That was the point.
   
Mr Bobbi Well, and if that was the case, he should have informed the customers.
   
Mr Lynch Well, whether or not AIRCELLE was aware of that is another matter.
   
Mr Bobbi   I think it's an absolutely incredibly important matter, if he believed that.

 

4184 / 4183 : MARK BOBBI EMAIL AND REPLY (24 JUNE 2009 FROM AIRCELLE - MAC'S CUSTOMER - RE A340/T500 EXHAUST LIFE "40,000 hour or less replacement requirement ...WE BELIEVE THE WHOLE THING IS A HOAX....."

4185 / 4186 and 4186A: Email from Aircelle (23 June 2009) to Etihad Airways regarding A340/T500 exhaust system life / certification "...There is no specific life limitation for the T500 exhaust system…….”

and in Mr Neill’s oral evidence on 27 July 2009 (p105+)

Mr Neill Had Mr Bobbi gone to the people who were familiar with the overhaul manuals and the maintenance manuals, you would have seen the language and the words that it contains about what kind of damage can be sustained and what you do when damage exceeds the limits specified in these manuals, but I didn't see any reference to that in either of his witness statement or any of his reports. I just saw a lot of – Mr Little interrupts in a disturbed state ……... 
Mr Little Rich,  that's exactly what he did do <see Bobbi report extract above>, and he asked the people in Singapore and some others to go through the manuals and they all got the stuff out and said we have to do checks at 40 thousand hours etc but there's nothing in here that would indicate that there's likely to be anything of that substance.  Hang on, I have a fundamental problem with this, this is really, really, really important.  Your cross-examination of him, Mr Lynch, was replacement, <doc 3597>  this is what it says, he took out of that and he up to then had been very careful about what he said to airlines and everybody else,  and I warned you <MAC and legal team> about this, that this is a major issue…….          Tribunal adjournment for a few minutes
   
Mr Little The question is, how come everybody doesn't understand the magnitude of that problem in the industry, Rich?  At  all?  And Magellan don't seem to be doing something about it within their engineering and the quality process?
   
Mr Neill : And the answer is, I think, that only time will tell whether Dr Thamburaj's tests, and the coupon tests that he did, is a clear representation of what will happen in service.  Somewhere between 20 thousand and 100 thousand hours, it is clear that exhausts will have to be -- to undergo a major repair and as I say, time will tell that.  On the coupon test, if you remember from that report, it says that fatigue was not the biggest issue; the biggest issue was in fact corrosion within the honeycomb itself, which would mean some kind of structural breakdown in the exhaust and only time will prove that.
Mr Little But Aircelle ….   Chairman interrupts
   
Judge    (p.66) You haven't told the industry anything about it?
   
Mr Neill

Untrue, we've completed a service manual, in 2005,  I think it was, where we had to complete some calculations to describe what is called the MTBR, the meantime between unit removal.  It was because we had to do that calculation and we've submitted this data to the tribunal, and to Mr Little, because we had to do these schedules, that we had Dr Thamburaj express an opinion on when we thought units would be coming back from service. 

Going back to the reports I referred to earlier, we had a damage tolerance report that said a hundred thousand hours is the design life, when they did the damage tolerance report they built into it a scatter range of 5, because the engine time between overhauls was 20 thousand hours and therefore the belief is that nozzles and plugs could start returning or needing repair from service from 20 thousand hours on, we thought 20 thousand hours was much too low a number to use for this calculation, and at the same time, given the amount of wear and tear that we knew that would occur, based on our experience, a hundred thousand hours was too great a number.  So we had as it were a floor and a ceiling.

We made the decision to base it on 40 thousand hours, based on the work that Dr Thamburaj did, that said that if any units are exposed to heavy use in a number of hot and high airports and marine environments, corrosive elements in the air, et cetera, et cetera, there's every likelihood that we'll start seeing heavy repairs from about 35 thousand hours on, and we chose the 40 thousand hours based on that fact, there was no other science behind the 40 thousand hours.

   
Mr Little Where is the documentation in the bundles on this, I have seen lots of comments on repairs and so on, and the unscheduled removals, but I have not seen any scheduled removals, and I have to say, I saw nothing of any work on any of this until I read the March 2007 or the March 2007 emails and paperwork in the June 2007 PwC report, ever, and nor have Aircelle.  Aircelle have nothing on this scheduled replacement.
   
Mr Neill  The maintenance manual and the overhaul manual are quite clear in their instructions as to how to inspect, repair, and manage this -- you then have to go over to each individual airline's service record and get from them the time between overhauls when engines will come off the wing.  When the engine comes off the wing, the exhaust and the plug will be taken off and inspected and the initial TBO that was planned was 20 thousand hours.

Note as Mr Bobbi and I had already seen and determined the Aircelle Component Maintenance Manual for T500 Exhaust nozzle and plug – sample 3625S – refers, and had always done so, to “FACTORY REPAIRS” by the manufacturer – Aircelle in the operating airlines.  Magellan and their own advisors (PwC) recognise that “due to the unpredictability of repair work” Factory Repairs (for On Condition Maintenance components) should not be included when recovering NRC assets.  They are also subject to contractual MTBUR and Guaranteed Direct Maintenance Cost (DMC) values of much less than a $1 per flying hour with Aircelle/Airbus (doc 3525). 

In part, this accounting treatment is because other companies, such as the global number 1 supplier of engine nacelles/exhaust systems, Goodrich (also audited by E & Y), provide a Repair & Overhaul service for the A340/Trent 500 engine Exhaust plug and nozzle to the airlines. A summary table of the flight cycles and flying hours to December 2010 on the A340-500/600 aircraft in service can be viewed here (doc 4240B-1).

<BL Observation – You will also note that the Magellan FD&T report in 2003 provided for the A340-500/600 Aircraft Type certification of the nacelle to Aircelle/Airbus and thence to EASA/CAA refers to a fatigue design life goal of 20000 flight cycles with an approximate 8 hours flight time/fatigue mission – or circa 160,000 flight hours.  Please note that Aircelle (part of the Safran Group), as Magellan’s customer for the A340-500/600 exhaust system were asked by me in late 2009 (and again in late July 2010) whether they wished to add any further comments on the factual accuracy or omissions in the Report. No additional comments were made. No changes have been made to the Maintenance plans or documentation in the airlines possession. Professor Ghonem, a global expert on BETA21S material, also commented to Mr Little on some of the assumptions made in the Magellan “technical report” disclosed at Exhibit 8.5 and referred to his October 2004 research>


Part F : Chief Executive Officer (CEO) - Mr J Butyniec and Chief Financial Officer (CFO) - Mr J Dekker - legal and regulatory quarterly and annual certifications of MAC financial statements.

Q2. 2006

CEO Certification -

Mr Neill  - as Chief Executive Officer dated Monday 14 August 2006 = which was the same day as Mr Butyniec / Mr Dekker sent the Settlement BAFO to Aircelle with lower proposed prices than in the Q2.2006 EAC with the $5.3m gross losses which had not been incorporated in the MAC public earnings statements (Q2.2006) published that same day to TSE.

Q2 .2006

CFO Certification –

Mr Dekker – as Chief Financial Officer dated Monday 14 August 2006

Q3.2006 

CEO Certification –

 

Mr Neill – as Chief Executive Officer dated 13 November 2006. (No revised A340 program EAC was produced for Q3.2006 for the A340-500/600 , during the alleged period of Mr Dimma’s internal investigation and the following day (14 Nov 2006) Mr Dimma sent a letter in which he also stated “I considered that the issues you raised were not financial or governance issues that were of concern to me as Chairman of the Audit Committee. They did not, in my view, amount to ethical or unlawful acts on the part of the Company or any of its employees.” 

Q3.2006 

CFO Certification –

Mr Dekker – as Chief Financial Officer

FY2006

CEO Certification -

Mr J Butyniec

(Mr Neill did not certify Q4/2006 or FY2006 although Mr Neill was in CEO position as the reporting date -  31 December 2006)

     

FY2007

CEO Certification -

Mr J Butyniec (see my Observation below. In FY2007 MAC reported Accounting errors and mis-statements in the period FY2003-FY2007, whilst Mr Neill was CEO, totalling some C$7m+

FY2008

CEO Certification -

Mr J Butyniec

FY2009

CEO Certification -

Mr J Butyniec

Q3.2010

CEO Certification -

Mr J Butyniec - 8th November 2010

     

FY2006

CFO Certification -

Mr Dekker

FY2007

CFO Certification -

Mr Dekker (see my observation below)

FY2008

CFO Certification -

Mr Dekker

FY2009

CFO Certification -

Mr Dekker

Q3.2010 CFO Certification - Mr J Dekker - 8th November 2010

<As we worked more closely together from mid-2005 and as time progressed I became more aware that Mr Butyniec’s strengths did not lie in financial/numerical  literacy and the reader/listener can hear an audio tape later in website Part G during my interview (2812) with PwC in January 2007 in which I state “ I think you just need to ask yourself that this man is due to retire (Mr Neill) , he wants to go up the way to whatever, he doesn’t want a balance sheet that effectively is going to get write –offs.  He and Mr Dekker and I have got to face into that because that’s what’s going to happen.  That’s not fair to Mr Butyniec to be taking over a balance sheet that isn’t right” > 

President and CEO - Mr Butyniec -  His oral evidence in January 2008 (p162) : A340 report P81 including   <Mr Butyniec was not interviewed by PwC>

Mr Little   Document 7/2892 Inventory section re engineering costs. About C$100m in Engineering/learning costs.
Mr Butyniec  Talk to John
Mr Little A340 programme is about $34-40m. It’s a significant amount?
Mr Butyniec  It is
Judge  Why are you asking the witness to look at something that is not in dispute?
Mr Little Move to Vol5/1830 – Q2.2006 EAC for A340 programme. Gross loss of around $5m
Mr Butyniec I can’t talk intelligently about this document    (the PwC Exhibits 8.3)
Mr Little But you review each quarter with the finance people?
Mr Butyniec Are the spares in here?
Mr Little Changes to improve the results by Q4.2006?
Mr Butyniec There is arbitration going on
Mr Little Price escalating?
Mr Butyniec I’m not sure if all put in - there was definitely some escalations
Mr Little One of the things different is about the marketing forecasts as well as Airbus. What marketing forecasts were used? 
Mr Butyniec I don’t know
Mr Little Airbus internal plan – rate about 10 per year?
Mr Butyniec

That makes sense    <then read the actual MAC production submission here

Mr Little Mr Vandersteen’s comments on A340 – “Trashed”- (doc2291) Mr Underwood didn’t   relate to you?
Mr Butyniec No
Mr Little Are you certifying the accounts?
Mr Butyniec I’m  trusting the people who work for my organization, yes

(BL Observation : The reader should note my written evidence (Website Part B : para 205) which states “.. In a conversation at Farnborough Airshow in July 2006 with Mr Butyniec, held after he had met Aircelle representatives to try and progress the commercial negotiations on the application of the pricing escalation formula , he said he too was concerned about MAC/Aeronca ever recovering its NRC investment on the A340-500/600.” Mr Butyniec and/or the Respondents counsel Mr Lynch QC never challenged this evidence in court.

Mr Butyniec had explained that he was skeptical (perhaps even cynical) about pressing for the arbitration route in Europe – they had not done so in their prior March 2005 amended commercial settlement (see history in Part D : Exhibit 8.1 document)  which brought into existence this escalation formula. I was the only Magellan person with prior experience of European arbitration via Shorts/Bombardier and it was really only Mr Furbay (Aeronca CFO) and myself who were convinced we needed to do this to get a proper overall pricing settlement for FY2006 etc and appropriate and relevant price escalation arrangements for the future.   I was also conscious of the limitations of the current escalation formulae in the medium- long term for a MAC perspective (the 0.31 fixed limit for BETA21 materials escalation. Prior to the MAC Board meeting on 8 August 2006 the MAC Directors were provided with a Gross Margin analysis document which showed that the “Operational Efficiencies” across the MAC units reporting to Mr Butyniec were some (C$7460K) below the approved FY2006 budget. Whilst price changes/increases across MAC were a net C$1856K ahead of the FY2006 budget for the Aeronca business (A340 & A380) some C$1036K in price increases had not yet been definitively secured. In part, and as a result of these deteriorating FY2006 results, Mr Butyniec produced his Best and Final Offer (BAFO) commercial letter proposal for settlement immediately following the MAC Board on 11/14 August 2006 with the approval of Mr Dekker , Mr Neill and Mr Edwards – see website Part D (c ) CD2 extracts with the relevant contemporaneous documents and sent it to Aircelle.  It was not discussed or approved at the MAC Board in the minutes or whilst I attended it throughout.

In the event Magellan filed for Arbitration but before those proceedings commenced they renegotiated with Aircelle and MAC reported in Q3/2008 (3481) “As noted in Note 5 “Inventories” in the Corporation’s 2007 (BL :and 2006) audited financial statements, due to the long term nature of the Corporation’s contracts , the Corporation may be in negotiation with its customers over amendments to pricing or other terms. During the third quarter of 2008, the Corporation concluded its negotiations in respect to one such long-term contract with a European customer and as a result recorded one-time retroactive price adjustments totaling $10.4 million, which was a direct increase to both of the Corporation’s revenue and EBITDA in the third quarter of 2008.” These price changes would have been for both the A340-500/600 AND A380 programmes as the planned arbitration was on the pricing for both of these products. My information from reliable Safran and Magellan sources is that this was settled by Aircelle before any Arbitration / hearings commenced with Mr Don Boitson and Mr John Furbay.

Magellan reported this settlement / price adjustment  in their Earnings webcast call in Q3.2008  (against the NRC Amortisation in FY2008 financial statements)

Mr Jim ButyniecMagellan Aerospace - President, CEO
Now we are open for Q&A.

Mr Cameron DoerksonVersant Partners – Analyst
I have a few questions here. First, the price adjustment that you’ve announced here, are you able to tell us what customer that was or what program that was predominantly associated with?

Jim Butyniec -  Magellan Aerospace – President, CEO
We haven’t disclosed that information “

Mr Cameron DoerksonVersant Partners – Analyst
On the depreciation line, it looks like depreciation jumped fairly significantly for Q3 from previous quarters , is there an explanation for that?

John DekkerMagellan Aerospace – VP Finance
It relates in part to the amortization of Deferred costs, of the deferred development costs that were moved down to long term assets as a result of the 3031 inventory section adoption at January1,2008

Mr Cameron DoerksonVersant Partners – Analyst
Okay, so is that sort of CDN9 million number what you would anticipate quarterly depreciation to be going forward?

John DekkerMagellan Aerospace – VP Finance
That is correct

<For information the MAC Q1.2008 and Q2.2008 earnings release did not show a separate line recording any Amortisation of Deferred Developments costs whilst the Q3.2008 financial statements showed Q3.2008 C$3095K and C$7185K for the nine months to 30,September 2008. This was in the same period as the C$10.4m retro price adjustment settlement with Aircelle.  Q4.2008 Financial statements would show amortization of deferred development costs of C$7289K for the fourth quarter and an annual C$14474 for FY2008.  Added April 2010  In FY2009 the audited results would record C$7360K were expensed as amortization of deferred costs on all programmes.>

And then (p11/12)

Mr Chris MurrayCIBC World Markets – Analyst
And John, I guess the next question I’ve got is on the CDN10.4m adjustment, could you explain why year to date the release adjusted to only CDN4.9 million?

John DekkerMagellan Aerospace – VP Finance
Yes, if you take a look at the retroactive price adjustment , a portion of it related to 2007 and a portion related to 2006. So when we take the perspective of just the quarter we really look at the retroactive piece that was from June 30 back all the way to the beginning of 2006.  But when we take up the nine- month perspective we take the position from December 21,2007 and back so there is a difference relating to the first – the amount of adjustments that related to the first two quarters of this year.

Mr Chris MurrayCIBC World Markets – Analyst
Okay and that was with one particular client. Do you have discussions ongoing with other customers that we may see some of these benefits in the future?

John DekkerMagellan Aerospace – VP Finance
Actually there are ongoing discussions and have been over the past number of years and we have alluded to them in the conference calls quite regularly. This one was fairly significant , as you can see, so it certainly warranted special disclosure. But there are discussions continuing as we speak, there are negotiations underway with other customers as well.

And then in the final Market analyst question (p14)

Mr Claude ProulxBMO Capital Markets Analyst
It’s Claude Proulx, from BMO. Just some clarification on the CDN10.4 million pricing adjustment. If we were to just for the sake of having better understanding of your past results to analyze current results , where would that money – when should  - sorry – when should you have booked revenues in terms of quarter – on a quarterly basis? Is there any way for you to give some indication?

John Dekker - Magellan Aerospace – VP
Let me take an action on that and look to see what sort of detail we can provide and we will post that

Mr Claude ProulxBMO Capital Markets – Analyst
Okay. That’s all, thanks.”

 

Subsequently Magellan publicly disclosed on its website that the commercial terms of that agreement was for increased revenues and gross profits of $4900K in 2006 and 2007 and $5500K in Q1/Q2/2008.    I know that during the course of FY2006 Magellan budgeted/EAC.Q4.2005 to ship 64 A340-500/600 units, and actually delivered 81; whilst in FY2007/EAC Q4.2006 budgeted for 40 units and actually delivered 45 units…for a combined total of 126 units over that 2006/2007 year period.   In FY2008 48 production and spares units were delivered by MAC: 25 during Q1/Q2/2008.   Subsequently with the A340 airline series production programme now nearing an end    only  17  A340-500/600 exhaust system units were produced by Aeronca/Magellan  in FY2009. 

With the A380 effectively at a standstill in supplier deliveries in the first half of FY2008 (due to the assembly problems at Airbus in 2006/2007) I cannot compute or understand why the retroactive pricing for A340 in the first half of FY2008 for 25 units would equate to C$5500K … if attributed to only A340 this would be a price uplift of C$220K (or approximately doubling) for every unit delivered by Aeronca in 2008.!!? – see page 14 below. As regards the C$4900K published by MAC for FY2006 and FY2007 what is certain is that even if all of it was attributed to the 126 units delivered in these two years then less than 50% of that C$4900K sum would have been obtained on the basis of the approved final counter offer to Aircelle from Mssrs Butyniec , Edwards and Dekker without MAC Board /Audit Committee Approval on 12 – 14 August 2006. And that 50% + reduction is before any portion of that C$4900K is actually recognised for the “justifiable” price increases due for the A380 deliveries despatched in FY2006 /FY2007 from Aeronca prior to and since my termination!!

Mr Edwards then proceeded in his oral evidence to the UK court on 31 March 2009 to state that “MAC gained a material price increase of C$10m to C$15m for the A340 program last year. The contract called for certain price adjustments and it was resolved favourably. That’s my degree of knowledge. It was a large contract ; commercial discussions went on and it was resolved satisfactorily in FY2008.” A document supporting that assertion was not disclosed by Magellan and was certainly totally inconsistent with his “approved final counter-offer” on 12 August 2006.

Mr Neill also spoke about this in his evidence on 27 July 2009 page 68/69

Mr Neill 

The maintenance manual and the overhaul manual are quite clear in their instructions as to how to inspect, repair, and manage this -- you then have to go over to each individual airline's service record and get from them the time between overhauls when engines will come off the wing.  When the engine comes off the wing, the exhaust and the plug will be taken off and inspected and the initial TBO that was planned was 20 thousand hours.

Mr Little I’m not suggesting they’re not getting reviewed… but none of that makes sense to the rest of the industry.  Can I also say , Timet are in --  interrupts
Mr Neill What do you think on condition actually means, it means -  that is the required has been operated for a certain period of time, you take it off, (After) and look at it, and if there are cracks, dents any sign of damage or corrosion in any sense you make a decision at that point, is the condition that there’s good enough to be returned to service or does it need a repair or does it need a replacement.
Mr Little I don’t disagree with that at all
Mr Neill That’s what it means
Mr Little  I don’t disagree with that at all.
Judge We know where the issue is.  Do you need to pursue that any further
Mr Little Well, the critical thing is that --  When the production level falls away, these replacements, the replacements are the only hinge in the Financial EAC and become the basis of justifying how you and Magellan recover the 40 million NRC, is that right?  That’s what this EAC says.
Mr Neill 

That is not entirely true either, because the, as you well know, there were a whole bunch of negotiations going on with Aircelle, regarding the very same non –recurring cost, which were settled post you leaving the company and a substantial contribution was made by Aircelle to the NRCs’…. the balance of that NRC will be then amortised out over the remaining production and the spares and repairs – of this programme

Mr Little And what is that, what is that remaining value and the remaining volumes assumptions at the end of 2008?
Mr Neill   …  Mr Dekker would have supplied that, when he was on the stand, I don’t have that – Mr Little interrupts
Mr Little He didn’t – Mr Neill interrupts
Mr Neill  It must be in the area of 15 – 20 million
Mr Little Right well I .. Mr Neill interrupts
Mr Neill  It’s – that is an estimate, that is not what was on the actual books.
Mr Little    From my reading of the accounts I reckon it will be about 20 million because 10 million was written off because of accounting policy but I was interested in what were the volumes you were still assuming because 800 units at $30000 per set, we were never going to recover that 40 million on that basis .

It would seem from my knowledge, experience and logic (recognising that this settlement would also include that for the A380) that the commercial terms of this further Aircelle “settlement” agreement  has NOT been constructed (as most stakeholders, including the professional stock market analysts, expected,)  on a “normal stepped increase pricing basis for the actual units delivered each year”, as per any normal arbitration of the escalation formula, but to substantively meet the financial and accounting needs of Magellan in reducing further its “over-stated” A340-500/600 asset valuation on the Balance Sheet.   I set this out in a spreadsheet showing the Q4.2006 EAC, the C$10.4m retroactive revenues and the Deferred Development costs recorded in the MAC audited Annual Reports as expensed for all projects in FY2008 and FY2009.

Though we do not have the precise “pricing/settlement terms” information with Aircelle, or that MAC accounting value, it seems very likely that a substantial portion of that CDN10.4m has been expensed against the Amortisation of A340 Deferred Development Costs.  It is not known what concessions in commercial terms were made, if any, on other programs in their amended commercial contract. One of my former business colleagues and friends, Mr Robert Beckett, asked Mr Dekker to see the documents (privately if necessary) which would demonstrate that I was and I am wrong on the A340 facts and the totality of the commercial agreement. Based on the above and the fact that these have not been disclosed to the court, to underpin their oral evidence, I firmly believe that Magellan have sacrificed other commercial and financial matters to Aircelle / Safran to secure this settlement focused on A340 NRC. This approach would be consistent with the example of the Boeing 737 systems kits from Ellanef also examined by PwC - and which is set out in Point 2) below - where medium/long term revenues and profits were and will be further reduced by FY2012 by approximately C$10m.

If part of this C$10.4m was set off against A340 Deferred Development Costs  then of the circa C$40m “MAC asset value”  at December 2006 approximately C$10m will have been reduced  through  “inventory accounting standards changes per 3031” see <below>,  which permitted the write-off of the A340 escalating labour-learning costs accepted by E&Y/PwC AND the majority of that C$10m + in amortization of deferred development costs via those “accounting-led” retroactive price adjustments in Q3 and pricing/terms in Q4.2008 with Aircelle will also have been “written-off“.

For information : Magellan Aerospace Corporation used only a fixed amortization amount of $30,000 per exhaust unit in FY2006  – which if continued at $30000 per exhaust unit would lead to only 65% recovery of the circa C$40m+  (USD 38.25M) inventory on the December 2006 MAC Balance Sheet.  PwC  set this out further in their para 8.117 : Current production costs per unit are such that at present the pre-amortisation margin generated per unit is not sufficient to absorb an amortization of USD 30,000 per unit and still break-even. In order for MAC to report an overall breakeven position, while at the same time amortising NRC inventory, it has been capitalizing that amount of production costs that is necessary to achieve the break-even position each year.  For this reason , “production inventory” for the A340 programme has been increasing”.  If MAC were to maintain the amortization at $30,000 per exhaust system, as in FY2006, only $3.30 million would have been reduced from the total A340 programme asset for the 110 units delivered by MAC in the three years between January 2007 and the end of December 2009/FY2009. (Updated 18 January 2011: With aircraft production exhaust units now all delivered a total of 110 production – to 131 A340-500/600 - production aircraft and 11 spares were delivered by MAC in the four years between January 2007 and the end of December 2010/FY2010, or equivalent to $3.63m).  PwC continues at para 8.118 “PwC believes that MAC’s NRC and production inventories should be considered collectively (for a total inventory of USD 38.2 million) and then amortised from this basis onward. Aeronca should also review the NRC amortization factor.  We believe that this factor should vary with the profitability of each unit.  As increasing labour and material cost efficiencies are realized in the production process, furthermore, the amortization rate should increase.” 

This policy does not appear to be a logical and mathematically sound approach on A340 as PwC recognised earlier in their report at PwC 8.94 – 8.95 that the current escalation formula – under any interpretation – would not  lead to increased profitability per unit once BETA21S materials costs exceeded 31% of the cost.  Those relevant PwC paragraphs are

8.94  The price escalation formula currently in effect (as per the SA dated 11 March 2005 between Aeronca, MAC and HH) directs that the total sales price for exhaust system units will increase by 0.31% for every 1% increase in the cost of Beta 21S.  In effect, MAC is protected for increases in the cost of Beta 21S, providing that the cost of Beta 21S per unit remains equivalent to or below 31% of the total cost of production per unit.

8.95  Given the volatility in the cost of Beta 21S (a titanium compound), there is a risk that in future years the cost of beta 21S could exceed 31% of the total cost of production. Indeed taking into account the existing assumptions in the EAC model , the cost of Beta 21S per unit would represent approximately 35% of the total cost of production per unit by FY2012.

This rising profit/contribution year on year subject is dealt with in some detail at website Exhibit 8.1. PwC failed to apparently integrate and challenge themselves, E&Y and MAC on this varying profit per unit policy in its specific implications for A340 amortisation with the escalation formula in place. I should also add that it has not been my experience elsewhere that such an approach was countenanced either by  management or auditors.

As above MAC continued to add Labour learning costs – after 400+  A340 nacelle sets/5 years of production to production inventory (and E&Y as their auditors accepted the further US $1.5m to US $8.63 million added in the FY2006 Balance sheet to sustain the “break-even” ) whilst the Inventories Exposure Draft (3031) which would end this capitalisation was issued by the CICA in August 2006.   The subsequent introduction of that Canadian Accounting Inventories Standard  3031 in MAC from 1 January 2008 permitted some C$40m of inventory assets to be written off against retained earnings (approx C$10m of which was for these A340 -500/600 program labour learning costs) and the reader can see Mr Dekker’s opening comments at Page 2 and then in his answer to questions regarding Magellan inventory and the new accounting standards from Mr Cameron Doerkson of Versant Partners (p6) and in more detail again by Mr Claude Proulx at Page 8 of the published transcript of that May 2008 webcast for Q1/2008 Earnings.>

Claude Proulx - BMO Capital Markets - Analyst
Thank you, good morning. Just again on that accounting change, if we look going forward, it seems to me conceptually that because you wrote off a cost that your margins will be improved going forward. But at the same time, when you start delivery and probably you brought up like a bonus for the Joint Strike Fighter or 787 or the Airbus A350, the margins will be depressed.  So when we look going forward, like for the rest of 2008, that C$550,000, is that something that we could put in our model for each of the [next three] quarters or – Dekker interrupts

John Dekker - Magellan Aerospace Corporation - VP-Finance
..I guess there is a couple of comments, Claude. First of all, the fact that we had to take that charge against retained earnings does not mean that those were not valuable costs and not anticipated costs. Those were costs that we had anticipated when the programs were originally bid, and we will still get recovery of those costs going forward.  As we sit here at this point in time, very few of our programs going forward will require learning curves with the current programs……

Despite both of these substantive MAC Balance Sheet reductions  I continue to believe from the evidence, as you have read earlier in  Website part D. Exhibit 8.3. that as at today, from the documents/information available, I believe the MAC Balance Sheet continues to be over-stated by in excess of C$10m on an equivalent basis, a “material” value.

For completeness, you will also see in Part K that the basis of my “reasonable belief” in MAC Q2,Q3 and FY2006 financial statements is central in the UK Employment case for the A340 Protected Disclosures PD22,PD23 and PD24.  At that time we faced actual costs on A340 which were escalating further and further away from our FY2006 Budget/Program EAC, a North American management team (with Mr Edwards approval) who were prepared to settle with Aircelle -  and not proceed into the Arbitration/commercial  processes etc – as per Mr Butyniec’s 11/14 August 2006 Best and Final Offer letter  for A340-500/600 pricing that was LESS than we had used in our Q2.2006 EAC, which itself had already generated a publicly unreported $5.3m gross loss outcome as at Q2.  Although just a couple of days after my Protected Disclosures to Mr Neill (PD22,PD23) and Mr Edwards (PD23) from his written 12 August 2006 approval it appeared that Mr Edwards and MAC were prepared to settle at these pricing levels/terms  and further concede those lower A340 Revenues ($5.2m- $8.9m) and even higher gross losses (>5.2m) than those in the Q2.2006 EAC as NOW being acceptable on 11/12 August 2006, for whatever unstated reason(s), to settle this long-running dispute and avoid arbitration/litigation in Europe.

That “management override” of the Program EAC gross losses of $5.2m, compounded further by this 11/14 August BAFO settlement letter financial implications were NOT reflected in MAC Q2.2006 Financial Reporting by Mr Neill /Mr Dekker/Mr Dimma published to the TSE on the 14 August 2006 (see Exhibit 8.3 oral evidence in Part D), despite also an increasing clarity from multiple sources and decisions that the quantities/volumes which were also being used in our A340 Program EAC were no longer valid or justifiable from any “reasonable” business or accounting assessment/quarterly financial reporting certification. PwC correctly recorded in the Final Draft report at para 8.61 that “Brian Little stated in the E&Y presentation that his concerns regarding the treatment of the A340 NRC were raised following Q2.2006.” and as you can hear on the audio tapes (Tape recording - Part 1 (16 minutes) and Part 2 (7 minutes) and Part 3 (24 minutes) and Part 4 C (20 minutes) and Part 5 C (29 Minutes). I stated “And the fundamental issue here which we have to come to terms with is that this product is a product that has not only got a cost/price problem but it’s now also got a programme volume one!”

Ordinary MAC Shareholders will also recall that on Friday 26 January 2007  MAC shares were at a “new peak”, equivalent to C$16.25 + per ordinary share.  In fact that “new MAC share price peak” had risen since the week following the Q2.2006 earnings webcast on 15 August 2006 by some 50%.     It was also evident to Magellan Directors/Senior Officers, PwC and me that this C$16.25 share price coincided with Magellan filing their defences (ET3) to my whistleblowing claims on A340 etc (ET1) in the UK case and concurrently Mr Dimma instructing PwC to undertake their  7 month/C$3m+ investigation to August 2007 under his Chairmanship. 

Most Magellan ordinary shareholders before and since Q2.2006/14 August 2006  will also know only too well that the MAC Market Capitalisation value of C$300M +  on the Toronto Stock Exchange (TSE)  (broadly equivalent to its publicly reported Balance Sheet value) and their own ordinary share values has fallen very substantially since that last seven days in January 2007 -   See TSE – click 5 and 10 year MAC Company chart history.

Mr Dekker A340 Written and oral evidence (p167+) at Report:P79-80 in April 2008 and further A340 document (doc3605A) – in May 2009 
 “At a glance the assessment that would have been carried out by the auditors in order to satisfy themselves that the accounting on this matter was appropriate
   
Vice President Finance (CFO) and Corporate Secretary - Mr Dekker - His oral evidence (p167) and at Report in April 2008 : P79 including
   
Mr Little A340-500/600 aircraft programme was the largest product except the  super jumbo Airbus A380 ?
Mr Dekker It is one of the largest
Mr Little In terms of the MAC Balance Sheet, C$40+?
Mr Dekker Approx that yes
Mr Little This is probably the biggest single item to be a management issue from the inventory?
Mr Dekker

I don’t think I can dispute this                                  and shortly thereafter

   

Mr Dekker

I’d go through with Mr Neill the certificates and identify remarks of that nature. We need to be sure we’re fully versed. I saw this (referring to document 2006) and Mr Neill said he’d talked to Mr Little already. Issue re enough product from Aeronca.    It was not my expertise. I’d just leave that to him.

Judge What he wants to know is did you have a discussion with Mr Little?
Mr Dekker It was noted
   
Mr Little Would you expect Mr Little to be obliged to look at the accounts,  Aeronca EAC (BL referring to document EAC.Q2.2006.1830 etc) to satisfy himself?
Mr Dekker The self-certification process is laid out fairly clearly
Mr Little Can you specifically say you’d be expecting me to satisfy myself?
Mr Dekker I’d be disappointed if you didn’t
Mr Little Can we look now specifically at document 1830 for Q2.2006
Judge Have we left PD22? We know what and why, what’s 1830 got to do with it?
Mr Little It would have been one of the documents I would have looked at
Judge You don’t need to justify…. Mr Lynch QC interrupts
Mr Lynch And Mr Neill has been fully cross examined regarding this
   
Mr Little On 14th the conversation Mr Dekker and me had re arbitration might not have been connecting. I was getting increasingly anxious.
Judge Did you have that impression re Aeronca
Mr Dekker  It was of concern to him yes. As it was to all of us
Judge PD24 then
Mr Little This is the telephone conversation between JD/BL on 14th September. In it BL is saying this really is getting much worse. Very concerned re financial statements. What does Mr Dekker recall? We talked for 29 minutes and you were …….  Judge interrupts
Judge Sorry to cut across you again. It looks like it’s admitted so you don’t need to go there. It’s also accepted it tends to show breach
Mr Lynch QC NO, No!!
Judge You’ve admitted it in your schedule
Mr Lynch QC Oh, I see, of reasonable belief
Judge  It’s a continuation of your allegations on 11th August. As a finding of fact, I can’t conceive we wouldn’t find on that. The only issue is whether you had reasonable belief.
Mr Lynch QC If everything alleged is established, the real reason is reasonable belief,  and we dealt with Mr Neill with……  Judge interrupts (see also Part K 1B - Mr Lynch QC)
Judge It’s the same issue. It comes back to March re MAC financial statements.
Mr Little I was specifically concerned because I saw at least C$10m, and probably more…. 
Judge Mr Stafford QC cross examined Mr Neill. Do you want to focus on a question to Mr Dekker?  Any question you can ask Mr Dekker to establish or show us your reasonable belief.  You should also bear in mind they all had concerns
Mr Little I had a real concern that Arbitration was not just the solution that we had to address. The magnitude and impact were not being recognized.
Judge You’ve heard the Claimant’s motivation. What can you tell us?  It was a valid concern.   How did you regard it at that time?
Mr Dekker We were aware of this programme and the risk.  It was not being disregarded by anyone. As a management team it’s important to have different points of view.  Mr Little’s view is important in this assessment but his is not the only one. His point of view was valuable.  The auditors were comfortable with the outcome.

plus his further UK court evidence on 10 June 2009 – in particular pages 133-160.
Transcript/Notes of the UK public hearing by WordWave International Ltd (A Merrill Communications Company)    Official Shorthand Writers to the UK Court of Appeal

Chair of MAC Audit Committee - Mr Dimma -  His oral evidence at Report in June 2008 :P100-114 including

Mr Little  Why did you instruct PwC?
Mr Dimma You met Barbara Hadfield (“BH”) external auditors, E&Y.  Auditors are extremely risk averse. Barbara Hadfield raised the issue with her partners. They felt they had an obligation to meet you.
Mr Little Then the Audit Committee decided to commission the investigation?
Mr Dimma Yes. E&Y were sufficiently aware/concerned you had raised these issues, they felt they should investigate further. On UK counsel advice, the Audit Committee hired PwC.
Mr Little  Vol 2.585 transcript of my meeting on 29 January 2007 with PWC “meet with AC, PWC and EY but without your lawyers to agree the scope of an investigation.”  I never had that opportunity, did I?
Mr Dimma Our view was that the appropriate way to proceed was to hire independent forensic accountants. Appropriate arm’s length way to proceed.  Terms of reference set between AC and PWC
Mr Little I had no say?
Mr Dimma No reason why you should
Mr Little It was important
Mr Dimma  You met with John Tracey, as 585 attests, for a long time. The AC felt PWC investigated your concerns and would further discuss with you.
Mr Little Why not share the terms of reference?
Mr Dimma You’re the aggrieved party , we wanted a totally arms length relationship
Mr Little I saw you in early February at your office.
Mr Dimma  We met in the lobby briefly
Mr Little  I said I wanted to work through it with you
Mr Dimma  I don’t recall, but you might well have said so
Mr Little Was I asked to make amendments about factual accuracy?   Vol 8/3002  Sent by independent lawyers working for the Audit Committee. I asked to make comments as I had been advised to do so by Deloitte. I asked if I could be invited to comment on the factual accuracy – it was denied
Mr Dimma You met with PwC during the investigation?
Mr Little  These are specific questions I asked if I could make comments. This opportunity was denied.
Mr Dimma In the view of the Audit Committee, PwC is a reputable audit firm, a first class UK forensic accountancy team, capable of getting all the facts for a sound report. They did so. There was no need for other parties comments.
Mr Little Why allow the Magellan management to comment on that PwC report and not me? It now takes longer for me to bring up factual issues.
Judge You don’t have to. Not sure Mr Dimma can help on factual issues. Try a couple.
Mr Little Major concerns about A340, C$40m plus on Magellan balance sheet               (True and Fair View)
Mr Dimma Yes
Mr Little Significant challenge to inventory value, significant impact on future asset value and cash recoveries
Mr Dimma  Yes
Mr Little EAC – estimate at completion document – did the Audit Committee look at this regularly?
Mr Dimma  Yes
Mr Little  I raised the issue about this in Q2.2006
Mr Dimma Yes
Mr Little Vol 5 /1830  A340 Estimate at Completion  June 2006   Q2.2006
Mr Dimma Yes
Mr Little Gross profit / loss was a  $ 5m+ loss
Mr Dimma Yes, I see the number
Mr Little That didn’t appear in the accounts at Q2 when reviewing the certification documents. I put a note on 9 August 2006; Please discuss A340, Boeing Systems integrator kits.  I had a discussion on my return on 8 August about that.  Did Mr Neill tell you I had that discussion?
Mr Dimma I would like to make a general comment before going into this level of detail
Judge Are you struggling to answer?
Mr Dimma The Audit Committee looks at things from a different level of detail. We looked very, very carefully at the draft and final PwC report, but we didn’t get into the exquisite level of detail that Mr Little is now pursuing and Mr Dekker would have been involved with.
Judge Once you received the PwC report, the Audit Committee looked at it but didn’t investigate the factual issues on which the conclusions were based?
Mr Dimma The Audit Committee read the report, discussed it, but focused principally on the conclusions and no exquisite details at the bottom of the numbers
Judge I’m not sure you’ll get more than that?

(BL note

1.  As we heard it Mr Dimma asserted in his evidence that effectively he relied on Mr Dekker and PwC. However he stated that the Audit Committee looked at the draft and final PwC report very, very carefully.  As ONE example we cannot understand why Mr Dimma or his colleagues (or indeed anyone at MAC) did not see the obvious “basic logic and simple maths” errors, which alone inflated their calculated demand by several hundred units or $100M+ revenues, made by PwC (“forensic deceit”) when they calculated a potential demand for A340 Spares and Repairs of “1572” units by FY2021. This was only one of those from our list of factual errors and omissions which we were denied the opportunity to provide to PwC or the MAC Audit Committee by Mr Dimma and his legal advisors from TORYS LLP before the Final Report was issued in late August 2007.

UPDATED JULY 2010 -   in an email which I sent on 18 July 2010 to Mr Dimma I asked at Q.2 on A340

QUESTION 2 :   To your knowledge was Mr Butyniec’s 11 /14 August 2006 BAFO settlement pricing proposal discussed and/or approved by you or any other member of the MAC Audit Committee or non executive Director?  Was its proposed pricing settlement implications with regard to the A340 unit pricing that had been used by all of us in the Q2.2006 A340 EAC explained to any of you,   in relation to the $5.3m Gross loss etc?”

<The Respondents UK legal team moved their position to opposing my “reasonable belief” as at August/September 2006 -  in documents presented to the UK court in November 2007 - based solely on a reliance on the PwC Final Report – see further information at Part K. Although there were multiple electronic and people sources within Magellan from which these documents and information could have been obtained by PwC they were in any event given these relevant August 2006 pricing documents (CD2) by me BUT EXCLUDED from their “findings of fact” , Report and Exhibits.  This Mr Butyniec FINAL counter-offer for settlement to Aircelle on 11/14 August 2006 - before the public release of the Q2.2006 earnings statements -  had the written approval of Mr Edwards and Mr Dekker, which included, as you can see, A340 pricing which was lower than that MAC had used in the Q2.2006 EAC and consequentially would mean even greater  “Gross losses” than the $5.3m in the Q2.2006 EAC -  which were also NOT recorded in the accounting by Mr Neill (CEO) and Mr Dekker (CFO) in the Q2.2006 Earnings statement release to the TSE.>

2.  For completeness readers will have observed that the Q2.2006 quarterly certificate (doc 2006) also refers to Boeing 737 – Integrator Kits.  In the Dossiers I provided to Mr Dimma (Folder B4/32 pages) in September 2006 were on this Boeing 737 accounting concern <Protected disclosure- PD19 and PD20>.  Mr Neill and Mr Dekker engaged in “management over-ride”  of the Ellanef submitted financial accounts for Q2.2006 . Despite the information which follows below Mr Dimma failed to intervene in the Q3.2006 quarterly financial statements and ensure this USD800K /C$904K adjustment was made to the published Q3.2006 MAC financial statements, as it failed the basic revenue recognition test.  Indeed PwC record (para9.42) that he Ellanef CFO also included himself an exception with respect to the Boeing accrual in his quarterly certificate letter for Q3.2006 on 1 November 2006 to Mr Dekker and Mr Neill (after my termination) but before a recommendation for approval by Mr Dimma and the Audit Committee on to the MAC Board approval.

UK evidence – Mr Neill and Mr Dekker

Judge  What was your understanding as to why the Claimant was raising the issue
Mr Neill  Brian believed we did not have enough certainty with Boeing to go ahead recognizing the reduction of discounts.  However the history of the relationship was such that if someone in Mike’s position made that kind of verbal commitment we were comfortable that it would be carried through
Judge Expand in answer – I think I know – but as a result – the Claimant’s concern was     that the accounts were misleading.
Mr Neill  That concern was unfounded
Judge But was it his concern
Mr Neill It was
Mr Stafford Before go into the details of that – such a concern is par excellence a concern of    corporate governance
Mr Neill  Yes
Mr Stafford  And that is doubly so in the case of a publicly listed company
Mr Neill  If there was any such issue – that would be a concern
   
Judge  Email of 7th August – best response we could get it relates to an issue still under discussion
Mr Stafford  5/2006 – this is a sub certification sign-off sheet. This is the first time we have looked at this. After Enron an attempt to make sure that directors did not look other way.
Mr Neill Yes raised profile of how business run – regulation in different companies – to ensure that management is accountable.
Mr Stafford This is a certificate signed by you on 14th August 2006 – 5 days after Mr Little had signed his sub certificate – 2006
Mr Neill  Yes
Mr Stafford You fulfilling duty re filings accounts of MAC
Mr Neill Correct
Mr Stafford No untrue statement of fact  – this is you putting neck on block re quarterly filings
Mr Neill  Yes
Mr Stafford Q3 interim accounts – also included another amount for the discounts you were giving to   Boeing which had not yet been agreed
Mr Neill  Yes
Mr Stafford  Profits were increased by the value of those discounts by C$904.000
Mr Neill If not included would be overstated
Mr Stafford Would be a serious thing
Mr Neill   Would disagree – materiality – material effect on final published accounts – that is what we would identify
Mr Stafford At this stage -  not been identified.  At end of the 4th quarter the whole recognition of revenue was reversed and C$904K was taken out of the accounts
Mr Neill Correct
Mr Stafford  And the consequence was to reduce the profits of the Company by reason of that reversal in Q4.2006
Mr Neill  Correct
   
Mr Stafford Do you think that investors would be happy to know that the company would be deliberately reporting its profits in a way that would need to be reversed
Mr Neill  Our investors are
Mr Stafford  Do you think it would affect the confidence in company accounts?
Mr Neill  Have confidence in the auditors
Mr Stafford Auditors would say – we have to have confidence in the managers – they take responsibility for the accounts
Mr Neill Correct
Mr Stafford  They would be happy – that 3 quarterly accounts would need to be reversed and corrected?
Mr Neill Silence

In your 14 November 2007 re-examination you told Mr Lynch QC about the Mr Little’s Q2.2006 quarterly certificate on document 2006 – on 9 August 2006

Mr Lynch Did Mr Little object to the accounts being signed?
Mr Neill  Object? 
Mr Lynch Did he say the accounts should not be signed off 
Mr Neill  Don’t recall him saying that but did make his concerns known  

Can I also refer to the transcript of oral evidence in April 2008 for Mr Dekker

Mr Dekker He’s saying about the inclusion of the profit, yes
Mr Little  I did say if we’re doing this we need to ensure we don’t take the 1st and 2nd Quarter?
Mr Dekker Did he say the accounts should not be signed off 
Mr Neill  Whilst he may not have used the words he did express concern about the inclusion of income in that period    <BL – USD600K/C$699K)

 

Extracts from some paragraphs in PwC report – Section 9 – on Boeing 737 Integrator kits.

Para 9.16 “For Q2.2006, the preliminary reporting package (exhibit 9.4) submitted by Ellanef to Corporate continued to include USD300K within prepaids and other assets with the description “Accrue for revenue on integrator.” A revised reporting package submitted by Ellanef on 4 August 2006 with the description “package revised due to last minute change from Corporate” included an additional USD300K of revenue and an amount of USD600K within prepaids and other current assets with the description “Accrue for revenue on integrator” (Exhibit 9.5) The revised package was used for the Q2 consolidation and publicly released quarterly financial statements.”
   
Para 9.48  “In March 2007, following further consultations with EY regarding the appropriate accounting treatment for the Boeing revenue accrual as part of the yearend audit process, John Dekker indicated that he now agreed that since an agreement in writing from Boeing had not been obtained the revenue accruals should not have been taken at the 2006 quarter ends since they failed the revenue recognition test. We note that EY does not carry out quarterly reviews of MAC’s results.”
   
Para 9.54 “Brian Little’s position that the inclusion of profits with respect to reversal of the price reductions on the integrator kit was made in the absence of a firm undertaking or agreement from Boeing is supported by PwC’s analysis and by MAC’s conclusion that revenue should not have been accrued at quarter ends”.

re 737   

The MAC Q4.2006 quarterly results were then reduced by the USD800K and published accordingly.
MAC’s 2006 yearend financial statements were issued on 2 April 2007.

Subsequently, on 1 June 2007 MAC and Boeing reached agreement in writing with respect to price adjustments and an extension of the contract from 2009 to 2012. This agreement included the payment of higher pricing on a one-off basis for those units delivered by MAC from 1 June 2007 to 31 December 2007 and MAC accounted for this in revenue recognition terms appropriately for deliveries in Q2.2007, Q3.2007 and Q4.2007 earnings statements.

When the Selling price/gross margins review was presented by Mr Groot and I on December 2005 (MAC Board 151-156) it was accepted that we needed, as a minimum, to target on the Boeing 737 System Integrator kits (circa $30m revenue per year) the re-negotiation out of the contracted discounts from the MAC Board approved 5 year contract signed in 2004.

The new June 2007 contract for the Boeing 737 system integrator kits prices to be paid by Boeing (in this new extended MAC agreement:doc 2964-2968) for FY2011 and FY2012 are contracted to be lower than the “discounted prices” for the deliveries throughout the 2005- 2009 original contract.  As I am no longer directly involved I can only comment that, on the face of it, this acceptance by MAC management and its Chairman and Board of Directors of this new “lower” pricing for these Boeing 737 system integrator parts seems very odd.  This is particularly so after the natural disappointment and comments/discussions following the  total MAC/Boeing sales contracts and poor actual/projected gross margins through to FY2009 presentation made in December 2005 to the MAC Board  by myself.  We set out to achieve the MAC Board and Corporate strategy objective of a  minimum 15% EBIT across all the Boeing revenues.  Mr Neill stated a 15% EBITDA target (EBIT?) in a question from Richard Stoneman during the Q3.2006 MAC Earnings webcast call (p8/p9) which followed a similar question on EBITDA from Richard during the Q2.2006 MAC Earnings webcast call re FY2007 (p19/20).  Certainly from a commercial and financial perspective, given its importance to MAC in its Revenues from the Boeing Commercial Aircraft Company, this extended contract AND LOWER pricing is inconsistent with the MAC Board threshold targets discussed with all the MAC Directors in December 2005 and prior to my dismissal.

In my functional strategy and senior sales and marketing role I would not have suggested or recommended to the MAC Board, in accordance with the MAC Corporate Bid/ Contract approval process and financial documentation from Mr Dekker, that we accept LOWER pricing than the $103,765 per aircraft set in FY2005.  It would seem that this new agreement (doc. 2964-2968) will have provided enhanced revenues and gross profits of approximately $1.9m from June - December 2007, to maintain the equivalence of that FY2005 price,  to the end of FY2007 but for the following five years from FY2008 will mean less Magellan revenues and gross profits of approximately $10m.   In fact the Boeing 737 Integrator kit aircraft set price to be paid by Boeing in FY2012 will have reduced by 7.4% / USD $7657  to that paid to MAC seven years earlier in FY2005. 

I am surprised and disappointed, as a former Senior Officer with functional responsibility for these matters (and an ordinary shareholder), that Mr Butyniec and Mr Dekker did propose this to the Magellan Aerospace Corporation Board for approval.  Furthermore I was shocked to learn from Mr Edwards , for the first time, in his witness statement (Para 11)  that he had been told by Mr Butyniec that he considered my efforts in explaining the needs to Boeing for improved contract pricing, to help justify capital investments in Ellanef alongside MAC land sales,  as being “reckless behaviour”.   To me this is truly astonishing for a Chairman and a major investor in MAC.  Mr Edwards never raised the subject with me.   Obviously now when this contract comes up for renewal again in FY2012 the follow-on contract discussions for FY2013 + with Boeing will also start from that much “LOWER PRICING BASE” for any future period – and I consider it is very probable that the Boeing 737 Single aisle aircraft will be in series production in Seattle for another decade.

3. Although Mr Neill was the President and CEO from 2002-2006, and MAC reported net losses in every year from 2002 – 2007, Mr Neill stated to the UK court (RAN11) “Far from being a financially dubious or badly or carelessly managed group, Magellan was and is a solid performer in an extraordinarily challenged market backed by major shareholders who are both involved and patient”. Shortly after Mr Neill’s retirement as CEO and Several months after PwC completed their Final Report MAC announced on 31 March 2008 for FY2007 “Accounting errors and mis-statements in accounts receivable were uncovered at one of the Corporation’s divisions during the course of an ongoing process to collect outstanding accounts receivable on a timely basis. This prompted an internal investigation that uncovered the overstatement of various assets on the balance sheet resulting from improper accounting and also discovered unsupported and unrecorded transactions. This  was for a sum of C$7m + and took place over the period when Mr Neill was President and CEO ( Mr Dekker CFO)  from 2003 -2007.

As a result of the accounting irregularities that occurred from 2003 – 2007  ……… Although the amounts of the restatements relating to the individual years prior to 2007 were not likely material, the Corporation has restated those periods as the cumulative irregularities was material in 2007” )

During Mr Dimma’s oral evidence on 4 June 2008

Mr Little      In April 2008, Magellan disclosed a “fraud” position of C$7m+ in British Columbia?
Judge         What’s the relevance?
Mr Little      They have had another “fraud” allegation, commentary on the overall Company culture
Judge         We wouldn’t widen our considerations

<BL observation : Although I am not aware of MAC ever disclosing which business unit or jurisdiction these accounting errors and mis-statements took place in, I believe it can only be one of the two business units in Canada in which I had no day-to-day functional responsibility within MAC.  That is I was instructed by Mr Neill (the former President and CEO and my superior) to leave Aerotech / MATS and the Power Generation Division outside of my functional scope.  

I say this for two reasons.   One I believe I would have had a sense of the magnitude of any such activities within the businesses in which I had a strategic and functional sales and marketing involvement and secondly in briefly looking at the financial numbers for the extent of overdue debtors greater than 90 days in Aerotech (in Langley , British Columbia), as part of my MAC general reviews for the other businesses, I thought the financial numbers seemed much higher than would be typical of the “norms” in that type of business.  I believe there was one occasion when I made such an observation to a Toronto Head Office finance person in the summer of 2006.   I did not pursue that any further and I of course I may, perhaps, be simply wrong.   

More concerning, and unclear to me, is why in the Ernst & Young (Canada)  public audits at MAC year end FY2003 to FY2006 were these accounting errors not discovered by E &Y in their year-end audit processes and testing , or by my former MAC senior management colleagues  -  Mr Dekker and Mr Neill – in their governance and cash management routines.

4. PwC also report (para 5.22/5.23) that they uncovered in their investigation an email from Mr Dekker to Mr Groot dated 5 November 2005 entitled “life is full of opportunities”  in which John Dekker suggests a number of possible positive accounting adjustments (doc 1099) for Q3/2005 and then in para 5.23

“ We asked John Dekker what he meant by the phrase “life is full of opportunities”.

He told us that it was an ironic, light hearted phrase, designed to recognise that the trading performance of MAC had been well below industry trends for some time and that this would continue for a further 12 – 18 months.  He stated that it was his practice to look at adjustments that might be made at the end of each quarter, regardless of whether the impact on earnings would be positive or negative.”     The reader will observe in doc 1099 above that Mr Dekker’s list of opportunities are all positive adjustments to Magellan’s short-term financial and cost reporting.

PwC and I can comment on two of these items in Mr Dekker’s Q3.2005 email as I was functionally responsible for these  (they reduced MAC’s  publicly reported Q3.2005 net loss by approx - 50%) 

  1. -       consider if 266 GBP reserve can come in
  2. -       consider capitalizing overhead burden into engineering inventory

- consider if 266 GBP reserve can come in.   I learned after the Q3.2005 earnings results were published to the TSE in mid November 2006 that Mr Dekker had unilaterally included the release of this reserve in the MAC Q3.2005 earnings.  MALUK correctly had not reported its release in their engineering or MALUK accounts.  I had advised Mr Dekker and Mr Neill on various occasions that whilst I had secured agreement in Airbus UK on commercial terms, which would permit the release of that £266K reserve, we had NOT yet obtained the written authority from Airbus Toulouse to properly release that £266K reserve to Magellan earnings.  Mr Archer and I in MALUK did finally achieve that written agreement in January 2006 and therefore the Q3/2005 financial statements were overstated , Q4.2005 was under-stated and obviously the audited FY2005 MAC financial statements for FY2005 were correct.  Mr Neill and Mr Dekker had also released the other substantial part of this reserve (£200K) at the end of 2003.  As I state in the website at Part K the commercial agreement and payment by Airbus for the related activity was only concluded shortly before, during and after my termination in September 2006 by me with the Airbus UK MD – see his and Mr Renson’s witness statements in Part J.   The ultimate irony is that the inclusion of that £200k profit in the MALUK accounts and hence in the Q3.2006 MAC quarterly earnings meant that MAC reported its first quarterly profit in many quarters.

- consider capitalizing overhead burden into engineering inventory     PwC record at Para 5.25 of their Reports “A document titled “Magellan Aerospace Corporation Eliminating and Adjusting Entries Index September 30,2005 (exhibit 5.10) shows an adjustment made by Corporate for the quarter ending 30 September 2005 for CAD 107,000 which is described as “To adjust overheads on Engineering inventory (UK) – Q3. “  Shawn Smith (Magellan UK CFO) stated in interview that he was unaware that this adjustment had been posted by Corporate and expressed surprise that it had been done. We have identified no e-mail communication that would indicate that any MALUK employees were consulted on the adjustment.”   In para 5.48 PwC also state that in their experience of SSAP 9 the inclusion of non-productive costs and office administration – as Magellan had done - are not generally absorbed into inventory.  PwC also record at para 5.62 that no review concerning net realizable value of WIP and loss provisions had been carried out.  A similar accounting approach was taken in the Q4/2005 earnings and Magellan Aerospace Corporation FY2005 audited accounts.  In due course the MALUK statutory accounts for FY2005 had a C$100K+  downwards adjustment – which I and the MALUK Engineering Accountant still believe was insufficient.

Although in additional to my functional roles I had the business/legal duties and responsibilities of a MALUK director and MAC Senior Officer (with a first class honours in Business Studies, specializing in Finance and Accounting) Mr Neill it would appear from contemporary court evidence had been told that I was impeding the ability to achieve compliance with costing and reporting systems.   He never discussed this with me.   Elsewhere in PwC’s  Executive Summary at para 2.36  “We have sought to set out the relevant facts and circumstances in relation to the five accounting issues that the Audit Committee of MAC has asked us to investigate.  The Audit Committee and its legal advisors will wish to consider whether there has , or has not, been “financial engineering” as alleged by Brian Little”.   

Correctly PwC  note also that materiality considerations are not driven solely by the size of an adjustment or transaction , as is often misunderstood by many business /lay people and some accounting professionals,  CICA Assurance and Related Services guideline AuG 41 sets out the Concept of Materiality.  This point was and remains consistent with what I had learned from the Director Training on directors duties and responsibilities provided by the Institute of Directors in the UK>


Part G   The Corporate Framework

As a former Senior Officer and Senior Vice President of MAC and as a whistleblower, I have sought to discharge my legal, business, ethical and moral responsibilities and in doing so, provide greater transparency for the stakeholders surrounding the inherent culture and financial framework within MAC. This objective of transparency is seemingly in conflict with the board of directors and is the key reason why I have sought to highlight these concerns in public by now implementing my suggested proposals at this year’s AGM - see part H - with the publication of this information.

“Magellan Aerospace Corporation Board of Directors General Guidelines

The fundamental responsibility of the Board of Directors is to appoint a competent executive team and to oversee the management of the business, with a view to maximizing shareholder value and ensuring corporate conduct in an ethical and legal manner via an appropriate system of corporate governance and internal control.”

The MAC Board fundamental responsibility  -

  1. appoint a competent executive team and to oversee the management of the business
  2. with a view to maximising shareholder value      -    MAC Shareholder.5 year.share performance from the Management Information Circular ;April 2010.  No dividend policy. 
  3. ensuring corporate conduct on an ethical and legal manner     -    MAC website 
  4. via an appropriate system of corporate governance and internal control  - attach  Mr Dimma – November 2006 report and letter .   Also note multiple letters to each individual Director.

Three Letters from Brian Little to each MAC Director

Example - Mr Edwards - Chairman    7 November 2006    :    4 December 2006    :    27 November 2009
                (A340 Oral evidence Report P82-89)

Similar letters were sent to : 7 November 2006    :    4 December 2006    :    27 November 2009

Mr R. A. Neill

2006 President CEO : 2007 Vice Chairman - (A340 Written & Oral evidence report p56 - p64, p72 - p78)

Mr W Dimma

William A.Dimma , CM, BASc, PEng, MBA, DBA, HonDComm (St.Mary's), HonLLD (York), KCLJ - Chair of the Audit Committee (Report attachment E p100 - p114)

Mr W Davis

Honourable William G. Davis, P.C., C.C., Q.C.
Chair of the Human Resources and Compensation Committee

Mr D Lowe

Member of the MAC Audit Committee Former President of Fleet, was part of MAC

Mr B Gowan

Member of the MAC Audit Committee (Former CFO of MAC)

Mr J Palmer

James S Palmer, C.M., A.O.E., Q.C.

Mr L Moeller

Edco Financial Holdings Ltd., V-P, Finance.

With the 4 December 2006 Letter to each director a dossier which contained DIR44 –UK Times article– 28 Oct. 2006 “End Looms for Airbus A340 as Emirates cancels $4bn orders”

Prior to the provision of some of Mr Edwards oral evidence I record some specific evidence from others regarding Mr Edwards awareness and involvement in “detail” at Magellan 

Brian Little  Evidence-in-Chief – 19 January 2009

Mr Stafford

There has been references to Mr Edwards, Chairman of MAC. Have you had many dealings with him?

Mr Little

At Magellan staff meetings , which I attended 70%-80%.  He probably attended more. Occasional meetings when I was in Toronto – 3 or 4 times a year. I can only recollect one or two direct conversations with him at a business level in one or two years.

Mr Stafford

What was the impression as to the level of detail he brought to the business?

Mr Little

He was CEO of the business when he acquired the business. Major executive responsibility continued.  I’ve never met someone with such a phenomenal recall of memory – tremendous recall ability.

Mr Stafford

Let me paint a spectrum with wholly detached at one extreme and wholly involved at the other, where was ME?

Mr Little

Almost wholly involved.

And then another. Although a number of MALUK Engineering management Employment contracts referred to “CEO discretionary bonuses” the Respondents QC argued during Mr Nokes cross-examination  

Mr Lynch

Mr Neill was expressing sympathy with the bonus payment and you understood that as a firm commitment and I suggest he didn’t and couldn’t.

Mr Nokes

He did to me. Whether he was in a position to do so or not I don’t know. He was the CEO.

Mr Lynch

You’d be aware - man of status – Mr Edwards.  Resisting would be extraordinary regarding Mr Neill.

Mr Nokes

I never knew that Mr Edwards was involved at that level so I can’t agree….


And finally another -- Ms Ball oral evidence on 22 January 2008

Mr Little

Vol4 1336   You said it was to be divided as the European management sees fit?

Ms Ball 

I don’t know if I’d ever said that.  I do know the approval process though . Mr Edwards likes to be involved.  

(Elsewhere in evidence, although the written policy did not require it, Ms Ball considered that Mr Edwards would need to approve some 16 junior engineer forms for one –off payments totaling C$20K).  
Mr Little  Do you remember complimenting or thanking me for my activities?
Mr Edwards I’m sure I did . It is important to recognise success in any corporations.

Mr Edwards was asked during his initial testimony by videoconference in the UK public court on 5 June 2008 (p19)

Mr Edwards

I have no recollection. In this industry there are repeated obligations on revenue and price increases to reflect cost increases. I have no recollection of the detail.

Judge

No more questions on detail. ME has no day-to-day knowledge

Mr Little

In my experience he has a phenomenal memory

Judge

On what has been suggested, where you say you do not have recollection, are you being untruthful?

Mr Edwards

That is incorrect. I take offence at that. I believe my memory is good but I can’t recall things I wasn’t involved in.

Mr Little

10 August 2006 After the Board meeting. Our meeting included a discussion of the A340-500 and 600 programme being under review in Airbus, which would have a serious effect on our recovery………

Mr Edwards

Your role was in relation to marketing issues, but I wasn’t involved at that level of detail

Mr Little

I said it would mean write offs on our Balance Sheet

Mr Edwards

You never mentioned it to me at all      (Perjury? – (1))

<BL Observation –  (1) Contrary to Mr Edwards oral evidence above Magellan’s UK legal team led by Mr Lynch QC,  in their Respondents PD schedule dated 16 November 2007 provided to the court, ACCEPT  that I disclosed the A340 PD23 information to Mr Neill and Mr Edwards after the MAC Board Meeting.

PD23 is stated in my Witness Statement at para 212  ------     “After the MAC Board on 10 August 2006, while I was still in Toronto, I had a meeting with Mr. Neill and Mr. Edwards on a number of matters.  During this meeting, I told Mr Edwards of my concerns regarding the A340 programme and also informed Mr Edwards and Mr. Neill that on the basis of my own market intelligence, I understood that three scenarios were being considered by Airbus for the A340 programme – namely 60, 80 or 100 further aircraft deliveries from January 2007.  Compared with the assumption of a further 800 exhaust system deliveries from January 2007 assumed in the EAC this represented a downgrade of perhaps 50% and in my opinion, had serious adverse implications for MAC’s ability to recover the NRC in the Group balance sheet against the future profits from this programme, which we would have to address through our accounts and disclosure to the stock market. This was my Twenty-third Protected Disclosure.” >

Most curious then that Mr Edwards – a lawyer by training - would deny it under oath to the UK court / Tribunal. At first he stated he had no recollection of this meeting, claiming he was unable to recall things he wasn’t involved in – ignoring the fact that he had been directly involved. He then denied outright in court that I had told him the news from Airbus would mean write-offs on the balance sheet of up to 50% of our anticipated future A340 volumes. As we know, bad news regarding the A340 project could hardly have come as a surprise to him. He knew as the previous CEO that MAC had underbid and under- costed it from the outset. But this was even worse – the volume cut-back would expose the company’s inability to recover the NRC, and it would trash the Balance Sheet and cash recoveries. His denial in court, despite his QC’s PD schedule instructions to the contrary, that I had even discussed it with him and Mr Neill was viewed as the performance of a man viewed in panic and evasion, apparently forgetting which lie he had told last.

And then Mr Edwards immediately continued in cross-examination

 

 

Mr Little

Was a C$30m write off a big issue for the companies/shareholders funds? ( Replicated A340 EAC Summary scenarios from BL/Deloittes – 4242A)

Mr Edwards

I cannot say: it would be based on speculation  (Edwards prior FY2002 MAC Financial statements experience in March 2003

Mr Little

The write offs from 2006 were signed off by all of us?

Mr Edwards

I did not sign off on anything. That is a mis-statement on your part. This is an issue for internal management. I can rely on the fact that things were signed off under accounting principles.  I do not personally understand it. I was not personally involved.   (2)

 

(2) This had not been my experience, as you can read below in  Mr Edwards personal written authorisation of the final settlement offer to Aircelle 11 / 14 August 2006 made by Mr Butyniec. This final settlement offer  was for A340 pricing which was LOWER than the A340 - Q2.2006 EAC pricing assumptions.  Mr Butyniec’s final offer would also lead to REDUCED program revenues of a further $5.2m-$8.9m  on top of the “management over-ride” by Mr Dekker and Mr Neill of the publicly unrecorded /non-disclosed  Gross losses of $5.2m in the Q2.2006 EAC produced in late July 2006. 

As recorded in the MAC Annual Information Form (AIF) on 24 March 2006 the MAC Board meeting minutes on the 11 May 2006 also records that Mr Edwards advised the directors that the following are significant issues the Corporation has to resolve: Aeronca’s contractual issue with Aircelle on pricing for the A380,A340 and A318…”.     At the next MAC Board on 10 August 2006 during my attendance there was NO proposal made to the Board by Mr Butyniec or Mr Neill /Mr Dekker to seek the approval of a final pricing counter-offer to Aircelle – see my Question 2 to Mr Dimma in Website Part B (doc 268-273).  
Mr Edwards at precisely that same time re Q2.2006 also authorised Mr Butyniec’s 11/14 August 2006 final offer for settlement with Aircelle (as did Mr Dekker) which stated “final” pricing for the A340-500/600 which was LOWER than we had used in the Q2.2006 EAC.   Given the senior management and MAC Board attention it had received over the last twelve months and its significiance it naturally required Mr Edwards approval.  As you can read Murray Edwards authorised that Final Pricing Offer to Aircelle (not negotiating with ourselves any longer) in his 12 August 2006 email with the comment       “Letter looks fine to me. Let's hope this puts this issue to bed." 
Although just a couple of days after my PD23 protected disclosure above from this written email approval it appeared now that Mr Edwards and MAC were now prepared to settle at these levels/terms  and concede those lower A340 Revenues and higher gross losses (>5.2m) than those in the official and only Q2.2006 EAC.  I know Mr Furbay at Aeronca was never asked to produce a further EAC incorporating these pricing concessions (and I never saw one) but Mr Dekker and Butyniec must have done so to obtain the approval of Mr Edwards and Neill.  To this day I do not understand why these LOWER pricing terms were approved by Mr Edwards and Mr Dekker and suddenly became acceptable on 11-14 August 2006, just hours before Mr Dekker publicly released the Q2.2006 results to the TSE.   
Lest it be missed this is a precise example of the detail which Mr Edwards was involved in despite his evidence above.   So, contrary to the impression he worked hard to give the Tribunal of his having a general approach to it, Mr Edwards intervenes in the detail of the business and exercises a very hands-on approach to running MAC.  He participated in more than 90% of the Magellan weekly staff meetings for several hours each Tuesday. For A340 examples read, 15 Aug. 2006-doc .2021, 12 Sept. 2006-doc.2179. This means he is aware of all the strategic issues affecting the company’s profitability, especially its biggest Balance Sheet item, the A340. Naturally, therefore it was recorded as a major point in the MAC AIF in 2006.

So, when in court he was also asked the question below “Have you any idea of what the orders position is re this (A340) aircraft?” it was not credible for him to say “Not at all”.  This is the Chairman, a former CEO of the business, a man with a remarkable memory and grasp of detail, talking about the most important and closely monitored item in the history of the company – a contract he won. And now we know that it has been flagged up to him since 2002 as a hot potato in an anonymous letter. He could easily have come out with a figure or overall sense but he chose to be evasive.

Indeed, having made a case to the Court that he could not be expected to remember details, this denial can only be explained as a deliberate and cynical attempt to support that fiction.  And would every other MAC Ordinary shareholder not reasonably expect that as Chairman he should be involved and know the A340 detail given the long history and substance of such a project and finances since he was CEO.     It was, as he had quite rightly had identified himself, the number one customer contract and financial issue in MAC!!  He also signed the Annual Balance Sheet Assets, Liabilities and Shareholders’ Equity – for example FY2006.   The centrality of any MAC pricing settlement on A340/A380 with Aircelle was recorded in the Annual Information Form (p14) on 24 March 2006 as above.

 

Furthermore Mr Edwards and Magellan Aerospace Corporation do have some experience of the TSE share price reaction to C$30 m write-offs. On 15 April 2003 Magellan announced its financial results to the TSE for FY2002.  This involved significant C$30m + write offs as can be read at this hyperlink .  The TSE MAC share price history rise and then fall for the month of April 2003 is also disclosed.  I suspect most people know the broad outcomes which generally occur in a stock market reaction when poor financial results are publicly disclosed by companies.  

As a matter of record you will also see that C$70m of funding in convertible debentures was raised by MAC only three months before these published C$30m write-offs, and that this same C$70m Convertible Debenture funding for MAC would come up for renewal by 31 January 2008. Crucially this was less than 12 months after the published FY2006 results and the final quarterly/annual published period before Mr Neill’s retirement from his position of MAC President and CEO.   You can listen to what Mr Dekker said about that new C$15m loan and future C$70m funding in an analyst webcast call for Q4.2006 – April 2007. In the event the MAC proposal in December 2007 failed to attract the external funding and therefore was concluded differently.

Subject matter such as the “TRUST” placed in the published Earnings and MAC Balance Sheet asset values are important in the public /shareholder interest; as you can hear in this important Q&A exchange in November 2006 between Mr Neill (& Mr Dekker) and Mr Claude Proulx, a respected aerospace stock market analyst when he raises his concern about earnings and inventories – “because a lot of it is program-related” before Mr Neill responds that “Well, we may want to differ with you in opinion on that Claude. Because I would argue that book value is likely higher than you’re stating right now” - athough Mr Proulx was directly quoting the figures which had been published by MAC for its Balance Sheet for Q3.2006, the subject of that specific MAC Webcast Earnings call.

A USA reader input after reading my website–   “How can you tell when a CEO is lying” and audio interview (4 minutes)
Furthermore PwC are running stories/video clips on “Building and Sustaining Trust” on their website with a quote from the Vice Chairman of Thomson Reuters “Society has lost trust in business and we need to regain that trust”.>

And then Mr Edwards immediately continued in cross-examination (p20)

 

 

Mr Little

Why were my points, especially on the A340, not included in the PwC report?

Mr Edwards

A large amount of money was spent on the external auditors E&Y and the third party PwC. They were of high repute. They reported to the Board and the Audit Committee, it was acceptable to rely on them.......................................(ICAEW Assurance Reporting)

Judge

“How much money was spent on the PwC Report?”  

Mr Edwards

“Too much!!   The shareholders struggle with the fact that the amount spent on that report could have been used for creating jobs etc….it cost in excess of C$3m. It is a substantial amount, but it was at the instruction of the Audit Committee, which is made up of fully engaged independent directors.  It was a standard and detailed report.  

<BL Observation - see UK evidence in court at Attachment D and point 3 below which includes email offers of support to Mr Edwards and Mr Dimma for recovery of £1M of fees from PwC in my email dated 13 October 2008 and emails below.  Also later in Part G the requests to PwC top management in PwC UK and PwC Canada to carry out their own internal investigation in accordance with their quality and governance processes and return £1m in fees to Magellan and its ordinary shareholders as “responsible leadership” which at the very least were now  “doing the right thing”.>


and shortly after the above I suffered my first “seizure” / period of unconsciousness in the UK Court.   As a result Mr Edwards testimony - he trained as a lawyer - continued (the day after the Magellan Aerospace FY2008 financial statements were published to the TSE and public) by video conference on Tuesday 31 March 2009 (p.9)

   

Mr Little

Are you saying you believe the pricing side was addressed but you’re not sure of the 2006 financial accounts.

Mr Edwards

We have independent auditors come into Magellan on a regular basis to do annual review. In each case EY signed off the statements. I have to rely on my professional advisors

Mr Little

The financial statements that E & Y rely on are produced by management

Mr Edwards 

When your auditors <sign> statements they have done a thorough detailed review. Directors can’t get into details and rely on the professionals. Given your sensitivity and since you’ve gone we have gone through due diligence and we have to rely on them.   And shortly later  

 

 

Mr Little

Document 3602. Have you seen this before?          (Airbus Orders & Deliveries spreadsheet from their website - Feb 2007)

Mr Edwards

No

Mr Little

Airbus website . Orders column for A340-500/600.  Total now 153. This was the document now provided to PwC and also what was given to E&Y. Have you any idea of what the orders position is re this aircraft?

Mr Edwards

Not at all     

<BL Observation –  (4)  (Note:A340 significiance to MAC finances as the largest asset for cash recovery in MAC Balance Sheet & my email to Mr Edwards (and Mr Dimma) in Sept. 2007 with A340 illustrative examples on PwC “findings of fact” omissions/errors etc.).    This Exhibit was in the PwC report at Exhibit 8.2. Please also note that Mr Edwards received a letter dated 4 December 2006 with a dossier which contained DIR44 –UK Times article– 28 Oct. 2006 “End Looms for Airbus A340 as Emirates cancels $4bn orders”.  See also Website Part D Exhibits 8.1-8.4 and related oral evidence.>


Mr Little 

It is reduced.  The orders position has reduced.   Do you see why I continued to be concerned that you’re not aware that management have misrepresented, misled and been untruthful to the public and to the auditors, and PwC have not included any documents that would undermine this?

 

 

Judge 

What is being suggested is management has deliberately over-stated the health of the project by deliberately mis stating the figures. Are you able to comment?

 

 

Mr Edwards

He used the word untruthful and I take some offence at that. My view of Mr Neill, Mr Dekker, Mr Butyniec – they do things right and with integrity. It bothers me to hear that comment. E&Y has been in my view absolutely diligent in producing these accounts. Have been super sensitive and have never provided the Board of Directors with any reason for write-off - given their degree of professionalism – one can always point to a number of variables. Economy has slowed down, have to look at the pricing/cost forecast. We don’t have the skill set to focus on this one issue.  PwC/EY would also look at revenue/costs. 

<BL Observation – (5) 

Confronted by the Judge with the spectre that his own management team may have deliberately overstated the health of the A340 project and conspired to keep it from him, he chose to take exception to the idea and, again most curiously, he chose some of his words carefully “We don’t have the skill set to focus on this one issue.”

Mr Dekker and Mr Edwards approved Mr Butyniec’s letter dated 11 August 2006 for the A340 BAFO settlement offer to Aircelle. The Q2.2006 had already generated gross losses of $5.2m (unpublished /unrecorded in MAC Q2.2006 Balance Sheet) and this final commercial proposal by Mr Butyniec would only make that position worse – further reducing Revenues by some $5.2m - $8.9m.

Given its importance it would be both alarming and improbable if Mr Edwards (after Mr Dekker’s assessment/knowledge and input) would not have properly considered the financial impact / write-offs on all the MAC ordinary shareholders before approving Mr Butyniec’s 11 August 2006 BAFO letter to Aircelle. It of course formally sent to Aircelle literally just hours before Mr Dekker would file the Q2.2006 earnings statements with the TSE/public and the MAC Earnings webcast on 15 August 2006>

 

 

And then Mr Edwards continued in cross-examination (p26)

 

Mr Little

Document 78, part 3  <Magellan Ethics Policy > “all employees……………. “  added for ease …….

If an employee becomes aware of a materially inaccurate or misleading statement in a public communication, the employee must report it immediately to the Chief Executive Officer of Magellan or the chairman of the Audit Committee of the Board. Making false or misleading statements to external auditors can be a criminal act that can result in severe penalties. No employee may directly or indirectly take any action to fraudulently influence, coerce, manipulate or mislead Magellan’s independent public auditors for the purpose of rendering Magellan’s financial statements misleading.”

   
Mr Edwards It’s a powerful statement and correct
   
Mr Little  I had discussions – PD22 - on 8/9 August , with you and Mr Neill – PD 23 – on 10 August, and -PD24 – on 14  September 2006 with Mr Dekker.  Did you know it is my view that a substantive element of why I was dismissed was because I was going to expose there would be a requirement for substantial write-off in 2006 and Mr Neill didn’t want that to happen on his “watch”,  and that is part of what he and Mr Dekker used to remove me?
Mr Edwards  I have no reason to believe – I’ve seen no evidence. Mr Dekker and Mr Neill do the right things. My view is there’s never been any connection to your dismissal.
Mr Little No further questions
Mr Lynch  No re-examination
Judge In accordance with those questions – just check you have asked them all.  
Mr Little   Pause     Confirmed
Judge Mr Edwards evidence is concluded 

<BL Observation – the reader should also refresh their minds re the oral evidence of Mr Dekker at Part D Exhibit 8.3 B and  Part D  (c )  re  CD2 extracts sent to Mr Edwards/Mr Dimma & PwC. I sent a number of emails in October/November 2009 and my A340 Final Draft Report to Mr Edwards – see pages 154 -158 and concluded –

UPDATED 2 AUGUST 2010  :  A340 Anonymous whistleblower letter to Mr Edwards in 2002 

Arising from Mr Furbay’s termination by Mr Dekker on the 23 June 2010  I have received a copy of a letter/information sent by an Anonymous Whistleblower on the A340 Project in  2002 to Mr Edwards – when he was Chairman and CEO/President  of Magellan Aerospace.   Please find attached a scanned copy of the covering letter.  As you can read it sets out this Magellan/Aeronca “whistleblower’s” view  on the A340 -500/600 project :

“Dear Mr Edwards

It is this writers belief that Magellan Aerospace Corporation has a significant long term financial exposure on an A340 contract – stateside – see attached.

The subject contract was grossly underbid. At last count it was also grossly under-costed. I can find no mention of the potential impact anywhere in your financial reporting.  

A conservative estimate of that level of exposure could be $50 Million U.S,

This writer recommends that you task Mr William A. Dimma with an audit of the subject A340 Estimate at Completion (EAC) at your U.S. Subsidiary.,,,,,,,,,,”

QUESTION 4  to Mr Dimma -  Can you please confirm when , in your role as Chairman of the Audit Committee, you received a copy of this “whistleblowing”  letter from Mr Edwards?  When you carried out your investigation, at his request, where can we see the public record of the financial implications of that in the public accounts of Magellan since FY2002 or is there none?

As before I look forward to a response to my four questions (and four supplementaries) by the end of July 2010.” 

Mr Dimma  (Mr Dekker as a finance employee and the Fleet-Operations-dismissed Mr Butyniec) are no strangers to whistleblowing within their career/organisations.   A former work colleague in the mid-1980’s in Shorts/Bombardier in Belfast, who subsequently worked in Operations for the Fleet Aerospace Corporation ( the predecessor / founder company of Magellan Aerospace in 1995), on recently learning of my ill-health, sent me a website link to a Canadian public news link ( the Spectator in September 15 / 17 - 1990 headlined “Blowing the Whistle”  by Dave Kewley.). I can see why he considered it very relevant as this is a fascinating article with many substantial similarities in our “whistleblowing” and would have been familiar to Mr Dekker, Mr Butyniec  and Mr Dimma’s experiences.

Nor are “whistleblowers” a new experience elsewhere for Mr Edwards.   I have recently learned that a Canadian “friend” and former CFO within another of Murray Edwards “publicly traded” companies is also involved in litigation in Mr Edwards hometown in  Calgary, Alberta for “a hostile work environment” which was creating a bullying and intimidating approach towards finance, leading to “aggressive revenue recognition”.   He has also suffered serious health problems as a consequence.  PwC have been and are the external auditors of this Calgary-based “public company”.    Naturally the parallels to A340-500/600  “Revenue Recognition Policy” and senior management actions will be apparent to the reader. As I understand it this case will come to a public trial in Calgary within the next 12 months – UPDATED 18 January 2011 -   I now understand that this case has been the subject of an out-of court settlement. 

<BL note :  I sent a number of emails in October/November 2009 and my A340 Final Draft Report to Mr Edwards – see pages 154 -158 and concluded –

From: Brian Little [mailto:brian@fortfield.com]
Sent: 16 November 2009 23:51
To: 'm.edwards@edcofin.com'; 'ichurch@edcofin.com'
Subject: RE: A340 On the Record FINAL REPORT
Your message
    To:  m.edwards@edcofin.com; i.church@edcofin.com
    Subject:  FW: A340  On the Record FINAL REPORT      
    Sent:  11/16/2009 4:51 PM                                                 was read on 11/19/2009 1:18 PM.

For the record

Following the receipt of various inputs to the “Final Draft” report issued on 9 November 2009 please find attached a copy of the A340 On the Record Final Report from me.  This of course will assist you in considering the actions that you should take next on this matter as Chairman of MAC.  When you read my email and the Final Draft report (read receipt Calgary 12.07pm on Tuesday 10 November 2009) you will have had some further insight into these A340 matters.  This completes my on the record position and the document subject to any final inputs from a wider audience by Friday 27 November 2009.  

My offer to support the recovery of the C$3m of PwC monies to MAC remains open.
Kind regards
Brian Little

 and later in email trail
I hope this my Final Draft Report on A340 (which is not complete but substantive from a MAC materiality perspective) provides you with the necessary evidence to take actions now as Chairman of MAC and the significant shareholder on behalf of MAC and all of us . I reiterate my offer from the MAC AGM to support MAC efforts to hold PwC to account for their work, on behalf of Mr Dimma and the Audit Committee, to recover funds for the MAC Ordinary and Preference shareholders and move towards the MAC Board primary objective of maximizing shareholder value.

and in my email to Mr Edwards on
1 December 2009

For the record    Mr N.Murray Edwards  -  Chairman of Magellan Aerospace Corporation    (TSE – MAL)
This is confirm that this attached covering letter (dated 27 November 2009) and a 8.4 lb file pack (Copy 1 of 22)  including my  A340.On-the-Record.Final Report.27 November.2009 (Red Tab) and other relevant documents have been signed for at 10.01 am  ( Tracking Number 8651 0534 1767)  by Sonny at your EDCO offices on  Monday 30 November 2009.

Kind regards  
Brian Little
Note:   File Pack is also available for Mr Larry Moeller as a MAC Board Director in the relevant period.>
   (Note :   also provided in files / dossiers    to E&Y UK  and Canada and PwC UK and Canada)

UPDATED  9 May 2011: Following the disclosure of the 20 June 2007 letter from PwC to Mr Dimma by Magellan lawyers after the UK Daily Telegraph article earlier that day it was clear that perhaps with the specific quote recorded by Mr Dekker

John Dekker, vice-president finance at Magellan, said: "PwC undertook a thorough and independent investigation and we gave them full access to documents and people. It's true to say that the full information in both the draft and final reports was presented to the audit committee."

 there was a possibility that Mr Dimma had never shared this letter with the other Magellan Board Directors, including Mr Edwards.  Just in case Mr Edwards had not seen it before I provided it in an email on 6 May 2011 directly to him.

Ernst & Young LLP

From a TSE shareholder/financial markets analyst perspective, please LISTEN to an important question asked by Richard Stoneman of Dundee Securities and then by a Mr Claude Proulx of BMO Capital Markets (a respected aerospace analyst in Canada)  on the subject of Magellan Inventory and third party verification during 5 minutes of the Q3.2006 earnings webcast call in mid-November 2006 and answered by Mr Neill (President and CEO: shortly to retire and be promoted to Vice Chairman)  and Mr Dekker , the current Magellan CFO and Corporate Secretary.  The complete transcript of the Q3.2006 MAC Earnings call on 14 November 2006 can be read here.  At p15

“Claude Proulx - BMO Capital Markets - Analyst
And the second question is , I mean, I look at your stock today and it’s trading at roughly 80% of book value. And I always believe that the market to some extent is efficient. And I’m  wondering , to what extent can we trust your book?  I mean, the book is really – that’s its real.  I mean , understand that there is some real estate probably – maybe understate the book. But at the same time, there’s a lot of things in your inventories – engineering , average excess over costs – where it’s going to be more questionable, especially in light of the performance that you are generating these days. Can you talk about this or – interrupts

John Dekker - Magellan Aerospace Corporation - VP-Finance and Corporate Secretary
- Sure, sure. Sorry .. R Neill now interrupts then John Dekker Continues

Claude, let me try to address the valuations of the inventory. Clearly , if you look at our balance sheet, the inventory is one of the most significant assets we have. That alongside capital assets. And we’ve spoken about capital assets and some of the valuations on the property. So let’s focus on inventory, which is really I think the crux of your question.  We go through extensive reviews of our inventory at any point in time. And I would estimate 80% of the external audit focus at the year end is on inventories. So there is an extensive amount of work done to confirm that those values are appropriate. So we have third party verification of those amounts.

Claude Proulx - BMO Capital Markets - Analyst
I’m just concerned because a lot of it is program-related. And you need to generate some earnings in order to justify the value that is there. And the earnings are not there at this point. So....R Neill interrupts

Richard Neill - Magellan Aerospace – President & CEO
Well, we may want to differ with you in opinion on that Claude. Because I would argue that book value is likely higher than what you’re stating right now.  – see remainder of transcript

Importantly this followed a Q2.2006 Audit Committee meeting on 10 August 2006 in which Mr Dekker and Mr Neill had taken a management override decision on the Ellanef-submitted accounts for Q2.2006 for the Boeing 737 systems integrator discounts (adding C$700K to the H1.2006 profits) and even more crucially the Airbus A340 Q2.2006 EAC which now calculated some $5.2 m gross losses in which they had both determined solely by management over-ride to report a A340 breakeven position in Q2.2006.

As you can read in the 10 August 2006 minutes at Point 5 on the Private Session with Ernst & Young “ Mr Linsdell of Ernst & Young (“E&Y”) reported that he had several discussions and had met with management prior to this meeting to discuss the second quarter’s results and presentation of certain items, primarily related to the accounting treatment of the Ellanef rejuvenation initiative. He reported that while he had received schedules from management prior to this meeting he only received the financial statements and the MD&A at the meeting.”   Whilst at Point 7 the Private Session with management minutes that “Mr Neill expressed his concern that it had taken E&Y too long to make a final recommendation o the accounting treatment of the Ellanef initiative. Mr Edwards  reiterated his concern that the 2005 audit fee was too high and that management and E&Y must work together to find a way to reduce the 2006 audit fee.”

Turning now to that third party, E&Y,  at the FY2006 year end

Mr Don Linsdell, in his first financial year as MAC’s lead E&Y Canada partner/auditor for Magellan Aerospace (responsible for automotive sector), concluding comment, to Mrs Clare Pettifer (one of the former MALUK Head Office Accountant/Treasurer people) and me on 14 December 2006 at our meeting in London, that “It doesn’t pay to be a whistleblower” has seldom left my mind since and certainly will never leave my living memory.      As an experienced friend recently told Jackie and I , after reading our website,   “When money speaks the truth keeps silent”.

When I followed up with Mr Linsdell of E&Y on 11 January 2007 he left the attached 2 minute voicemail message on my mobile phone .  I also note that although Mr Dimma was Chair of the MAC Audit Committee it was Mr Edwards, the Chairman of the Corporation, who had spoken to the Ernst and Young Canada Chairman ( Mr Lou Pagnutti?) about the issues arising in the last FY2005 Magellan audit (as recorded in the 11 May 2006 Audit Committee minutes); which was managed by Mr David DeWolf (the previous E&Y Canada partner who had led the external public audits since Magellan’s formation in 1996) and who had now been replaced by Mr Linsdell.   Our family accountant/auditor  Mr James McCreery (who accompanied me to my meeting with PwC on 29 January 2007) also met Mr DeWolf in an unplanned meeting in the Square 1 shopping mall in Mississauga in mid May 2007 during which he expressed to both of us his opinion that in his experience he viewed “Murray Edwards as a bully”.  

Mr DeWolf was not isolated in that opinion, as I had heard other senior management colleagues in Magellan Head Office use words to this effect in my year located in Toronto.  I put this question in cross-examination to Mr Edwards on 5 June 2008 -  “Do you accept that some staff thought that you were a bully?”    and     “Do you realise you are perceived by some staff members as cranky or grumpy? ” – based on Mr Dekker’s oral evidence 2 April 2008 (p.48.57).  The Judge then intervened and because of my recollections of these multiple comments from others and the short subsequent exchange he triggered the final input/driver that caused my first seizure and unconsciousness in court for several minutes.    Mr Butyniec had earlier - 24 January 2008 (p160) -  given his evidence that “Murray was a very emotional guy. Certain things he says can be understood” whilst Mr Dekker subsequently confirmed in his cross-examination on 2 April 2008 to this question “Was Mr Edwards emotional…”   interrupts  “…… He can get expressive when he needs to make a point.”

13 March 2007

MAC Board  --  chaired by Mr Edwards the minutes record

Mr Dimma reported that Ernst & Young (“E&Y”) attended the last meeting with PwC and had indicated that they were prepared to sign off on the 2006 financial statements even if the PwC final report was not available, assuming they received a verbal report that indicated no issues affecting the financial statements.
Board members expressed concern at the cost of the PwC effort and were anxious to have the process completed in as efficient and effective manner as possible”.

MAC Audit Committee counsel would also later advise that   “With respect to the “zone of insolvency” issue, this matter was discussed by the Audit committee with E&Y during its audit.  E&Y was aware of the issues you raised and discussed PwC’s work with PwC. The Audit Committee was satisfied that E&Y would not have been able to deliver its audit report unless it was satisfied on the “zone of insolvency” matter and that was, in the Audit Committee’s opinion, sufficient review of the matter. PwC was therefore instructed to leave that matter out of its further work and its report as any further work in this area by PwC would have been unnecessary duplication.”  ……… see E&Y audit report – 27 March 2007 and 30 March 2007 Note 18 ……………. Going Concern
   
14 March 2007

Magellan create new Spares and Repairs forecast quantities .. <up from 190 to 886+>  by FY2021 based on instructions of Mr Neill predicated on a  135 A340 production build forecast scenario . eg. my Airbus A340 series production in Toulouse is complete ;

This forecast was sent to PwC.  It is not apparent that this was sent to E&Y at that time.
   
16 March 2007 Audit & Communication Results from E&Y:

Mr Linsdell briefed the MAC Audit Committee on E&Y view – the minutes record 

Mr Linsdell reported that although some audit procedures are not complete, he does not anticipate the results will change the financial statements as presented to the Committee and that he expected to provide an unqualified opinion on the financial statements, subject to any adverse findings by PricewaterhouseCoopers that might affect the numbers or disclosure in the Corporation’s financial statements.” 

The lower schedule (1831A) is the representation made by MAC to E&Y in the Q4.FY2006 Estimate at Completion (EAC). As per the PwC report para 8.61 “The Q4 FY2006 EAC was also used by EY for year-end audit testing purposes.”  The Estimate at Completion (EAC) process/documents are the MAC management  “most reasoned view and likely outcome – oral evidence :Dekker”  and showed in this Q4.2006 EAC submission to the auditors E&Y and PwC an improvement over Q2.2006 to a miniscule  $0.1m gross profit on $250m program revenues

On 5 May 2009  Mr Dekker submitted (by solicitors)   this “At a Glance” statement and the numbers used by E&Y etc in their FY2006 audit for Production and Spares.

Mr Neill in his oral evidence on 27 July 2009 (p.81)

Mr Neill

Brian, I personally did not give any information to auditors, the information they were seeing was through the finance organization they effectively can be in the plants for a period of two to three weeks and they get a multitude of pieces of information during that time and I personally have no detailed knowledge of what is given and what is not.

Mr Little Can I just ask this question clearly now.  Are you saying that you had no discussion with Ernst & Young during the early part of 2007 and particularly March 2007 on any part of the A340 programme.  Is that what you are saying?
Mr Neill

No.   I had at least one meeting, may be some discussion on another subject, and I recall the discussion was primarily about the discussion we had earlier, which was the spares and repairs forecast, it was not about the programme per se.

Mr Little Right, so it wasn’t about the 3605 and it wasn’t about the EAC itself, it was purely the spares conversation?
Mr Neill Correct. 
   
  Whilst at P.128
   
Mr Little  Did you draw the attention of PWC and Ernst and Young and Mr Dekker to the assumption of approximately 40 aircraft or 160 units for each and every year and that Mr Dekker and you prepared the price and units sales on the basis of those assumptions?
Mr Neill I can’t recall. If it was – if that was one of the published forecast documents , then I would have done so, but I cannot recall.
Mr Little Did you ever attend any meetings with Ernst & Young or PwC with Mr Dekker and/or Mr Butyniec on the sales revenue and pricing assumptions which were the subject of the 2006 audit process
Mr Neill  No.  I attended one meeting with Mr Dekker
Mr Little Can you tell us what was discussed at that meeting just simply on that?
Mr Neill  It was a wide-ranging meeting, they had a number of issues across Magellan and they wanted to discuss and this was one of the items on the agenda, and I have already, I think, testified to this, that my part of that discussion that I can recall related to spares and repairs.
   
  Whilst at p.97
   
Mr Little But you know that the PwC report referred only to spares being in the EAC and that they did not think repairs ought to be?  I presume you’re aware it said that in their report  ……   at paragraph 8.72 below
Mr Neill I know , I read these words, yes.
Mr Little Okay. But for accounting purposes it’s spares only is what is in the EAC?  That’s what John told us, too.  Do you know?
Mr Neill I would ……….  I don’t know but I suspect what he was alluding to would say the fact that individual spare parts, for which we sell somewhere like half a million dollars’ worth a year are not in the EAC’s and are additional to the EAC’s.  Spares and Repairs that come from the aftermath of work that is done in the factory are in the spares and repairs part of the EAC.
Mr Little Okay, we have your evidence, okay….  

Transcript of court hearing on 8 June 2009  at pages 62-72 Mr Lynch QC to Mr Bobbi  X –exam
Information item 1 :  sets out the frequency/consistency of Mr Lynch’s mindset/line of questioning

1.1  Line 19 – 25  Mr Lynch QC 
“What I suggest to you is this : that although, within that context, he once uses the word “repair”, towards the very end of the email, what I suggest to you is that on a fair reading of that email it’s plain that what Dr Thamburaj is saying is that the durability or lifespan of those units is 40,000 flying hours. That’s right, that’s a fair view?”

1.2 and on page 63 states
Line 3 – 7  Mr Lynch QC  
“Exactly, good, and that relates to replacement, doesn’t it, spares rather than repairs. If that’s the lifespan of the unit, then once the lifespan is over it’s a question of a replacement, other than repairs, that’s right, isn’t it?”
Line 9 – 15 Mr Lynch QC
“Well, but that would be the obvious inference to draw, wouldn’t it, from what Dr Thamburaj is saying. The obvious inference to draw is that that is the service limit, that’s the lifespan of the unit, and obviously, if the lifespan is that, then one needs a new unit when the lifespan is spent. That’s the obviously sensible reading of Dr Thamburaj’s email, that’s right, isn’t it?”
Mr Bobbi : He is still confusing spares and repairs.
Line 17 – 20 Mr Lynch QC   “I don’t think he is, and that’s my point. If we look again at his email isn’t it perfectly obvious that what Dr Thamburaj is saying is that that is the lifespan of the unit, that’s exactly what he says.

1.3  and on Page 65 states
Line 5 – 16 Mr Lynch QC
“We have Mr Neill’s email to Mr Moore of PricewaterhouseCoopers.  I know it’s a bit compressed in its typescript.  Tribunal, of course there is a bigger version in the bundle, if that’s a bit small to read.  (Pause)   <doc 3597…. in referring to doc3605H –Aeronca estimates based on 40K life>.
Mr Bobbi, you can see, can’t you, looking at the two substantive paragraphs – it actually is a feature of both of those paragraphs – that Mr Neill makes it expressly clear that Magellan is simply basing its calculations for accountancy purposes on spares or replacements, he’s not included anything to do with repairs”.
   
1.4  and on Pages 72 and 73 line 1-3 states
Line 10 - 13 Mr Lynch QC
“Right. So it’s plain, isn’t it, that PwC did indeed examine and accepted for accountancy purposes, the validity of Dr Thamburaj’s calculations, yes?”
Mr Bobbi  “No, that’s not. Because a component has a “lifespan” does not mean necessarily it will be replaced by something new, it can be repaired.”
Mr Lynch QC    “Yes. Well, no, I think the whole point is this, it’s not, Dr Thamburaj’s point was not a question that they will need repairs after that period, Dr Thamburaj’s point was around 40,000 flying hours was indeed the lifespan of the unit. That after that, it’s lifespan was spent and should be replaced. That was the point.”

whilst Mr Dekker also gave these evidence sequences on 10 June 2009 (p125+)

Mr Dekker

Again , as I said earlier, I didn’t manage the flow of information that went to PricewaterhouseCoopers, I know that Mr Neill spent considerable time with Pricewaterhouse Coopers, and Ernst & Young, discussing the A340.

Judge You can’t say what?
Mr Dekker I can’t say what documents he presented to them, I simply don’t know.
Mr  Little Right And if that were the case, turning first of all to the two documents that were disclosed yesterday, I can pick any one of the 3605 series?
Mr Dekker The only one I have here is the old one
Mr Little They’re all the same essentially. If you go to spares and repairs – yes.  If you would agree that this document which is one of the ones that has gone to PwC and Ernst & Young, it has said there were 18 spares delivered and a projected further 172 by 2021.
Mr Dekker Yes , that’s correct.     <although Mr Neill also received this email he told us in evidence on 27 July 2009 (p77) that “I don’t recall reading it at that time”>
Mr Little I asked the question with regard to A340 sales forecasting and financial accounting in Aeronca.  Now you are responsible for the financial accounting in Aeronca, and therefore what  would be provided to the auditors for the purposes of their audit, and the representation to them.  So my question is, how did these technical reports (Dr Thamburaj) impact what was provided in financial accounting terms , through the EAC to the auditors?
Mr Dekker The two documents that were provided , I think yesterday, the reasons there’s two of them, they are identical, one was a set provided to PricewaterhouseCoopers and the other one was to Ernst & Young, so we provided them the same information, and Rich Neill spent time with both parties and they were, each party was aware that the other was looking at the documents.
Judge Yes
   
  Mr Dekker 10 June 2009 (p128+)
   
Mr Little You do know that that document isn’t at all an exhibit in the PwC report?  It’s not anywhere near the PwC report.
Mr Dekker  Well……….
Mr Little That’s a matter of fact
Judge That’s a matter of comment, then.
Mr Little Okay, sorry, you’re aware it isn’t, then, is really my question.
Mr Lynch Tribunal, obviously the exhibits are what PwC have decided to cross-reference in their report, it doesn’t define necessarily what PwC looked at
Judge Not necessarily, no
Mr Dekker I trust there’s no suggestion that those reports didn’t in fact go to PwC because they certainly did.
Judge Well..
Mr Dekker The cover letter, the email attached to it.
Judge It says , to PwC, Stephanie Leblanc
Mr Dekker I don’t want there to be any doubt that’s the truth
Judge Stephen Moores
Mr Little On that point, John, I am more than surprised that this would not be an incorrect document if Mr Neill had spent so much time on itinterrupts
Judge That’s a comment of yours
Mr Dekker I didn’t control any of the   interrupts
Judge No, it’s not evidence that Mr Little is giving, it’s comment
   
  Mr Dekker (p158)
   
Mr Little Is there anything else you want to add to what we’ve just done, around that, with E&Y.
Mr Dekker Around the sales re revenue and pricing –
Mr Little Q4?
Mr Dekker Q4.2006 , we had a number of discussions but again it’s the sensitivity, what if we get 31, 9, 60 per cent price increase, it was all sensitivity analyses on the various scenarios to get some sense for what might occur, and they asked us to do some different iterations, and John Furbay would have alerted me to that, I would not have had the data.
Mr Little Did you ever attend any meetings with Ernst & Young and PWC with Mr Neill and Mr Butyniec for the A340 in the period January to August 2007?
Judge

That’s with Mr Neill and Mr Butyniec, with one or the other

Mr Little With E&Y and PwC
Mr Dekker PwC, No, that wasn’t the form for interview, it was an one on one, whenever PwC talked to us.
Judge  No, so you met with Ernst & Young
Mr Dekker Ernst & Young , I mean, the regular meetings the board meetings, first of all management meetings to discuss the financial statements, both Rich and Jim would like that, I’m confident they were both there, but certainly at the board meetings, Jim and Rich would be there and you know, that would be a topic of discussion.
Mr Little There’s no indication in the Ernst & Young meeting of having met Rich at all during 2006, into of 2006.  He’s not listed as one of the interviewees in the audit report
Mr Lynch  PwC
Mr Little  No, Rich isn’t
Judge Can you remember whether you met?
Mr Little 30 March 2007, you remember it always lists who they interview and who they need, Rich’s name isn’t on that.
Judge Well
Mr Dekker  Well
Judge This is January 2007, to August 2007. Can you help us?
Mr Dekker I guess I’m a little bit uncertain of what we’re describing as interviewing and meetings
Judge No, just a meeting with, I don’t know that that’s taking us any further (overspeaking)
Mr Dekker Because Rich would have been involved, when we were dealing with the quantities issues, Ernst & Young was in our offices, I mean, they lived there for the months of February and March, and Rich was in constantly, and Jim was there, and we would have meetings in the boardroom regularly with them to talk about the various matters so certainly we would be meeting with them
Judge Yes  Okay.

The contemporary documents for
 
(a)    the FY2006 audit report from Ernst & Young (4053+) on 30 March 2007 do not show any meeting with Mr Neill.
(b)   the PwC report at Appendix D  list the interviewees at doc 724
Mr Dekker  - - 17 January 2007, 5 March 2007, 7 March 2007, 21 March 2007, 13 April 2007  
Mr Neill  -- 7 and 21 March 2007
Mr Butyniec   - no interview with PwC.  
with their final interview with Mr Edwards on 17 April 2007.

Note that PwC interviewed Mr Dekker and also Mr Neill on 7 March and 21 March 2007

After the 7 March 2007 meeting : on Monday 12 March 2007 Dr Thamburaj produced his Report on the instructions of Mr Neill – see PwC Exhibit 8.5. (doc 3617 – 3621)

After the 21 March 2007 meeting:  Mr Neill sent an email on 22 March 2007 with the answers to seven questions put by PwC.  This is at doc 3598  and is followed by Mr Neill’s email dated 29 March 2007 at 3597 on the morning of the MAC Audit Committee and the day before the FY2006 results were published to the TSE and shareholders.

   
27 March 2007 E&Y Audit opinion in MAC FY2006 Annual Report  (30 March 2007 funding)
   
29 March 2007

Mr Neill’s email dated 29 March 2007 at 3597 to PwC (not copied to E&Y) on the morning of a MAC Audit Committee in which he refers to the 14 March 2007 production scenario/ forecast for A340 Spares and Repairs.

Mr Dimma advised that on 29 March 2007 the Audit Committee met with PWC and Torys LLP and received a verbal report from John Tracey, Partner of PwC.

   
30 March 2007 Audit and Communication results E&Y:

MAC Board approved the MD& A and financial statements for FY2006 – minutes record

Mr Linsdell provided the Audit Committee with a status update in respect of the audit since the last Audit Committee meeting on 16 March 2007. Mr Linsdell reported that Ernst & Young were comfortable with the PWC report and that although there were some outstanding audit issues with management , he was prepared to provide an unqualified opinion on the financial statements.

Note the MAC Board minutes at Point 7 confirms that on the same day the annual banking credit agreement  has been renewed and increased by C$20m (to a maximum of $175m) on 30 March 2007. This had previously been due for renewal on 24 May 2007.  Furthermore a C$15m loan due on 1 July 2008 had been  advanced by a Director , Mr Moeller, to assist Magellan with interim financing while an alternative to the ECC accounts receivable program was found.  The accounts receivable is reported by MAC to have increased from C$58.0m on 31 December 2006 to C$70.3m on 31 March 2007.  Without both of these actions MAC could not be a “Going Concern”  --  see  E&Y Audit Report to Shareholders.        I would also ask the reader to note that this is after the sale of UK receivables / debtors to BNP in the last week of December 2006 for a sum equal  to £3.3+ m or C$7.5+ m.

   
9 May 2007 PwC Final Draft Report    - subsequently Ordered for disclosure on 20 June 2007
   
10 May 2007

MAC Board minutes and Audit Committee minutes – 3 and 4 May 2007.  Before Annual General Meeting on 10 May 2007. 

Magellan Aerospace Corporation (MAC) - Q1/2007 Earnings release (public - 11 May 2007) and FY2007 Annual Report (public- 31 March 2008)

“In addition, administrative and general expenses also contain legal and accounting fees of approximately $3.5m incurred by the Corporation in relation to a wrongful dismissal claim by a former employee and as a result a detailed investigation of concerns raised by a former employee regarding certain accounting issues. The concerns were thoroughly investigated by PricewaterhouseCoopers (“PWC”) who, under the direction of the Corporation’s audit committee, prepared a report for the audit committee on their findings. The Corporation’s legal counsel has advised the Board of Directors that PWC met with the audit committee and the Corporation’s external auditors, and based on the report prepared by PWC, PWC has advised the audit committee that they had not found anything that would undermine the integrity or accuracy of the Corporation’s financial statements.

   
20 June 2007

ADDED  - this only known  : disclosed  following UK Daily Telegraph article on 4 May 2011

UK   Daily Telegraph – 4 May 2011 by Rowena Mason
Article  PwC faces probe over removing client criticism from report

The MP raised concerns on behalf of the whistleblower, Brian Little, the former head of Magellan's UK operations. ..etc “

Later that day Magellan lawyers provided for the first time a copy of the letter from PwC dated 20 June 2007 to Mr Bill Dimma , Chair of the MAC Audit Committee which can be viewed here.   As you can read this PDF document file was extracted on the 1 May 2011 from a computer record and specifically also encloses the PwC Final report on 20 June 2007 not 24 August 2007.

l have also provided a copy of the A340 Final draft and Final Reports for Section 8  : MAC : Aeronca – Airbus A340 non-recurring costs which are directly relevant to the PwC criticisms in (a) , (c) and (d) in that 20 June 2007 letter from PwC enclosing their Final Report.

“ Financial control within MAC and MALUK in relation to the areas we have examined is poor and needs to be improved; this need is particularly acute given that MAC is a public company. Examples of poor financial control that we identified during our work include:

(a) Accounting adjustments made with insufficient supporting analysis or documentation;

(b) Inadequate understanding or documentation of balance sheet provisions and insufficient documentation of the decision to release certain provisions;

(c) A lack of awareness of the program accounting requirements under either Canadian GAAP or UK GAAP. The accounting rules and guidelines are complex and our impression is that the principles are not well understood throughout all of the finance community within the MAC group;

(d) Poor control over individual projects from an accounting perspective. Project sales volumes, revenues and costs are not reviewed with sufficient frequency or rigour.  In particular, EAC calculations require many estimates by management. Our experience with accounting practices and governance in the aerospace industry is that these estimates and key assumptions should be reviewed on at least a quarterly basis.”  

   
11 July 2007

E&Y UK  issue a letter to the UK Directors regarding the FY2005 statutory accounts which I recommend you read here.   This letter was only disclosed after a Court order in December 2008.

None of the E&Y contents are included or referenced in the PwC “Final Report - August 2007” – indeed, instead, contradictory material is included as new content since the Final Draft Report on 9 May 2007.

   
24 August 2007

Magellan solicitors – PinsentMasons LLP- state PwC Final report date – August 2007
Next doc is p3891, vol 10 it should contain a comparison of the draft/final PwC report.  Provided to the Respondents three times and PwC to confirm validity. Independent solicitors and Deloitte have verified the differences. Colour coded. Red is deleted between final draft and Bold Black is added during May and disclosure Aug 07……………. 

In my unprecedented letter to Mr Lynch QC and Mr Rae on 30 September 2009 I include

“You complain about the word for word quoted evidence from Mr Bobbi’s and Mr Neill’s oral evidence <see Points 1.1 -1.4 above>  as I suggested before both Mr Lynch QC and you should read that evidence carefully again and learn what is actually being said and think beyond a public courtroom to its implications elsewhere.  Although I have no obligation to provide them those court stenographer transcripts can assist both of your understanding, if read carefully.

It is also abundantly clear to me that Mr Dekker is in large part instructing you on some of these matters and your letter statements above.  He knows full well that the International accounting policy and practice for NRC Engineering and Development costs recovery can ONLY include Repairs work when they are

1.  “scheduled” repairs (that is NOT an ON CONDITION Service Life Policy for the Trent 500 Exhaust system as Mr Neill confirmed) with
2. “known”  revenues and costs and
3. which are 100% certain to be carried out by the Original Equipment manufacturer (OEM).  This is why Mr Neill, from his engine experience, stated and knows that only some very specific NRC can be retained on the Balance Sheet – a certain point for repair/overhaul AND  a certain revenue and cost AND a 100% OEM Repair – such as on Engines and APU’s.  These are the subject of mandatory documents within EASA, FAA etc for “actual” time limits/””hot service life parts” - known as LLC – Life Limited Components or sometimes LLP – Life Limited Parts.

That of course is NOT the situation on the Trent 500 Exhaust Nozzle and Plug – which is Maintenance “On Condition” ( document 3625A-3625Z2 / Mr Neill’s oral evidence) and confirmed by the eight airlines and Airbus.  In effect the Repairs are, as PwC say at para 8.72,  simply unpredictable,  with variable revenues and costs and no certainty that Magellan will carry out those Repairs.”

Unsurprisingly this is reinforced in the PwC report at para 8.72  
It is of note that the internal report also makes reference to the requirement for repairs in its conclusion and not explicitly to the need for spares or replacement units. Management acknowledges the unpredictability of repair work and has appropriately chosen not to consider repairs in the EAC analysis.  Management believes that given the estimated life of the exhaust system, there will be a combination of spare units and repair work.  Further, management asserts that the requirement for spare units will support and exceed the total number of units projected in the EAC”…  assertion by Mr Neill.
PwC calculation of “1572” Spares & Repairs demand by FY2021 (which is wrong/untrue on at least six points) and his email dated 29 March to PwC

I would ask you to note, while reading these, that the Board resolution approved Magellan Aerospace Corporation Annual Report for FY2006 at page 14 (MD&A/AIF.p12) states

"The Corporation relies on customers' delivery projections as well as external market forecasts to determine the number of units over which to amortize non-recurring costs. Should deliveries not reach the number projected, any unamortized balance that remains would then need to be charged to cost of revenues which could have a material adverse impact on the Corporation."

There was an addition to the PwC Final Report in August 2007 at para 8.61 {691} which stated that E&Y $137K gross profit assessment / representation reliance –   The Q4 FY2006 EAC was also used by EY for year-end audit testing purposes.”  The Estimate at Completion (EAC) process/documents are the MAC management  “most reasoned view and likely outcome – oral evidence :Dekker”  and showed in this Q4.2006 EAC submission to the auditors E&Y and PwC an improvement over Q2.2006 to a miniscule  $0.1m gross profit on $250m program revenues which was unsupported by the pricing assumptions and quantities mathematical calculations.    Pricing / Quantity calculations and management assertions which appear to never have been mathematically checked, never mind verified, by E&Y as well as PwC.

Some two years after Mr Linsdell left that 2 minute voicemail you can read also  Mr Linsdell’s email reply to me (dated 12 January 2009) in response to my email asking for confirmation of the actual A340 documents disclosed to E&Y for their audit and EAC testing in FY2006 and other documents relating to their audits in FY2005 and FY2006.This included a  further A340 document (doc3605A) – in May 2009 – with a comment from the Magellan UK solicitors in which they state………

“As you know both Ernst and Young and PricewaterhouseCoopers were comfortable with the manner in which the Respondent justified the quantity of units expected to be delivered. For the sake of clarity, we also attach (at page 2 – 3605A) a document that our client has recently prepared which At a glance the assessment that would have been carried out by the auditors in order to satisfy themselves that the accounting on this matter was appropriate”    

With the assistance of Deloitte I Extended the At a Glance  to include the other relevant MAC representations and other PwC / Brian Little information.

Point A:   Magellan Aerospace Corporation used only a fixed amortization amount of $30,000 per exhaust unit in FY2006  – which if continued at $30000 per exhaust unit would lead to only 65% recovery of the circa C$40m+  (USD 38.25M) inventory on the December 2006 MAC Balance Sheet.  PwC  set this out further in their para 8.117 : Current production costs per unit are such that at present the pre-amortisation margin generated per unit is not sufficient to absorb an amortization of USD 30,000 per unit and still break-even. In order for MAC to report an overall breakeven position, while at the same time amortising NRC inventory, it has been capitalizing that amount of production costs that is necessary to achieve the break-even position each year.  For this reason, “production inventory” for the A340 programme has been increasing”.  BL - If MAC were to maintain the amortization at $30,000 per exhaust system, as in FY2006, only $3.30 million would have been reduced from the total A340 programme asset for the 110 units delivered by MAC in the three years between January 2007 and the end of December 2009/FY2009. (Updated 18 January 2011: With aircraft production exhaust units now all delivered a total of 110 production – to 131 A340-500/600 - production aircraft and 11 spares were delivered by MAC in the four years between January 2007 and the end of December 2010/FY2010, or equivalent to $3.63m).  PwC continues at para 8.118 “PwC believes that MAC’s NRC and production inventories should be considered collectively (for a total inventory of USD 38.2 million) and then amortised from this basis onward.  Aeronca should also review the NRC amortization factor.  We believe that this factor should vary with the profitability of each unit.  As increasing labour and material cost efficiencies are realized in the production process, furthermore, the amortization rate should increase.” 

Mr Dekker also disclosed in May, June and August 2009 doc 1830A,1831A and the 3605 document series (3605A, 3605B-G – 1 March 2007 , 3605H  - 14 March 2007 in Part C - - - NONE of which appear or were mentioned in the PwC report) -  as  key Representation documents in which he asserted and you should examine   –

“As you know, both Ernst & Young and PricewaterhouseCoopers were comfortable with the manner in which the Respondent justified the quantity of units expected to be delivered. For the sake of clarity, we also attach a document which    “At a glance the assessment that would have been carried out by the auditors in order to satisfy themselves that the accounting on this matter was appropriate

Separately Deloittes and I have produced working schedules which reproduced and then  extended this “At a Glance” for the A340 Program Q2.2006 and Q4.2006 EAC together with the underpinning numeric Quantity/Number of Units and prices analyses & stated cost assumptions which enabled an overall A340 financial summary/outcomes.

As above the reader will have noted from the PwC report that MAC and E&Y continued to add Labour learning costs – after 400+  A340 nacelle sets/5 years of production to production inventory (and E&Y as their auditors accepted the further US $1.5m to US $8.63 million added in the FY2006 Balance sheet to sustain the “break-even” ) whilst the Inventories Exposure Draft (3031) which would end this capitalisation was issued by the CICA in August 2006.    The subsequent introduction of that Canadian Accounting Inventories Standard  3031 in MAC from 1 January 2008 permitted some C$40m of inventory assets to be written off against retained earnings (approx C$10m of which was for these A340 -500/600 program labour learning costs). The value of that as a cash deficiency for shareholders will of course remain unchanged and would also have had a enormous impact if properly reflected in the MAC five year strategic plan.  

As at today from the documents/information available I believe the MAC Balance Sheet continues to be over-stated by in excess of C$10m on an equivalent basis, a “material” value in every sense of the accounting standards and reality. 

Point B:  The MAC Audit Committee minutes on 10 August 2006 (which I did not attend) for that Q2.2006 meeting also record at Point 5 in the Private Session with Ernst & Young “ .. that Mr Linsdell of E&Y had …”only received the financial statements and the MD&A at the meeting”.
Prices per unit      :  Mr Edwards (12 Aug) and Mr Dekker (11 Aug)  had just approved Mr Butyniec’s BAFO for settlement with Aircelle on 11/14 August 2006 which had LOWER pricing (e.g. $179,623 in FY2006)  than in our Q2.2006 EAC ($181,170 in FY2006) and which would lead to a reduction in revenues of $5.2m - $8.9m and further increase the $5.2m gross losses. If internally Magellan were satisfied with this documented BAFO pricing settlement for A340 - and Aircelle had indeed accepted this Magellan final offer - how could Mr Dekker and Mr Neill rationally and reasonably believe that this lower pricing would have more than set off the A340-500/600 $5.2m gross losses in our Q2.2006 EAC document and was in the best interests of non-management MAC ordinary shareholders.

PwC correctly recorded in the Final Draft report at para 8.61 that “Brian Little stated in the E&Y presentation that his concerns regarding the treatment of the A340 NRC were raised following Q2.2006.” and as you can hear on the audio tapes (Tape recording - Part 1 (16 minutes) and then Part 2 (7 minutes) ) I stated “And the fundamental issue here, which we have to come to terms with, is that this product is a product that has not only got a cost/price problem but it’s now also got a programme volume one!

There was an addition to the PwC Final Report in August 2007 at para 8.61 {691} which stated that E&Y $137K gross profit assessment / representation reliance –   The Q4 FY2006 EAC was also used by EY for year-end audit testing purposes.”  The Estimate at Completion (EAC) process/documents are the MAC management  “most reasoned view and likely outcome – oral evidence :Dekker”  and showed in this Q4.2006 EAC submission to the auditors E&Y and PwC an improvement over Q2.2006 to a miniscule  $0.1m gross profit on $250m program revenues which was unsupported by the pricing assumptions and quantities mathematical calculations.    Pricing / Quantity calculations and management assertions which appear to never have been mathematically checked, never mind verified, by E&Y as well as PwC.

Although consciously not part of the UK court case I also documented with Mr Linsdell at 37/4 and 37/5 following our February 2007 discussion -

a)  the MAC Fixed Assets Machinery and Equipment Depreciation accounting policy MALUK management and statutory financial  reporting policy in the UK is 10 years (straight-line)  not the MAC  20 years. The three UK resident MALUK directors  and auditors (Mrs Barbara Hadfield-E&Y UK audit partner)  determined in FY2004 that we could not present a “true and fair view” by using a plant and equipment depreciation rate of 20 years as our representation in our UK statutory public reporting.  Both the former MALUK CFO’s and myself considered that if we were to use the MAC 20 years for the Magellan UK Plant and equipment we would understate the real costs in future contract bids, reflect higher short-term profitability and overstate the realizable value of those assets.   For MAC Canada reporting this 20 year depreciation policy obviously has the effect of reducing the depreciation costs below those used by other Global and Canadian aerospace companies (some also audited by E&Y as identified in document ) with the consequent effect on the MAC Income and Balance Sheets. I believe this difference in depreciation policy reporting and practice would equate to several million dollars per year in profitability and of course Balance Sheet value issues.   (At the end of FY2009 MAC represented for their audit that the asset value of Machinery. Equipment and Tooling was for some C$177 million) 

Mr Neill offered his opinion on the MAC Balance Sheet/book value of the North American Plant and Equipment, as well as other assets, in answer to part of a question by Mr Claude Proulx during the Q3.2006 earnings conference call with analysts which you can listen to here or  read a complete copy of the Q3.2006 Earnings webcast call transcript.  Of course as the non-resident MALUK Directors Mr Neill and Mr Dekker have both known and approved the MALUK 10 year P&E depreciation policy and published MALUK statutory accounts from the beginning in FY2004 to date.

From my strategic/sales and marketing perspective, in fact, on several occasions I increased the finance costing rates in contract bids and documentation to obtain higher selling prices for MAC proposals to prospective and actual customers.  One particular customer bid proposal I vividly recall in late January 2006/February 2006  was increased by almost $18 million.  Obviously I do not know what happens now in MAC to address this in the Sales and Marketing bids through the MAC bid and approval governance processes to ensure appropriate pricing is submitted for new work to beat the 15% + gross margin/profitability targets set by the Magellan Board.

b)   the MAC inventory policies and provisions -   regarding costing/realizable value basis and slow/non-moving materials  (to my knowledge this was addressed only by EY (UK) in MALUK FY2005 statutory reporting. See Part B Point 2B E&Y letter dated 11 July 2007“Uncorrected Misstatements : We understand that not all of the differences raised in the matters above were adjusted by Magellan Corporation in the preparation of their group accounts for the year ended 31 December 2005. However the decision as to the materiality of these adjustments for this purpose was discussed and agreed between Magellan Aerospace Corporation and EY Canada. For the purposes of the UK statutory accounts for the year ended 31 December 2005 all audit differences raised in the matters discussed above have been adjusted in the statutory accounts……” – these adjustments equated to some C$2m + and  MAC FY2006 financial statements were adjusted for their MALUK FY2005 overrides.   I have no evidence of what was implemented in MAC North America   ???? and obviously shareholders et al would look at relative measures such as inventory turns in comparison with competitors and best practice norms  (even the internal MALUK inventory comparison of inventory as a % of annual sales was  15%  compared to twice that at 30% for the North American operations in FY2006, this is also evident in inventory turns benchmark comparisons)  ……you can also read more on Mr Neill’s views on inventories in the Q3.2006 MAC earnings webcast call transcript

(At the end of FY2009 MAC represented for their audit that the asset value of MAC Inventories was for some C$147 million.  Based on the E&Y audit fees of C$5.7+ m from FY2006 – FY2009 and Mr Dekker’s assessment,  in that same Q3.2006 webcast answer that 80% of those fees were being incurred for inventories “third party verification”,  some C$4.5m was paid in fees to Ernst & Young for that various inventories work in FY2006-FY2009)   …… and

c)    in the strategic planning process, after the Airbus A340-500/600 (NRC approx C$40m in FY2006), the second largest MAC  Balance Sheet item is the GE414 engine on the SuperHornet F/A 18 E/F programme.  This GE414 cash investment was also addressed by Nick Morton of RBC during the Q3.2006 MAC Earnings webcast call (p10-13).    I suggested that E&Y Canada carefully consider the validity and verification of the GE414 program asset value (recorded as Technology Rights) of some C$30m +  on the MAC Balance Sheet.  This was after some 5 years and 450+ engine  deliveries of front end exhaust systems since the contract award by GE in 2003 and the related revenue sharing agreement with MAC.  For that audit MAC will also probably have partly relied on the latest production forecasts from Forecast International Inc for the Super Hornet published in March 2008.  As you can see more than 50% of the forecast production deliveries had now been completed since contract award  with a “FI Good confidence” expectation that production would cease in FY2014.   Spares volumes would be additional to that forecast and E&Y should/would have carefully read the commercial agreement on the revenue share as part of their audit process.    The latest Teal Group external market forecast dated December 2009 for the SuperHornet programme shows about 550 engine deliveries in the six year period 2004-2009 and a remaining 10 year forecast of approximately 400, including a speculative 88 for undetermined customers.   

At the Farnborough AirShow  2010   Mr Douglas Barrie of Aviation Week took “A sortie in the F/A-18F”  - see video.

As at the end of Q4.2009 the MAC Chairman (Mr Edwards) , Chair of the Audit Committee (Mr Dimma), CEO (Mr Butyniec)  and CFO (Mr Dekker)  signed off the E&Y audited and publicly reported MAC Balance Sheet value in the FY2009 MAC Annual Report  for almost CS30m – see below.   Separately I am also aware that Mr Neill was incredibly agitated and lost his temper before abruptly walking out of a conversation with Murray Edwards during the concluding internal discussions/negotiations on the GE414 program in December 2003.  Subsequently I understood from a senior Head Office colleague that Mr Edwards was also annoyed with Mr Neill when he failed to involve Mr Edwards properly in the MAC governance processes when further GE414 program investment commitments were made by Mr Neill/Magellan in 2005.

     “TECHNOLOGY RIGHTS

As at December 31, 2009 the Corporation’s technology rights amounted to $29,158 [2008 — $32,567] net of accu­mulative amortization of $9,832 [2008 — $6,673]. Technology rights relate to an agreement signed in 2003, which permits the Corporation to manufacture aerospace engine components and share in the revenue generated by the final sale of the engine. A follow-on contract was signed in 2005.”

UPDATED 7 APRIL 2011 :

Substantively consistent with the other market forecasts available the latest Teal Group external market forecast in December 2010 shows about 640 engine deliveries in the seven year period from 2004 – 2010 and a remaining 10 year forecast of approximately 332 units as the production programme moves to a conclusion with the introduction of the Joint Strike Fighter (F35).

(As you can see that is approx 35% of the total 972 units , whilst the MAC Balance Sheet would need to utilize a future amortization figure of approximately FOUR times that used in the preceding 2004 – 2010 period to fully recover the cash and asset within their current strategic planning five year period.. by FY2015.   It would appear that an amortization figure of approximately $35,000 per engine was used by MAC, and E&Y accepted in the FY2010 financial statements.  From another perspective if maintained at that $35000 amortization level approximately 400 additional engines (a total of 732) would be required to recover the entire $25m on the MAC Balance Sheet also signed by Mr Edwards and Dimma  as at 31 December 2010.

This is based on the E&Y audited FY2010 MAC Annual Report which records  “As at December 31, 2010 the Corporation’s technology rights amounted to $25,654 [2009 - $29,158] net of accumulative amortization of $13,251 [2009 - $9,832]. Technology rights relate to an agreement signed in 2003, which permits the Corporation to manufacture aerospace engine components and share in the revenue generated by the final sale of the engine. A follow-on contract was signed in 2005.”            - end of update.

UPDATED 16 NOVEMBER 2011

Mr Neill gave evidence on 27 July 2009 that MAC relied on Forecast International market forecasts in its business.   “We placed heavy reliance on Forecast International <A340>. We had used their reports on one of the other Magellan divisions, Orenda, for may years, we had found with regard to engine-specific forecast <such as GE414> they were reasonably accurate, so I saw no reason to deviate from that belief in the Forecast International numbers.”

Recognising this the Forecast International March 2011 GE 414 forecast shows a future 8 year forecast from 2012 – 2020 of approximately 146 units as the production programme moves to a conclusion in 2016,  with the introduction of the Joint Strike Fighter (F35).  I expect Teal Group will release a similar production forecast when they report in their annual cycle in December 2011.

Last Monday 14 November 2011 MAC released its Q3.2011 results and their Balance sheet recognises the IFRS accounting rules introduced on 1 January 2011.  Naturally E&Y will shortly commence their audit processes for FY2011.  That change in accounting rules meant that MAC recorded a reduction in their reconciliation of equity of some C$17m on 1 June 2011 for Q1.2011. From my knowledge and experience I was astonished to read their Disclosure  Notes at page 40 when it recorded that in Q1.2011 that “As a result of the impairment tests performed, the Corporation recognized a reversal of previous impairment losses of S3280 against technology rights <GE414> and S4347 against development costs relating to various civil aircraft programs as the Corporation was able to achieve reductions in costs as a result of a mix of improved efficiencies and reduced material costs. These impairment reversals were treated as reduction against recurring costs of revenues. The Corporation also recognised impairment losses of 232 against development expenditures relating to a civil aircraft program.”

I would ask the reader to note the impact this disclosure has on the MAC FY2011 results reported to date and in particular highlight that the disclosure note makes no reference to any assessment on future Revenue changes.   That of course will be audited by E&Y in their year – end audit testing processes …………and of course we have seen the outcomes of that in failing to acknowledge and recognise impairments etc on the A340 in FY2006 and ever since.
The E&Y audited Balance Sheet history for the F/A 18 Super Hornet GE414 technology rights is FY2005=C$38.1m; FY2006=C$37.1m; FY2007=34.5m; FY2008=C$32.6m; FY2009=C$29.2m; FY2010=C$25.7m and under IFRS will now be “revalued”  by the MAC executive management and its Audit Committee/E&Y at FY2011> ….end of update

OPEN LETTER to the Chairman and Chief Executive Officer, Mr Louis P. Pagnutti , of Ernst & Young (MAC public auditors) and other prior back-up documents .  Magellan Aerospace Corporation 2010 AGM  Resolutions and AGM (14 May 2010) and other relevant documents.   

See copy of email trail re OPEN LETTER delay to Mr Trent Henry (successor) in August 2010. (Sent 5 May 2011)

Copy 1.

Mr N. Murray Edwards (Chairman of Magellan Aerospace Corporation) ,

Copy 2/3

The Accountancy and Actuarial Discipline Board (AADB) in the UK.

“The Accountancy & Actuarial Discipline Board ("AADB") is the independent, investigative and disciplinary body for accountants and actuaries in the UK. It has up to eleven members. The AADB is responsible for operating and administering an independent disciplinary scheme (the Accountancy Scheme) covering members of the following accountants' professional bodies:- the Association of Chartered Certified Accountants, the Chartered Institute of Management Accountants, the Chartered Institute of Public Finance and Accountancy and the Institute of Chartered Accountants in England and Wales; The Institute of Chartered Accountants of Ireland and the Institute of Chartered Accountants of Scotland. 

The AADB will deal with cases which raise or appear to raise important issues affecting the public interest in the UK and which need to be investigated to determine whether or not there has been any misconduct by an accountant or accountancy firm, or by an actuary.”

And the then the  Canadian Public Accountability Board (CPAB - since its incorporation in 2003, the mission of the Canadian Public Accountability Board (CPAB) has been: To contribute to public confidence in the integrity of financial reporting of public companies in Canada by promoting high quality, independent auditing,

Copy 4.

The Ontario Securities Commission     and

Copy 5.

The Royal Canadian Mounted Police (RCMP)  – Commercial Crime section.

Copy 6.

Etc


With the global financial and banking crisis in FY2008 the Chartered Accountants of Canada issued a relevant CA ALERT on 17 December 2008 – CA Profession’s Role In Restoring Confidence and formed in 2008 the

Copy 7.

The Public Trust Committee of the Canadian Chartered Institute of Accountants  (CICA)


UPDATED AUGUST 2010: Several of the business readers have observed,  after reading the website and on reflection, that it was three people with personal career familiarity with accounting/finance  matters within the Big 4 audit firms who “blew the whistle”.   Mr Paul Moore (“Truth – Forget it” video) - a former audit partner at KPMG and celebrated HBOS whistleblower.  Mr Matthew Lee (Lehman Brothers whistleblower) – a former principal at E&Y.  Brian Little – Magellan Aerospace -  a former senior consultancy associate with E&Y from 1997 – 2001 and subsequent exposure to PwC “independent forensic investigation?” processes.  Due to my ill-health/mental breakdown in early February 2010 I was unable to write this OPEN LETTER or attend the May 2010 AGM . I am currently recovering and I hope I am sufficiently well to be able to compile this OPEN LETTER and send it in the next few months toing other appropriate regulatory bodies and interested parties suggested in discussions with my MP – for example “The Accountancy & Actuarial Discipline Board (AADB)” and the Solicitors Regulation Authority and the Law Society – he is currently giving this some further thought before the summer recess of Parliament.)

Following my emails to Mr Dimma on 23 July 2010 / 2 August 2010 “Extract”

UPDATED 2 AUGUST 2010  :  A340 Anonymous whistleblower letter to Mr Edwards in 2002 

Arising from Mr Furbay’s termination by Mr Dekker on the 23 June 2010  I have received a copy of a letter/information sent by an Anonymous Whistleblower on the A340 Project in  2002 to Mr Edwards – when he was Chairman and CEO/President  of Magellan Aerospace.   Please find attached a scanned copy of the covering letter.  As you can read it sets out this Magellan/Aeronca “whistleblower’s” view  on the A340 -500/600 project :

“Dear Mr Edwards

It is this writers belief that Magellan Aerospace Corporation has a significant long term financial exposure on an A340 contract – stateside – see attached.

The subject contract was grossly underbid. At last count it was also grossly under-costed. I can find no mention of the potential impact anywhere in your financial reporting.  

A conservative estimate of that level of exposure could be $50 Million U.S,

This writer recommends that you task Mr William A. Dimma with an audit of the subject A340 Estimate at Completion (EAC) at your U.S. Subsidiary.,,,,,,,,,,”

QUESTION 4  Can you please confirm when , in your role as Chairman of the Audit Committee, you received a copy of this “whistleblowing”  letter from Mr Edwards?  When you carried out your investigation, at his request, where can we see the public record of the financial implications of that in the public accounts of Magellan since FY2002 or is there none?

As before I look forward to a response to my four questions (and four supplementaries) by the end of July 2010.” 

I wrote an email to Mr David De Wolf of E&Y on 3 August 2010 and asked whether

“Given the magnitude of this A340-500/600 matter and the letter/information provided did Mr Dimma make you aware of this “anonymous” whistleblower letter (or perhaps Mr Edwards) as you had been the E&Y audit partner from 1996-2005 before being rotated off by your Chairman/CEO Mr Louis Pagnutti.”

As yet I have received no reply.

UPDATED 7 April 2011:  I wrote an email on 18 March 2011 to Mr Trent Henry, the new leader of E&Y Canada, and Mr Linsdell in advance of the completion of the FY2010 audit of Magellan’s Financial statements and their public release.  As you can read this was copied to Mr Dimma.
A few days earlier, on 16 March 2011, I requested that Mr Henry also provide support to E&Y in their response to Mr Shannon’s questions regarding “independent forensic investigations”.

Then after the release of the MAC FY 2010 Financial statements Mr Shannon MP followed up his November and 15 December 2010 letters to Mr Dimma in his email dated 6 April 2011; in a part of which you can see he records that there is no evidence that PwC repaid any of its C$3m fees to MAC and its shareholders.

You will recall earlier that I stated

<For information : Magellan Aerospace Corporation used only a fixed amortization amount of $30,000 per exhaust unit in FY2006  – which if continued at $30000 per exhaust unit would lead to only 65% recovery of the circa C$40m+  (USD 38.25M) inventory on the December 2006 MAC Balance Sheet.  PwC  set this out further in their para 8.117 : Current production costs per unit are such that at present the pre-amortisation margin generated per unit is not sufficient to absorb an amortization of USD 30,000 per unit and still break-even. In order for MAC to report an overall breakeven position, while at the same time amortising NRC inventory, it has been capitalizing that amount of production costs that is necessary to achieve the break-even position each year.  For this reason , “production inventory” for the A340 programme has been increasing”.  If MAC were to maintain the amortization at $30,000 per exhaust system, as in FY2006, only $3.30 million would have been reduced from the total A340 programme asset for the 110 units delivered by MAC in the three years between January 2007 and the end of December 2009/FY2009. (Updated 18 January 2011: With aircraft production exhaust units now all delivered a total of 110 production – to 131 A340-500/600 - production aircraft and 11 spares were delivered by MAC in the four years between January 2007 and the end of December 2010/FY2010, or equivalent to $3.63m).  PwC continues at para 8.118 “PwC believes that MAC’s NRC and production inventories should be considered collectively (for a total inventory of USD 38.2 million) and then amortised from this basis onward. Aeronca should also review the NRC amortization factor.  We believe that this factor should vary with the profitability of each unit.  As increasing labour and material cost efficiencies are realized in the production process, furthermore, the amortization rate should increase.” >

At 7 April 2011 following the publication of the MAC FY2010 audited financial statements the following

MAC Balance Sheet valuation for A340-500/600 at 31 December 2006 = $USD 38.25m / C$ 44.60m
(Of this C$44.6m; approx C$34.6m was Engineering .Other costs and C$10m in prodn/labour learning)  

Actual Deliveries                                            Other remarks         

FY2007     - 45 exhaust units    

(We know that during FY2006 MAC /E&Y continued to add A340 labour learning to  inventories/asset and at the end of FY2007 the Eng inventories valuation (including A340) was C$62.70m whilst the labour learning costs,  including A340 and all of which would be shortly to be written off were C$29.6m)

FY2008     - 48 exhaust units     

(With the introduction of the new CICA inventories standards on 1 Jan 2008 MAC/E&Y wrote off circa C$10m for all A340 l/l asset.   A C$10.4m retroactive price adjustment INCLUDING an undisclosed A340 NRC /pricing recovery was recorded in Q3.2008. A total of C$14.5m was amortised for ALL MAC projects; leaving a total (including A340) of Deferred Development Costs of C$69.2m on MAC Balance Sheet at Year end. The exact number amortised for A340 was not disclosed and therefore the residual C$ value)

FY2009    -  17 exhaust units   

A total of C$7.4m was amortised for ALL MAC projects ;  leaving a total (including A340) of Deferred Development Costs of C$59.5M on the MAC Balance Sheet. The C$ number for A340 was not disclosed.

FY2010    -   11 exhaust units

A total of C$7.7m was amortised for ALL MAC projects ; leaving a total (including A340) of Deferred Development Costs of CS54.7m on the MAC Balance Sheet. The C$ number for A340 was not disclosed.

Q1.FY2011  –  0 exhaust units

Total     Actual deliveries in period   FY 2007 – Q1.2011 = 121 exhaust units 

This brings the total development, production and spares figure shipped to 555 exhaust units.                          E&Y in their FY2006 audit testing used a figure of some 1285 exhaust units by the end of the current contract in FY2012; or a further 833 exhaust units from FY2007 - FY2012.   My expectation at that time (as relayed to E&Y and PwC) was a delinquency of perhaps 50% of the NRC Balance Sheet value for the A340 “asset.”     As at today, from the documents/information available,  I believe the MAC Balance Sheet continues to be over-stated by in excess of C$10m on an equivalent basis, a “material” value in every sense of the accounting standards and reality. 

The reader will already have mentally noted that if MAC/E&Y had maintained the USD30,000 amortization number then a total of circa C$4m (less than 10%) would have been the reduction / amortization in the MAC Balance Sheet as at 31 December 2010.

UPDATED 5 May 2011:  OPEN LETTER TO E&Y CANADA (Mr Trent Henry) today.

UPDATED 16 NOVEMBER 2011
The Chairman and CEO of E&Y Canada, Mr Trent Henry, also received a copy of Mr Shannon MP and my email / document dated 14 November 2011 on A340 Spares and Repairs and the EASA findings of fact and conclusions on A340 exhaust life.

I also sent the Chairman and CEO of E&Y Canada a copy of my email and document which incorporated the Airbus press release setting out the formal confirmation of the termination of the A340 programme.

Following receipt of clarification of the correct route by the UK Secretary Dr Vince Cable MP on 26 October 2011 my complaint letter and files for CICA Breach of Ethics will now be provided to the Canadian Institute of Chartered Accountants (CICA etc) this month by my MP and myself  for individual members . Those are Mr Dekker, Mr Gowan, Mr Linsdell, Ms Kinnaird, Ms Fabina and the CICA member firm E&Y Canada.

Our complaint will include the three non Protected Disclosure accounting items in North America which I raised with PwC Canada and E&Y Canada in February 2007 as per my website Part F – E&Y; and the SuperHornet  GE414 (circa C$30m)  in my letter to MAC Directors on 27 November 2009, Plant and equipment depreciation rates and inventory provisions.

My parliamentary aide has also recently established that CICA do not recognise the Chair of MAC Audit Committee Mr Dimma, as a qualified accountant or CICA member, despite Mr Lynch’s recent assertion in the Final Submissions that he is a “doyen of audit controls in Canada”.

UPDATED 28 NOVEMBER 2011
On 25 November 2011 I followed up my original email dated 5 May 2009 at 19.24 to Mr Linsdell (copy E&Y CEO Mr Trent Henry) on the subject of Mr Dekker and Mr Rae’s “At a Glance” doc that day.                     (CICA 2011 file ref.21) .  I had also raised this subject matter before in the email exchanges on 11/12 January2009 with Mr Linsdell at subject 1B. (E&Y 2009 file ref.37) 

On the same day I also followed up my original email dated 1/8 May 2009 to Mr Linsdell and Mrs Hadfield (E&Y 2009 file ref.37) - copy Mr Trent Henry) on the subject raised on the Letters of Representation to Management for the MAC FY2006 financial accounts. (CICA 2011 file ref.22).  I had also raised this before in the email exchanges on 11/12 January2009 with Mr Linsdell at subject 3A and 3B. (E&Y 2009 file ref.37) 

On the same day I followed up my original email dated 1 May 2009 at 14.05 to Mr Linsdell and Mrs Hadfield (E&Y 2009 file ref.44/1 ) and as it also relates to Magellan Aerospace UK and E&Y audit I copied Ms Cameron in E&Y UK. (CICA file.ref 23).   I also copied this email to ICAEW to assist their E&Y UK investigation. I also forwarded  an email to E& Y on the retroactive £10 loan / equity swop in October 2006, certified as original by PinsentMasons LLP, which was relevant to any MALUK Directors assessment on “Doubtful solvency” and which Mr Linsdell advised the MAC Audit Committee to exclude any investigation of my Protected Disclosures for that subject matter – MALUK Doubtful Solvency – despite the considerable time I spent with E&Y and PwC on 14 December 2006 and 29 January 2007.  E&Y were also provided with the opportunity to comment on my final draft A340 report in November/December 2009 – they chose not to comment on any factual errors.

During my time as a MAC Senior Officer I heard MAC Chairman Murray Edwardsstate to the MAC Board in 2006 his concerns about the costs of the E&Y audits at the circa C$600m business.  In the five years from FY2006 – FY2010 my termination E&Y have been paid on excess of C$7m for the audits at Magellan Aerospace Corporation.  The preliminary work for FY2011 audit by E&Y will commence about now

PricewaterhouseCoopers LLP  -   instructed to carry out an “independent forensic investigation”.     Reminder re some oral evidence

Mr Edwards was asked during his testimony by videoconference in the UK public court on 5 June 2008

Mr Little

Why were my points, especially on the A340, not included in the PwC report?

Mr Edwards

A large amount of money was spent on the external auditors E&Y and the third party PwC. They were of high repute. They reported to the Board and the Audit Committee, it was acceptable to rely on them. (ICAEW Assurance Reporting)

Judge

“How much money was spent on the PwC Report?”  

Mr Edwards

“Too much!!   The shareholders struggle with the fact that the amount spent on that report could have been used for creating jobs etc….it cost in excess of C$3m. It is a substantial amount, but it was at the instruction of the Audit Committee, which is made up of fully engaged independent directors.  It was a standard and detailed report.  

Chair of MAC Audit Committee - Mr Dimma -  His oral evidence at Report on 4 June 2008 :P100-114 including

Mr Little 

Why did you instruct PwC?

Mr Dimma

You met Barbara Hadfield (“BH”) external auditors, E&Y.  Auditors are extremely risk averse. Barbara Hadfield raised the issue with her partners. They felt they had an obligation to meet you.

Mr Little

Then the Audit Committee decided to commission the investigation?

Mr Dimma

Yes. E&Y were sufficiently aware/concerned you had raised these issues, they felt they should investigate further. On UK counsel advice, the Audit Committee hired PwC

Mr Little 

Vol 2.585 transcript of my meeting on 29 January 2007 with PWC “meet with AC, PWC and EY but without your lawyers to agree the scope of an investigation.”  I never had that opportunity, did I?

Mr Dimma

Our view was that the appropriate way to proceed was to hire independent forensic accountants. Appropriate arm’s length way to proceed.  Terms of reference set between AC and PWC

Mr Little

I had no say?

Mr Dimma

No reason why you should

Mr Little

It was important

And later

Mr Dimma

In the view of the Audit Committee, PwC is a reputable audit firm, a first class UK forensic accountancy team, capable of getting all the facts for a sound report. They did  so. There was no need for other parties comments.

Mr Little

Why allow the Magellan management to comment on that PwC report and not me? It now takes longer for me to bring up factual issues.

Judge

You don’t have to. Not sure Mr Dimma can help on factual issues. Try a couple.

Mr Little

Major concerns about A340, C$40m plus on Magellan balance sheet               (True and Fair View)

Mr Dimma

Yes

Mr Little

Significant challenge to inventory value, significant impact on future asset value and cash recoveries

Mr Dimma 

Yes

Mr Little

EAC – estimate at completion document – did the Audit Committee look at this regularly?

Mr Dimma 

Yes

 Brian Little   -   Evidence-in- Chief –   March 2009

Mr Lynch

The view was that Magellan’s view was upheld by PwC

Mr Little

This is a quarterly sub certification sheet to do with management accounts across the divisions. When I saw the Q2.2006 EAC showing loss that was part of my reason for the conversation on 8th  August.   Markedly difficult conversation with Mr Neill.

Mr Lynch 

If someone had concern that was the way to raise it

Mr Little

I speak to Mr Neill on 8th August. He’s already given his evidence. I was sufficiently concerned to raise it and made my point again on 10th August with Mr Neill and Mr Edwards.

And later

Mr Lynch

Never have you suggested holding the accounts

Mr Little

Because I was fired before I had a chance to do so!!

Mr Lynch 

After. There’s no reference by you to A340 replacements until after your dismissal.

Mr Little

I do further research before I go on holiday on 25th August. Satisfy myself there is a bigger issue and have a conversation on 14th September 2006 with Mr Dekker

and later

Mr Little

No – the only serious discussion was 8th August 2006 (PD22) with Mr Neill – follow up on 10th August with Mr Neill and Mr Edwards (PD23). There is a regulatory regime that dictates … Mr Lynch interrupts…..      before permitting me to complete with my conversation with Mr Dekker on 14th September 2006 (PD24) 

Mr Little

I’m quite clear there were no substantive discussions re A340. Nothing substantive re Spares. The first time was as a result of my disclosures. All my investigations to date shows that I think the   auditors and PwC saw fabricated …..  A340  - some number of life-limitation on these parts and I’m again publicly whistleblowing now.

Mr Lynch 

It is at least common ground that there was some discussion re A340.

Mr Little

Yes but you are challenging my reasonable belief.

Mr Lynch We’re relying on the PwC report
Mr Little These specific people know nothing about this aerospace industry             ( Mr John F Tracey , Ms Stephanie Leblanc and Mr Stephen R. Moore from PwC)
Judge Well  you can make that in Submissions

And later

Mr Little

They took some data – ignored a lot of data and wrote a conclusion to suit the outcome

And later

Mr Lynch

Direct question re A340 matter – after the analysis and examination PwC rejected your criticism

Mr Little I don’t think they properly understood the documents they were and ought to have been dealing with

And later

Mr Lynch

In addition to being able to raise whatever concerns with Mr Dimma it was MALUK and MAC that established the PwC enquiry.

Mr  Little Yes after my meetings with Ernst & Young they reported back to Mr Dimma. Reporting protocol meant that Mr Dimma was obliged to have an independent enquiry.
Mr Lynch It’s quite clear the PwC investigation was a very thorough and exhaustive investigation?
Mr Little No
Mr Lynch They examined a very large number of documents?
Mr Little They said so
Mr Lynch There’s no obligation on PwC to set out every item
Mr Little No but it is fascinating to see what has been ignored.
Mr Lynch  You can’t say ignored.
Mr Little Yes I can. I’m looking forward to the documents I referred to because it would clear up the A340. I was never asked to comment and Deloitte couldn’t believe I was not asked to comment.
Mr Lynch  You received the draft response
Mr Little By Court Order
Mr Lynch And wrote to PwC after?
Mr Little And continue to do so except whilst I’m in purdah. 
Mr Lynch The PwC investigation was very full and complete.
Mr Little No
Mr Lynch The Report speaks for itself
Mr Little No
Judge There are issues there

Mr Dimma’s  instructions to PwC and their professional indemnity limitations (doc 588-595)  included
“PWC should recognize that its engagement and the resulting report is prepared for the purposes of findings of fact relating to existing, contemplated and pending litigation, including the Legal Proceedings.

In substance the investigation is as to whether there is any substance to the “whistleblowing” allegations made by Mr Little for potential use in the existing Legal Proceedings, or potential subsequent proceedings arising out of the whistleblowing disclosures or any future shareholder claims and/or regulatory investigations and not an investigation of the dismissal, which is the subject of the current Legal proceedings.”

And then Limitation of Liability  (doc 595)    “The limit for the purpose of paragraph 28 (a) of Appendix A will be the lower of £1.0 million and 10 times the amount payable by you in respect of the Engagement at the date of breach of Contract or the commission of the tort.”   

Mr John F. Tracey a partner in  PwC Forensic Services UK led this “independent forensic investigation” engagement, although he had never undertaken any prior civil aerospace assignments.   PwC Forensic Services website

“Independent” - most people would understand this to mean that it should be free from external control  and professionally organized and executed by PwC.  In particular the process and its substance

To date no- one I have spoken to have ever seen any published professional standards from PricewaterhouseCoopers (PwC) for “independent forensic investigations” in the United Kingdom. However, there are professional institution standards in Canada since November 2006.

15 November, 2006 press release – “The Canadian Institute of Chartered Accountant’s Alliance for Excellence in Investigative and Forensic Accounting (IFA Alliance) today released new standard practices for investigative and forensic engagements that will protect the public by ensuring consistency to a standard of practice”.

I provide a number of relevant extracts from these CICA.IFA Standard Practices for Investigative and Forensic Accounting Engagements     

100.04:

IFA standard practices are needed to protect the public interest by ensuring consistency to a minimum standard of practice.

   

100.11:

An “investigative mindset” requires a skeptical attitude in the identification, pursuit, analysis and evaluation of information relevant to each engagement, contemplating that it may be biased, false and/or incomplete.  This is applicable in identifying and assessing relevant issues, assessing the plausibility of the underlying assumptions, assessing substance over form and developing hypotheses for the purposes of addressing the issues under investigation.

   

600.03: 

Prior to the issuance of the report, IFA practitioners should be satisfied that there is sufficient support for the content of the report, including any findings and conclusions reached.

600.04: 

IFA practitioners should present their findings and conclusions in an objective and unbiased manner.

600.05:

IFA practitioners should confine their findings and conclusions to subject matter, principles and methodologies within their competence, including their knowledge, skill, experience, training and education.

600.06:

IFA practitioners should consider all relevant information that could impact their findings and conclusions.

I cite just two examples of our legitimate professional concern – 

 (1)  “ The Chair of the Audit Committee Mr William A. Dimma insisted on chairing the “independent forensic investigation” although he had previously concluded in his own investigation on 14 November 2006 that “ I was satisfied (and remain satisfied) that the issues you raised did not (and do not) warrant further steps or remedy. I considered that the issues you raised were not financial or governance issues that were of concern to me as the Chairman of the Audit Committee. They did not, in my view, amount to unethical or unlawful acts on the part of the Company or any of its employees”. 

(2) at no stage was I invited by PwC to comment on the factual accuracy of their “Draft Report” which was produced some three / four months after the investigation commenced.  I offered to do so.

This stands in stark contrast to the position recorded in a meeting on 3 May 2007 at the Audit Committee where it records “The purpose of the meeting was to provide John Tracey with comments regarding factual corrections on the portion of the draft PricewaterhouseCoopers (“PwC”) report he had circulated. The Committee and management (Mr Neill and Mr Dekker present) made a number of comments regarding factual corrections to the portion of the draft report reviewed. “ 

My accountant, Mr James McCreery also raised both (1) and (2) of the above issues from the very outset with Mr Tracey, when he accompanied me to my interview with PwC in Belfast on 29 January 2007.  Deloittes LLP similarly pointed out both of these concerns directly with me too, enabling us to make further suggestions – which were steadfastly ignored by Mr Dimma and PwC.  Furthermore there was the natural concern and immense pressure on “independence” and “professionalism” which such an assignment can create for client satisfaction/fees and broader business relationships for the claimed “Number 1” global audit firm.  Indeed it is insightful to see what PwC state on their website regarding their Services

At PricewaterhouseCoopers we aim to deliver outstanding service to our clients. We put quality, integrity and client relationships at the heart of our approach. We have talented, enterprising and intellectually curious people who strive to help our clients achieve success.”  whilst at Consulting  “………..  Our work is always evolving to respond to industry trends and management focus, and we combine our deep technical skills in response to our client’s changing needs.  …  ”  and for the Aerospace/Defence practice PwC UK claim on their website that they have over 100 A&D sector specialists which are an integral part of the PricewaterhouseCoopers global Aerospace and Defence network, which is led by Neil Hampson of PwC UK, “giving our experts access to industry specialists in over 140 countries.”

PinsentMasons LLP, Magellan’s UK lawyers – the international law firm that’s working hard to make it easier for clients -, also set out in the final paragraph of their email dated 4 April 2007, when disclosing their Documents index in accordance with the Employment Tribunal CMD1 Order, that

“Further, the documents you have requested are not in our view, relevant to the facts and matters in issue in the Tribunal proceedings. In particular, the documents are irrelevant by reason of the fact that the investigation and report was commissioned by the Audit Committee after Mr Little’s dismissal.  Further, the Tribunal is not of course concerned with determining whether the alleged disclosures made by Mr Little were/are true still less to examine and make findings in regard to Magellan’s business.  In this respect, the issue before the Tribunal is a short issue of fact i.e. did Mr Little (to paraphrase the legislation) have a reasonable belief that his alleged disclosures tended to show that certain legal obligations had been (or were likely to be) breached.  That will be a matter for the Tribunal to determine by reference to the evidence before it in the form of contemporaneous documents and witness evidence.

You have failed to explain the relevance of these documents adequately or at all.

For these reasons, Magellan does not propose to disclose these documents in the Tribunal proceedings. “

Given the reliance by MAC on the Final draft PwC report in their public financial statements on 11 May 2007 Employment Judge Christensen Ordered the disclosure of this “draft” report in June 2007.  The first Exhibit in the PwC report - Exhibit 3.1 – was my Grounds of Complaint to the Employment Tribunal.   Despite the fact that the Final PwC investigation and report was not completed for a further three months (until late August 2007) we were never invited - though on commonsense and advice from Deloittes LLP and Mr McCreery- we offered on multiple occasions, to comment on the factual accuracy of that Final Draft PwC report before they completed their Final Report.  Those requests were all denied.

Forensic”      -    comprehensive and thorough “evidence – based” research

Extracts from the Canadian CICA Investigative and Forensic Accounting Standard Practices – Nov. 2006

400.01:

IFA practitioners should use an investigative mindset in the identification, pursuit, analysis and evaluation of information relevant to each IFA engagement, contemplating that it may be biased, false, unreliable and/or incomplete.

400.02: Throughout an IFA engagement, IFA practitioners should use an investigative mindset to assess the timing, nature and extent of the approach (es), procedures and techniques to be used.
400.03: The type of information obtained may relate to the facts pertaining to the underlying issues of the IFA engagement as well as factors relating to motivation, intent and bias.  
400.04: IFA practitioners should consider the relevance of all information that arises during the course of an IFA engagement.
400.05: IFA practitioners should identify, analyze, assess, and compare all relevant information, assess substance over form, and develop and test, as needed, hypotheses for the purpose of evaluating the issues in the engagement.
400.08: Where practical, IFA practitioners should maintain copies of all documents and other materials relevant to their findings and conclusions.
400.09:  IFA practitioners should maintain an appropriate record of all relevant information received orally. 
400.10: IFA practitioners should evaluate the reasonableness and consistency of all estimates and assumptions having regard to the IFA practitioners’ competence, expertise and other available relevant information 
400.11: Where IFA practitioners receive estimates and assumptions that are outside of their competence and expertise, and IFA practitioners intend to rely on such estimates and assumptions, they should consider the reasonableness of those estimates and assumptions.
400.12: IFA practitioners should review all information received during an IFA engagement, and consider its relevance, reliability, reasonableness, completeness and consistency with other known engagement information
400.13:  IFA practitioners should consider and address reasonable alternative theories, approaches and methodologies that may be relevant to their work. 
   
500.01:

IFA practitioners’ working papers should contain or have a reference to all information used and relied upon in carrying out an IFA engagement, including the following documents or summaries thereof which would usually be retained on file:
(a)  research    etc etc  (page 12)

Here I will select the most obvious A340 example.  Please select this link for the analysis / chronology for the creation and disclosure of the A340 documents.  This is crucial as you can also read and see in Figure 2 at Page 6 in the Canadian CICA document “CEO and CFO certification – Improving Transparency and Accountability” produced in 2004, to support the Canada Bill 198 provisions following Enron, where it shows that the Management Discussion and Analysis (MD&A) statements are an integral part of the CEO and CFO quarterly certification process / law.  CEO’s and CFO’s are required to certify that these filings do not contain any misrepresentations and collectively “fairly represent in all material respects the financial condition, results of operations and cash flows of the company”. 

The MD &A’s purpose is to give readers the ability to look at the company’s performance and future prospects “through the eyes of management.” It is intended to supplement and complement the company’s financial statements.  Disclosures of a forward-looking nature must be fact-based, reasonable and supportable.  Forward-looking disclosures must be based on management’s best judgment and reflect the facts, risk assessments and assumptions based on which management is running the business.

Despite the MAC MD&A in its Annual Report

"The Corporation relies on customers' delivery projections as well as external market forecasts to determine the number of units over which to amortize non-recurring costs. Should deliveries not reach the number projected, any unamortized balance that remains would then need to be charged to cost of revenues which could have a material adverse impact on the Corporation."

See the Exhibits section 8.1 – 8.5 detail earlier  in Website part D e.g.

(1)   NO Airbus customer delivery projections or production programmes are included in the PwC Report, despite them receiving copies from Magellan and me.
(Furthermore my last MAC staff meeting dated 12 September 2006 recorded substantial A340 production rate reductions which was reinforced in the approved MAC budgets for FY2007 and the Airbus production plan provided in February 2007 to PwC & E&Y.)

(2)  ONLY ONE external market numerical A340 -500/600 forecast is used from the at least six other available. The numeric forecast of which is contradicted by their written Forecast Rationale.
(Another of which -Teal Group – Mr Richard Aboulafia- was also available within PwC UK in its London office and you can hear was recommended by me, in my only interview with Mr Tracey of PwC in January 2007.  Mr Neill confirmed to the UK court in his oral evidence in November 2007 that he was aware of this Teal forecast of A340 series production cessation in 2010 – see  website part D.)

(3)  The Airbus A340 Order Book was NOT “adjusted” for known A340 600 sales order cancellations from public data available from other actual PwC airline audit clients – Air Canada (3 a/c) and Emirates             (18 A340-600 aircraft). 

(There were multiple sources of information about A340 600 cancellations publicly available. I provided a  October 2006 Times article to PwC, E&Y and all the MAC Directors.  Indeed you can hear that I specifically highlighted this in my response to Mr Tracey’s January 2007 question about the Emirates 18 A340 600 cancellation and provided them with that October 2006 article.  Mr Neill was also aware that the sales of the A340 were in rapid decline and also had a copy of that Times article (DIR44) and a number of preceding aerospace/airline press articlesDuring the Q2.2006 MAC earnings webcast he commented on the success of the Twin Aisle sales of Boeing 787 and the Boeing 777 – reinforcing his awareness of the ZERO  A340 sales at the Farnborough Airshow in July 2006).

4)  Whilst there are also fundamental aerospace industry failures by PwC to review Spares and Repairs available information (MAC’s customer Aircelle concludes – “hoax” – website Part E etc) what is equally disconcerting is that one would reasonably  expect “forensic accountants” from PwC NOT to make basic logic and mathematics errors in a C$3m+ report.  If the website reader turns to Pages 36/37 & 71 of my A340.On.the.Record.Final Report you will be able to read where I set out the evidence where PwC did precisely that and NONE of the other PwC or MAC readers observed or corrected those errors (which could be worth C$100m+ in MAC A340 revenue assumptions) in the three months before the Final Report was finalised  and circulated in August 2007. I set this out in a separate document on auditor scepticism with six different points about Paragraphs 8.74 /8.75 which can be read by opening this link.

As I said in part of my 2007 witness statement at Para 224.4 “In the circumstances I consider the mathematical spares calculation included in the report to be, at best, misguided.”   Three out of four (75%) of my wife’s 15 year old school mathematics students identified those basic errors  within three minutes of being given those pages from the PwC report to consider, but NO-ONE corrected it within PwC, E&Y, MAC or any of its lawyers.  

There was an addition to the PwC Final Report in August 2007 at para 8.61 {691} which stated the E&Y $137K gross profit assessment / representation reliance –  

The Q4 FY2006 EAC was also used by EY for year-end audit testing purposes.” 

The Estimate at Completion (EAC) process/documents are the MAC management  “most reasoned view and likely outcome – oral evidence :Dekker”  and showed in this Q4.2006 EAC submission to the auditors E&Y and PwC an improvement over a Q2.2006 EAC gross loss of $5.2m to a miniscule  $0.1m gross profit on $250m program revenues

Mr Dekker also ultimately disclosed in May, June, August 2009 and November 2009 doc 1830A,1831A and the 3597/3598 and 3605 document series (3605A, 3605B-G – 1 March 2007 , 3605H  - 14 March 2007 in Part C - - - NONE of which appear or were mentioned in the PwC report) which had been provided to both E&Y and PwC in March 2007 as one of the key Representation documents in which he asserted–

At a glance the assessment that would have been carried out by the auditors in order to satisfy themselves that the accounting on this matter was appropriate

Separately Deloittes and I have produced working schedules which extended this “At a Glance” for the A340 Program Q2.2006 and Q4.2006 EAC together with the underpinning numeric Quantity/Number of Units and prices analyses & stated cost assumptions which enabled an overall A340 financial summary/outcomes.

It is significant that neither PwC nor E&Y were presented as witnesses by Magellan Aerospace, although at one point on 10 March 2009 Mr Lynch told the Tribunal as you can read below “we can call them”. This oral exchange at the Tribunal was later denied by PinsentMasons and PwC or E&Y never appeared in the UK proceedings as witnesses in support of the Respondents or to face any cross examination by us.

Mr Little Next doc is p3891, vol 10 it should contain a comparison of the draft/final PwC report.  Provided to the Respondents three times and PwC to confirm validity. Independent solicitors and Deloitte have verified the differences. Colour coded. Red is deleted between final draft and Bold Black is added during May and disclosure Aug 07…………….  All the other changes are made by Magellan – more specifically Mr Neill , Mr Dekker and Mr Smith etc. as the central characters.

<This includes the COMPLETE REMOVAL  at page 3/7 of PwC para 2.40  “Financial control within MAC and MALUK in relation to the areas we have examined is poor and needs to be improved; this need is particularly acute given that MAC is a public company. Examples of poor financial control that we identified during our work include:

(a) Accounting adjustments made with insufficient supporting analysis or documentation,

(b) Inadequate understanding or documentation of balance sheet provisions and insufficient documentation of the decision to release certain provisions:

(c) A lack of awareness of the program accounting requirements under either Canadian GAAP or UK GAAP. The accounting rules and guidelines are complex, and our impression is that the principles are not well understood throughout all of the finance community within the MAC Group;

(d) Poor control over individual projects from an accounting perspective. Project sales volumes, revenues and costs are not reviewed with sufficient frequency or rigour.”>
All the other changes are made by Magellan – more specifically Mr Dimma, Mr Neill, Mr Dekker and Mr Smith as the central characters.

Judge

So PwC would’ve seen a request to make changes by those individuals and PwC, without forming their own view, acceded to those requests. That’s a pretty grave accusation to make against PwC…

Mr Lynch

We can call them

Mr Little

But they are paid by you!

Judge

It is a pretty grave accusation.

Mr Little 

I know and I don’t do this lightly

Judge

I’ve recorded that

Mr Lynch

Do we want to hear untested suggestions made?  It is unfair to the Respondents.  We say the accusation is ungrounded.

Judge We’re all experienced enough to make allowances and the stress and difficulties Mr Little faces in what is an enormous case and he can be forgiven for muttering under his breath.

It was no great insight in July/August 2006 that the “A340 was now dead.”    The industry knew.   PwC were told, at least by me.   Also the MAC President and  CEO Mr Neill told the TSE equity analysts during the Q2.2006 Earnings call on 15 August 2006 that  “On top of that, there was the indecision that we had around the whole A350 program, and then the final decision to go with what is now known as the A350 XWB as a competitor to Boeing's latest product. They took pains in getting there and, in doing so, they sent a number of concerns back not only through the investment community but through the supply chain as well, especially for those who had already started working on the A350 program.

In Boeing's case -- different story. The story for the quarter was the strength of the order book for the Boeing 787 that built through that period but also for the Boeing 777 as well. In fact, Boeing won the bulk of the orders for twin-aisle airplanes and had, for the first time, some success that they could boast about.  We saw that at the Farnborough Air Show.

For the MAC Senior Officer with functional responsibility for the lead and coordination of the MAC strategy I would have been wilfully blind not to acknowledge and act accordingly. From a career-long aerospace experience I also know the difference between Spares and Repairs, what regulatory On – Condition maintenance means on an exhaust system, together with the correct financial and cost accounting for NRC recovery of Spares.   Furthermore I understood my individual and collective duty, responsibilities and accountability in regard to the MAC Code of Ethics and the quarterly certification process in Canada.  Figure 2 at Page 6 in the Canadian CICA document “CEO and CFO certification – Improving Transparency and Accountability” produced in 2004, to support the Canada Bill 198 provisions following Enron, where it shows that the Management Discussion and Analysis (MD&A) statements are an integral part of the CEO and CFO quarterly certification process / law.     

In a separate paper I compiled and set out analysis of the PwC report and management assertion contained within in relation to A340 quantities.

I found that PwC made five errors which cumulatively represent “forensic deceit”
1.   PwC basic mathematics errors - page 2
2    PwC logic – failed to use aircraft in service dates
- page 2
3    PwC use wrong average annual flying hours
- page 2
4    PwC used only ONE production build forecast
- page 3-4  (consciously ignoring the customer production plan, 6 other third party forecasts , A340-600 cancellations from airline customers which PwC audit, general and specialist press publications and MAC Board approved 30 March 2007 Management Discussion and Analysis,  at page 14 (MD&A/AIF.p12) which states
    "The Corporation relies on customers' delivery projections as well as external market forecasts to determine the number of units over which to amortize non-recurring costs. Should deliveries not reach the number projected, any unamortized balance that remains would then need to be charged to cost of revenues which could have a material adverse impact on the Corporation."
5     Detail technical data for BETA21S materials - page 4

UPDATED 16 November 2011 See EASA investigation findings of fact and final conclusions – November 2011
following Mr Shannon MP’s  regulatory referral to the UK CAA on 24 January 2011

In this linked paper I turn my attention to the A340 pricing and financial analysis done by PwC on the A340.  Here I also identify four points which likewise represent forensic deceit and a failure to basically audit and test the documents and management assertion at PwC para 8.62B.

1.  Revenue increases from Q2-Q4.2006 of C$8470K for FY2007-FY2012 could not support Magellan management assertion to PwC / basic analysis by PwC - page 4-7
2   PwC basic mathematics errors / audit testing failures in sales prices in Q4.2006 EAC - page 8
3   PwC fail to obtain BETA21A material quotes to support Q4.2006 independent verification and assumed increases from Q2.2006 – 10% p/a increase from FY2007 to FY2012. - pages 8-10
5.  Amortisation $ per unit shipped in FY2006 –PwC analysis.. approval of MAC and E&Y prior conduct - pages 17-18

Point 4.  Other information and Pricing status at August 2006 prior to my termination which is relevant in Q2.2006 and to my state of knowledge prior to my termination at Toronto Airport. – pages 11 -17

It is worthwhile listening carefully again to the “Truth – forget it”  video response by Mr Paul Moore (a Big Four former audit partner and celebrated ex-HBOS whistleblower) to my Nov 2009 question and then considering and reflecting on the ten steps in our “findings of fact” evidence at paragraphs 9.1 – 9.10 of my PwC A340 Forensic deceit report.
click to listen to MAC.Q3.2006 webcast Q&A:Mr Proulx (read p.15+)  re MAC assets/etc    “Claude Proulx - BMO Capital Markets – Analyst …. 15 November 2006

29 January 2007 – interview with PwC UK – click on links for audio tapes

http://www.fortfield.com/images/tape-symbol.gif   Airbus A340 series production in Toulouse is complete

   At the outset I told PwC about the Emirates cancellation of 18 A340 600 in late 2006 – click –  PwC audit Emirates accounts and you can read here in its April 2007 Annual Report – no A340 orders. 

   I told click- PwC that they should obtain 2/3 external market forecasts (at least 7 available) inc.Teal Reports available in PwC London     and also read my document with history analysis:PwC  

    I warned PwC about Spares & full replacements at the outset of their investigation - click here  Magellan provided their forecast for spares and repairs of 172 units to E&Y and PwC on 1 March 2007

http://www.fortfield.com/images/tape-symbol.gif  “And the fundamental issue here… is that this product is a product that has not only got a cost/price problem but it’s now also got a programme volume one!”


PwC UK tapes on 28 March 2007 onclick here Engineering Overheads (6 Minutes) / E&Y notes of MALUK Directors Audit Closing meeting for FY2005 held on 10 February 2006

Investigation”   -   researching the body of evidence and facts from multiple public and aerospace/industry sources for information consistent with that expected from competent people with superior knowledge and experience.

Returning now firstly to the Canada Standard Practices for Investigative and Forensic Accounting  

200.04:

IFA practitioners should have reasonable assurance that the IFA engagement team collectively has the necessary expertise, competencies, resources and time to perform the engagement.

   
400.04: IFA practitioners should consider the relevance of all information that arises during the course of an IFA engagement.
400.05: IFA practitioners should identify, analyze, assess, and compare all relevant information, assess substance over form, and develop and test, as needed, hypotheses for the purpose of evaluating the issues in the engagement.
400.12: IFA practitioners should review all information received during an IFA engagement, and consider its relevance, reliability, reasonableness, completeness and consistency with other known engagement information
   
600.03: Prior to the issuance of the report, IFA practitioners should be satisfied that there is sufficient support for the content of the report, including any findings and conclusions reached.
600.04: IFA practitioners should present their findings and conclusions in an objective and unbiased manner.
600.05:  IFA practitioners should confine their findings and conclusions to subject matter, principles and methodologies within their competence, including their knowledge, skill, experience, training and education.
600.06: IFA practitioners should consider all relevant information that could impact their findings and conclusions.


  
A few “investigatory” examples

(1) PwC failed to obtain and report information which was available within the PwC global firm

(e.g.Teal market reports in PwC London  and PwC airline audit clients A340 600 aircraft cancellations)

(2) None of the relevant documents and CD2 PC email/report files were considered and reported on by PwC, although these were provided by me to PwC and some to E&Y. e.g. A340 pricing together with any proper analysis and supporting documentation for the uplifted pricing used by MAC in the Q4.2006 EAC.   I set this out in my analysis of PwC para 8.62B etc at this link

(PwC correctly recorded in the Final Draft report at para 8.61 that “Brian Little stated in the E&Y presentation that his concerns regarding the treatment of the A340 NRC were raised following Q2.2006.” As you can hear on the audio tape I stated “And the fundamental issue here, which we have to come to terms with, is that this product is a product that has not only got a cost/price problem but it’s now also got a programme volume one!”

The PwC Final Draft report in May 2007 was then changed in the PwC Final Report in August 2007 to exclude the pricing and costs assumptions by solely referring to “A340 volume expectations”. To change that text was wrong.

PwC did not report or assess the implications of those 11/14 August 2006 BAFO/commercial proposals, which were now “acceptable” to Mr Edwards and Mr Dekker – with reduced revenues of $5.2-$8.9m. Had PwC done so they would have reported that the inclusion of that “acceptable” lower pricing would only increase further those Q2.2006 EAC  $5.2m lossesI have asked Mr Dimma did he authorize it? )
 
(3)  the two people assigned by PwC Canada in the  A340 investigation demonstrated minimal, if any,  relevant Airbus experience and knowledge. The lead PwC A340 author Stephanie Leblanc CV and Mr Stephen R Moore – who has since left PwC – never met me.

As part of their investigatory tools the PWC Forensic team tape record a copy of their interviews (on advice we decided we would do likewise).  I attach a recorded copy of the interview with PwC in Pricewaterhouse Coopers in Belfast on 29 January 2007 led by Mr Tracey of PwC from the portion which dealt with the A340 subject-matter.   Full  Tape recording -  Part 1  (16 minutes)   and  Part 2  (7 minutes) and Part 3  (24 minutes)and Part 4 C (20 minutes) and Part 5 C (29 Minutes). PwC UK re whistleblowing – people (7 minutes). PwC UK tapes on 28 March 2007 on Engineering Overheads (6 Minutes)/ E&Y notes of MALUK Directors Audit Closing meeting for FY2005 held on 10 February 2006

UPDATED 28 NOVEMBER 2011  Ms Samantha Ashfield added a E&Y-based  calculation for Q3.2005 Engineering Overheads at MALUK  (In their PwC Final Report Exhibit 5.10A) in a retroactive action to justify the Dekker “life of opportunities” unilateral action by MAC in Q3.2005. This was without any awareness or involvement of MALUK CFO, Mr Smith, (PwC para 5.25) or anyone at MALUK.  The E&Y  calculation was also flawed –  see PwC para 5.48/5.49 - as it included costs which should have been excluded per SSAP9.   E&Y record that the Q4.2005 calculation (which they erroneously attribute to MALUK in their letter dated 11 July 2007) was confirmed as adjusted downwards in their letter dated 11 July 2007 to the MALUK Directors (page 3).   This new Exhibit was one of only two new Exhibits added by PwC to their Final Report between 9 May 2007 and (24) August 2007 as part of their “forensic deceit”.

The PwC report at Section 6 on MALUK Engineering Bonuses (led by Mr Sterl Greenhalgh) did not consider the impact on the MALUK FY2005 statutory accounts which was the subject of my Protected Disclosures. The letters to the employees signed by MAC COO Mr Butyniec specifically statesThe bonus payment is in recognition of your continued efforts in support of Magellan Aerospace (UK) during 2005.”   You can read a sample of the 26 May 2006 letter to Mr Phil Underwood who also gave evidence on this subject and document in his witness statement to the UK court.   E&Y requested and received erroneous signed specific representations from each of the MALUK Directors on the exclusion of these FY2005 bonuses from the MALUK statutory accounts for FY2005 – page 3. Mr Dekker representation.

Mr James Mc Creery , a partner in our lifelong accountants/auditors (McCreery, Turkington and Stockman in Belfast) also attended with me that interview with PwC in their Belfast office.     He also met Mr Dave DeWolf of E&Y Canada in mid May 2007 when we were both in Canada

We have created/provided a summary of our analysis of the “independent forensic investigation” and PwC conduct/behaviour for the A340 Section 8 report, underpinning our conclusion of PwC.A340 “Forensic Deceit”.

8.0

Accountancy/Auditors – perceptions of “independent forensic accountants”

I understand from other people within Big 4 audit firms that Forensic accounting people consider themselves to be amongst the “elite” members in their accounting/audit profession. I also believe from my research that most lay people would attribute such roles in such people and firms as having the following characteristics:

8A

Numeracy / finance skills – basic logic and mathematics – see paragraphs 9.1 and 9.2

8B

Reliance on them – comprehensive/thorough = truth / trust underpinned by independence / Objectivity –see paragraphs 9.3, 9.4 and 9.5

8C 

Access to information – global knowledge management / other audit clients and public information underpinned by technology in access to documents and records – see paragraphs 9.6, 9.7 and 9.8

8D

Professional scepticism , checking and validity:audit testing and deep technical skills – paragraphs 9.9 & 9.10

 
Some of the PwC steps in their act of A340 “Forensic deceit”         Private Eye 

9.1

A340 500/600 Pricing          -     numeracy and logic

9.2 A340 500/600 Volumes/ Quantities   -     numeracy and logic
9.3 A340 Customer delivery projections from Airbus – totally excluded in PwC analysis / assessment
9.4 A340 External Market forecasts from third parties – PwC not comprehensive / thorough
9.5 Independence/Objectivity – professionally compromised
9.6 A340 500/600 External market forecasts - failure to access global information
9.7 A340 500/600 Data from other Publications – including the file provided by MAC CEO, Mr Neill
9.8 Airbus Aircraft A340-500/600 “Website” Order Book   -   wrong analysis / assessment
9.9  Airbus A340-500/600 Unit Delivery projections - failure to check and audit testing validity
9.10 A340-500/600 pricing projections – failure to check and audit testing validity

See My A340 Report for PwC comments (pages 132-148) including my emails to
Mr Ian Powell (Chairman/Senior Partner – PwC UK) and
Mr Christie Clark (CEO/Senior Partner - PwC Canada)

in Attachment H (pages 138/139) and specifically my emails on 5 July 2009, 14 October 2009 and 9 November 2009 to both of them.  Classically you can also read their respective lawyers response.  Ms Caroline McQuater for PwC UK  - 1 Dec.2009    and Mr Robert Osborne for PwC Canada – 15 Oct/9 November 2009.  By now their CEO internal quality review should be complete.

Following the 12 January 2010 Press Conferences /website release of the Airbus Orders & Deliveries (O&D) information at December 2009    -   I sent a follow up email  to PwC  -     Mr Ian Powell, Mr Christie Clark and Mr J Tracey (Copy Mr N.Murray Edwards, E&Y  and others) in which I concluded with

“At the Magellan AGM in May 2009 (transcript in  Part H of the website)  I said I would publish all the relevant evidence available to me for the MAC shareholders and other stakeholders to review and consider for themselves . As you know from my prior emails I have just released this on my website   www.fortfield.com.

You all also  know (from 2009 and documented in my Final Report at page 138) Mr Edwards position on the cost of your PwC report.    I ask once again on the basis of all the evidence/information available together with your own internal review last year , on  behalf of the other MAC public shareholders, that PwC now return at least £1m (of the C$3m paid for the investigation) to Magellan Aerospace Corporation.   If Mr Edwards wishes to achieve more,  given his recorded concerns about the costs, then I will leave that to the MAC Board and he to pursue. If they wish with my assistance.”

UPDATED AUGUST 2010 : Due to my ill-health/mental breakdown in early February 2010 I was unable to write this OPEN LETTER or attend the May 2010 AGM . I am currently recovering and I hope I am sufficiently well to be able to compile this OPEN LETTER and send it in September 2010 including other appropriate regulatory bodies and interested parties suggested in discussions with my MP – for example “The Accountancy & Actuarial Discipline Board (AADB)” and the Solicitors Regulation Authority and the Law Society – he is currently taking further advice before the summer recess.)

As you will have read above - following the 12 January 2010 Press Conferences/website release of the Airbus Orders & Deliveries (O&D) information at 31 December 2009 – I sent an email to the PwC CEO’s in the UK and Canada requesting that PwC return at least £1m (as per its contract/professional indemnity) to Magellan and its Ordinary shareholders.

On the same day as Airbus published its 31 July 2010 website update for A340-500/600 aircraft deliveries and orders ( after the Farnborough Airshow 2010) I sent a further email to a similar circulation as in January 2010 in which amongst other material I stated the “ So in light of the PwC “Tone at the Top” and leading ethical actions etc from the front , together with all the evidence etc . etc,   will PwC finally now return at least £1m to Magellan and all the ordinary shareholders of Magellan Aerospace Corporation?”.

My reference to “Tone at the Top” is a PwC June 2010 survey/report (commissioned in part by the same Mr John F. Tracey) which a former PwC partner brought to my attention recently as being relevant to the case and the conduct of PwC set out in my website.    Colloquially put “PwC telling others (and taking fees in that process) what THEY should DO whilst NOT practicing that conduct and behavior in their own leadership organization structures”. Mr Ian Powell refers to "responsible leadership" and "doing the right thing" in the PwC 2009 annual report. Furthermore PwC are running stories/video clips on “Building and Sustaining Trust”  on their website  with a quote from the Vice Chairman of Thomson Reuters “Society has lost trust in business and we need to regain that trust”.

UPDATED 7 APRIL 2011:  After the release of the MAC FY 2010 Financial statements Mr Shannon MP followed up his November and 15 December 2010 letters to Mr Dimma in his email dated 6 April 2011; in a part of which you can see he records that there is no evidence that PwC repaid any of its C$3m fees to MAC and its shareholders.   In the period since my last update PwC are now producing videos on
PwC  -  Trust in Business and incredibly from Mr Tracey, the Chairman of the PwC Fraud Academy and engagement partner for this “independent forensic investigation”

Whistleblowing and Transparency  -  Striking a Balance  :  see also my Summary and A340 analysis

 

UPDATED 9 May 2011
UK   Daily Telegraph – 4 May 2011 by Rowena Mason
Article  PwC faces probe over removing client criticism from report

PriceWaterhouseCoopers has been reported to the accounting regulator, after agreeing to remove criticisms about its client from a £1.5m independent report into allegations made by a whistleblower

PriceWaterhouseCoopers has been reported to the accounting regulator, after agreeing to remove criticisms about its client from a £1.5m independent report into allegations made by a whistleblower.Mr Shannon's intervention comes at a critical time for PwC, since it is under scrutiny over its "independent inquiry" into the Royal Bank of Scotland's collapse. 

Jim Shannon, MP, has written to the Financial Reporting Council asking them to investigate a report prepared by PwC in 2007.

The MP's intervention comes at a critical time for PwC, since it is under scrutiny over its "independent inquiry" into the Royal Bank of Scotland's collapse. The "big four" - Deloitte, KPMG, PwC and Ernst & Young - have also been criticised by MPs for "dereliction of duty" during the financial crisis.

Mr Shannon's concerns relate to an independent report that PwC was hired to write for Magellan Aerospace Corporation, a Canadian aircraft parts company. PwC's brief was to look into a whistleblower's claims that Magellan's order book had been inflated.

However, criticism of Magellan's "poor" accounting was left out of PwC's final version – at the request of the client's audit committee.

The MP raised concerns on behalf of the whistleblower, Brian Little, the former head of Magellan's UK operations. ..etc “

Later that day Magellan lawyers provided for the first time a copy of the letter from PwC dated 20 June 2007 to Mr Bill Dimma , Chair of the MAC Audit Committee which can be viewed here.   As you can read this PDF document file was extracted on the 1 May 2011 from a computer record.

l have also provided a copy of the A340 Final draft and Final Reports for Section 8  : MAC : Aeronca – Airbus A340 non-recurring costs which are directly relevant to the PwC criticisms in (a) , (c) and (d) in that 20 June 2007 letter from PwC enclosing their Final Report.

“ Financial control within MAC and MALUK in relation to the areas we have examined is poor and needs to be improved; this need is particularly acute given that MAC is a public company. Examples of poor financial control that we identified during our work include:

(a) Accounting adjustments made with insufficient supporting analysis or documentation;

(b) Inadequate understanding or documentation of balance sheet provisions and insufficient documentation of the decision to release certain provisions;

(c) A lack of awareness of the program accounting requirements under either Canadian GAAP or UK GAAP. The accounting rules and guidelines are complex and our impression is that the principles are not well understood throughout all of the finance community within the MAC group;

(d) Poor control over individual projects from an accounting perspective. Project sales volumes, revenues and costs are not reviewed with sufficient frequency or rigour. In particular, EAC calculations require many estimates by management. Our experience with accounting practices and governance in the aerospace industry is that these estimates and key assumptions should be reviewed on at least a quarterly basis.”  

The Magellan lawyers in the UK misled the UK court (or were lied to by their client, Magellan) that the PwC Final report was not produced until late August 2007.  I will be pursuing this vigorously with various parties and the UK Employment Tribunal.   Also read now this witness statement from Mr John Dekker presented on 6 June 2007 to ET.

Furthermore I sent an email to Mr Powell on 22 May 2011 in which I put seven questions to establish more of the facts as to how this could have occurred.  My MP, Mr Shannon, also followed this up and I recommend reading the entire email trail.   At Mr Shannon’s request on 30 May 2011 I set out the detailed evidence in an email to Mr Powell, supporting the  retraction of the PwC spokesman comments “as it did not address the accounting matters which PwC were instructed to review”,  as this was simply false.   This can be read as part of the email trail here

Eventually on 3 June 2011 the PwC lawyer Mr Naylor from PwC replied and Mr Shannon MP followed this up in a crucial email personally to Mr Powell, on the 6 June 2011.  I recommend reading that email trail here.

UPDATED 16 NOVEMBER 2011
The Chairman of PwC UK, Mr Ian Powell, also received a copy of Mr Shannon MP and my email / document dated 14 November 2011 on A340 Spares and Repairs and the EASA findings of fact and conclusions on A340 exhaust life.     You may also access a 13 page document summary of this subject matter from a PwC perspective here – we commend it to you.

Furthermore I sent the Chairman of PwC UK, Mr Ian Powell,  a copy of my email and document which incorporated the Airbus press release setting out the formal confirmation of the termination of the A340 programme .   You may also access and read a 17 page document summary of this subject matter from a PWC failure / deceit perspective here – we commend it to you.
As the Daily Telegraph reported on the 26 July 2011, following the Annual Audit Inspection Report to the UK Business Secretary of State, Dr Cable MP

Biggest audit firms hit by scathing regulator’s verdict” –

Not enough scepticism, a failure to robustly challenge management, and a propensity to encourage salesmanship of non-audit services. These are just three of the recurrent rebukes detailed in the Audit Inspection Unit’s (AIU) assessment of the six largest audit firms…….

All the auditors were guilty of failing to check financial statements and management assumptions with enough analysis and rigour, according to the AIU.

PwC – the world’s largest auditor – was censured for a catalogue of failings like its rivals, most notably for problems with its assessment of goodwill at two FTSE 100 companies, weakness in the majority of its reviewed audit in relation to auditing of revenue, and issues with work led by an increasing number of audit directors rather than partners. PwC, was also criticised for its handling of international bank subsidiaries in the UK particularly on provisions made against loan books.”

UPDATED -  22 November 2011

Bloomberg – 21 November 2011    USA  Audit watchdog finds Higher Deficiency Rates at Two of Big Four

The Public Company Accounting Oversight Board found flaws in 28 of the 75 reviewed audits by PricewaterhouseCoopers LLP….. Totals reflected increases from previous years, according to PCAB data

PwC “failed to obtain sufficient appropriate audit evidence to support its audit opinion” in some cases…..

The PCAOB is a non-profit organisation funded by fees on public companies, that regulates and inspects auditors under the oversight of the Securities and Exchange Commission. It was created by the Sarbanes-Oxley Act of 2002 after accounting scandals contributed to the collapse of Enron Corp and Worldcom Inc.”

Following receipt of clarification of the correct route by the UK Secretary Dr Vince Cable MP in his letter to Mr Shannon MP on 26 October 2011 my complaint letter and files for Breach of CICA Ethics will now be provided to the Canadian Institute of Chartered Accountants (CICA etc) this month by my MP and myself for individual members.  Those are Mr Dekker, Mr Gowan, Mr Linsdell, Ms Kinnaird, Ms Fabina and the CICA member firm E&Y Canada.

My parliamentary aide has also recently established that CICA do not recognise the Chair of MAC Audit Committee Mr Dimma, as a qualified accountant or CICA member, despite Mr Lynch’s recent assertion in the Final Submissions that he is a “doyen of audit controls in Canada”.

Furthermore, neither Stephanie Leblanc nor Stephen R. Moore, who apparently produced the A340 report at PwC under Mr Tracey’s leadership, who I never spoke to, were certified / registered by the forensic accountants at the CICA.IFA. They and PwC also failed to apply the minimum CICA.IFA standard practices for investigative and forensic engagements.      I provided these two PwC individuals with advance notice of our intention to file a complaint against them as individual CICA members with some of the supporting documents.  You can read the subsequent email exchange with Mr Shannon MP /myself and PwC Canada here.

I wrote an email on 25 November 2011 to Mr Powell, the Chairman and Senior Partner of PwC UK  …..

Perhaps you should personally consider again whether you are prepared to instruct PwC UK to return the C$3m + fees for this PwC engagement in 2007 to the MAC shareholders now?

 


Part H : Magellan Aerospace Corporation - AGMs

May 2007 – I attended the May 2007 AGM (with my family accountant/auditor, Mr James McCreery) but we did not ask any questions.  I did not attend the May 2008 AGM but see Q&A transcript below…. 

however in May 2009 --  Brian Little extract p8/9:    “Can I just make a point now that there are effectively eight documents that prove your sole reliance upon E&Y and PwC has been invalid and unjustified.  Why don’t you publish the following documents on your website so that all the ordinary shareholders can see what happened in FY2006 - what has been said in evidence , what has been said by PwC, what has been said by Mr Mark Bobbi and everyone can see what has been said..........................   

.........I am now talking to those people who made the representations to the auditors for A340 in FY 2006 . Mr Neill, Mr Dekker - what they provided as that data to the auditors?   Provide the ordinary shareholders with the information / documents so they have the opportunity to see what has been said, put it on your website and let everyone see.   If you are not going to do it ...  I will in a month’ time. “

(Note added – delayed after further inputs/advice that three events / matters needed to be concluded. One of which was in deference and respect to the Uk Tribunal and the conclusion of the UK evidence phase.  Magellan UK’s latest estimate, in their most recent MALUK statutory accounts FY2008 filing, is that the UK employment case should now conclude by December 2010 but have excluded any  comment on the breach of employment contract case in the UK High Court which will be filed in March 2010 (after my health recovers) and likely to proceed into 2011. MAC financial statements address these matters at FY2007  Balance Sheet page 21 : Note 22b  (page 50) ;FY2008  Balance Sheet page 27 : Note 22b (page 57); FY2009  Balance Sheet page ? ; Note ??? (page ??).)

Mr Neill  :   Obviously on the website we provide all the documentation we are required to meet the OSC and the TSX.  To go beyond that in the context of this ---- is over and above what we have to do , especially since we disagree with you on so many of the issues.

Copy of transcript from Questions and Answers at Magellan Aerospace Corporation AGM - May 2008 (p10 - 14)
(Mr Edwards as usual chaired this public meeting and the customary public broadcast provided the Q&A information / transcript)

Copy of transcript from Questions and Answers at Magellan Aerospace Corporation AGM - May 2009 (p1 - 10)
(Mr Edwards was reported by the Vice Chairman to be unavoidably detained in Calgary and the Vice Chairman Mr Neill then chaired this meeting.  On this occasion (we believe probably as I was present) the customary public broadcast by CNW was terminated after the formal AGM resolutions and before the Q&A section. 

Fortunately a private copy of the Q&A was taped and was therefore available to create the transcript at p1-p10 above
)
as per tape recording of that AGM  Q&A (A340 – final question)   

Magellan Aerospace Corporation AGM –  May 2010

Updated May 2010 - due to my ill-health I will be unable to personally attend this AGM

Updated July 2010 -  on this occasion, although preceded by a MAC Board meeting on Friday 14 May 2010, neither Mr Edwards or Mr Neill were present at this AGM.  No questions were asked by anyone present at the public AGM.


Part J : Whistle blowers normally stand alone :

Magellan Customers (Airbus) 
* A340:oral
 evidence only

Suppliers to Magellan UK

   

Mr Iain Gray - Airbus Managing Director (MD) W/S *

Mr Stuart Wilkins W/S - MD of Apollo Metals
Mr Jim Fairbairn W/S - Commercial Mr Raymond Semple W/S - MD of Moyola Precision Eng
Mr Clive Renson W/S - Engineering*

Mr Terry Stocker - No Witness statement - Joint MD of All Metal Services

Mr Simon Price W/S - Procurement  

Magellan UK Employees - non Finance

Magellan UK Employees - Finance

   
Mr Paul Nokes W/S and Supplementary WS Mrs Clare Pettifer W/S and SWS
Mr Phil A Underwood - W/S Mrs Corrie Prinsloo W/S and SWS
Ms Helen Clorley W/S and SWS Mr Paul Precious W/S and SWS
  Mr Keith Baigent W/S

*  For commercial reasons the  Airbus UK witnesses did not wish to give written evidence on the A340-500/600. They were prepared and expected to do so their oral Evidence-in-.Chief .

Having received the witness statements of Mr Fairbairn and Mr Wilkins (above) PinsentMasons on behalf of Magellan sought to prevent for several months the admission of their entire witness statements as evidence to the Tribunal. Mr Lynch QC finally conceded this and their witness evidence was admitted and heard on 30 March 2009 and 1 April 2009 respectively.

It is significant that neither PwC nor E&Y were presented as witnesses by Magellan Aerospace although at one point on 10 March 2009 Mr Lynch told the Tribunal Magellan “we can call them” . This oral exchange at the Tribunal was later denied by PinsentMasons and PwC or E&Y never appeared in the UK proceedings as witnesses in support of the Respondentsor to face any cross examination.

Mr Little Next doc is p3891, vol 10 it should contain a comparison of the draft/final PwC report.  Provided to the Respondents three times and PwC to confirm validity. Independent solicitors and Deloitte have verified the differences. Colour coded. Red is deleted between final draft and Bold Black is added during May and disclosure Aug 07…………….  All the other changes are made by Magellan – more specifically Mr Neill , Mr Dekker and Mr Smith etc. as the central characters.

Judge

So PwC would’ve seen a request to make changes by those individuals and PwC , without forming their own view, acceded to those requests. That’s a pretty grave accusation to make against PwC.

Mr Lynch

We can call them

Mr Little

But they are paid by you!

Judge

It is a pretty grave accusation.

Mr Little 

I know and I don’t do this lightly

Judge

I’ve recorded that

Mr Lynch

Do we want to hear untested suggestions made?  It is unfair to the Respondents.  We say the accusation is ungrounded.

My personnel files, throughout all my business career and employment of some thirty years, have never had any complaints, whilst my superior Mr Neill (MAC CEO) and Ms Ball (HR) confirmed to the Judge in their evidence that they had consciously decided not to follow the UK statutory procedures and UK HR advice, when they both summarily dismissed me on my arrival at Toronto Airport for a week-long series of strategy and budget-setting meetings.

As my Leading Counsel, Mr Andrew Stafford QC, stated at the first UK hearing in October 2007 “Moreover it is important to appreciate that Magellan’s  approach is entirely consistent with the way in which whistleblowers are treated;   first ignored,     then demonized,    then dismissed and then        publicly rubbished.”

Earlier in my business career you can read references from Sir Roy McNulty at Shorts/Bombardier PLC, Mssrs Per Neilsen and Bill Gallagher at Harland and Wolff PLC, together with some personality profiles PAPI and SIMA.  Many other references are also available on request, although I now include a Selection of  12  Quotes from various letters , emails , cards (157) from staff to Brian Little on exit from MAL / MALUK  in September 2006 / October 2006.

As further examples of what was on the mind of the former President and CEO Mr Neill in his written evidence to the UK court (RAN20) stated that Brian was an experienced operator in the aerospace industry, with excellent links with key figures (such as Ken Brundell – should be Brundle at Bombardier– and indeed many others) …and (RAN22)
It was clear to me that the Claimant had lots of experience and knowledge of the industry. He had a good technical understanding of the issues, a good grasp of contractual issues (which led me to believe he would be a strong negotiator) and a sound strategic approach” 

BUT,  for the first time in my life read (RAN55) and heard that someone, in this case Mr Neill, believed that Brian operated badly on points of detail…..“ and

(RAN11) “Far from being a financially dubious or badly or carelessly managed group, Magellan was and is a solid performer in an extraordinarily challenged market backed by major shareholders who are involved and patient”……….

This is against a background that the Corporation consistently lost money in nearly every quarter whilst he was CEO , had paid no dividends to ordinary shareholders and the MAC stock market capitalisation on the TSE had fallen by 90% from approximately  C$2500M in 2002 to circa C$250m when he retired at 31 December 2006. Shortly after Mr Neill’s retirement as CEO and Several months after PwC completed their Final Report MAC announced on 31 March 2008 for FY2007 “Accounting errors and mis-statements in accounts receivable were uncovered at one of the Corporation’s divisions during the course of an ongoing process to collect outstanding accounts receivable on a timely basis. This prompted an internal investigation that uncovered the overstatement of various assets on the balance sheet resulting from improper accounting and also discovered unsupported and unrecorded transactions. This was for a sum of C$7m + and took place over the period when Mr Neill was President and CEO ( Mr Dekker CFO)  from 2003 -2007.

Given that there was no discussion with me about any of the pleaded defence case at paragraph 8 and “Claimant misconduct” allegations (para 9) with Mr Neill (my boss/MAC CEO and the Dismissing Officer) and I knew that there was nothing on any of this in my Personnel File, my legal team and I produced a Request for Further Particulars (Rfp) on 28 March 2007 (3171/3) in which we asked, amongst other items, for full particulars of the specific incidents which supported their defence / “demonisation” of me.   In both their solicitors letter responses on 4 April 2007 (3182/3) and again on 23 April 2007 (3222/3) their legal team refused to provide any further particulars.

Mr Little : “  No, I’m publicly whistleblowing <on A340 500/600>.   It’s still wrong and I’m going to give evidence that is the case.” - Stated in March 2009 Hearing

 


Part K : Current status of UK court / Tribunal case

The UK court / Employment Tribunal case being held in Bristol, England has now heard all the evidence for the Liability phase over 40 plus days during the two year period from October 2007 – October 2009 due to the part-time role of the Tribunal’s three members.  Magellan were advised of the Tribunal’s role in PinsentMasons information / explanation and advice to Mr Dimma/Audit Committee minutes – 21 Dec 2006/3 Jan 2007 (doc 297M/I and 309A/B) which includes as you can see

“Claims lodged with the Employment Tribunal

The primary interest of the Employment Tribunal will be to determine if Mr. Brain Little was “sacked” because he was preparing to make or had made protected disclosures under the whistleblower policy. They will not be interested whether the disclosures are true or not”. Based on UK case law the burden of proof is on Magellan / the Respondents to prove its case.  Mr Lynch QC also made Submissions on the duties and scope of an Employment Tribunal in paragraphs 7 & 8 of his written Submission to the Employment Judge on 1 June 2009.

Current legislation for UK Employment Tribunals do not provide any formal powers to refer my “Protected Disclosures” to the relevant national (until 6 April 2010 when the ET has the power to refer cases to the relevant regulators) / international regulatory bodies.    I believe and understand that Magellan Aerospace Corporation ordinary shareholders, as at August2006 - March 2007, and others have such powers and responsibilities.    

These UK evidence hearings have therefore taken so long, in my view, caused primarily by

1)  Magellan witnesses have barely dealt with my case (the protected disclosures) in their written witness statements.  As the best example, despite  MALUK “doubtful solvency” as a significant number of the protected disclosures in my Grounds of Complaint and my case – largely disclosed to Mr Dekker (MAC CFO), he chose to deal with these specific Protected Disclosures in their entirety in his witness statement at para 79 “In terms of the detail, one of the matters that was initially considered, as a result of the Claimant’s allegations regarding governance, but that ultimately did not fall to be reported upon by PWC was in regard to the business’s solvency. I believe this was because the claimant dropped this allegation when he was pressed on it in the aftermath of his dismissal”.    It is also noteworthy that this was also after Mr Dekker had initially agreed, through their solicitors in March/April 2007 in a Schedule of Factual Issues that certain statements (or words to that effect) had been disclosed to him by me (Protected disclosures PD1,PD2,PD3,PD9 & PD10 at two crucial dates on 15 August 2006 and 14 September 2006) and then apparently set out to deny that in his oral evidence in April 2008. 

In fact PwC’s final draft report recorded at para 4.11 “EY confirmed at a meeting of the MAC Audit Committee that the outcome of our investigation into the zone of insolvency and the whistleblowing process would not affect their audit of the consolidated audited financial statements for MAC for the year ended 31 December 2006 and the financial statements of the MALUK for the financial years 31 December 2005 and 2006. At the request of the audit committee we have deferred the investigation of these matters”. This paragraph was removed in its entirety in the Final PwC Report published some three months later in August 2007.   Yet the Magellan legal team continue to state they rely on PwC’s report in contesting my “reasonable belief” on these.  For the remaining less than half of the protected disclosures investigated by PwC the Respondents preferred instead to rely wholly on the PwC reports and E&Y – who although Magellan’s clients – were not presented to give their evidence on these subjects.

The combination of this approach to my case, when combined with Mr Dimma / PwC denying me the opportunity to comment on the PwC Final Draft Report, even after it was Ordered for disclosure by the UK court, and before PwC completed their investigation, has undoubtedly directly caused a substantial prolongation of the hearing cost and time for this Tribunal as well as leading to a failure by PwC to carry out an “independent forensic investigation” by any basic professional standards.  Also as a consequence of the unreasonable conduct of their case comprehensive notes/transcript of the oral evidence has been necessary throughout the 40+ days of public hearings.  We have some 660 + pages of oral evidence similar to the extracted detail you have read elsewhere in this website over those 40 days.

A subset of this is particularly clear on the A340,where Magellan’s position on my “reasonable belief” was initially expressed in May/June 2007 (6 June 2007-CMD 4)  as“ At present there is no challenge made by the Respondents in regard to the “reasonableness”  of any beliefs of the Claimant. If that is not a live issue between the parties, ordering disclosure (of the PwC report) in connection with that non issue would, with respect, be inconsistent with the over-riding objective and would not be necessary for the fair disposal of the case. Naturally, the issues in litigation can shift. Further, if, say, the issue of reasonable belief became a live issue between the parties that would be relevant to consideration of whether the PwC Report was a relevant document for disclosure. However, until such time as the final Report exists, the above cannot be determined.” You can also read what was stated in prior skeleton submissions to the Tribunal CMD’s  by Magellan’s Mr Lynch QC on 19 April  2007 (CMD2) and 17 May 2007 (CMD3).

This then became, during the first hearing in the UK court/tribunal on 16/19 November 2007,  the Respondents (Magellan) position was on the record as “It is right to say that, prior to the receipt of the PWC report,the Respondents envisaged that the issue of reasonable belief might not be a live issue.  PWC concluded that the view adopted by the Respondents as to the treatment of those costs and likely sales of the A340 formed no basis for criticism.”  Magellan’s position had then changed due to this reliance on PwC and the belated challenge to my reasonable belief on A340. This necessitated more documents and witness recalls of Mr Neill and Mr Dekker.  Although most of these documents were provided (DOC 1830/1A series,3605 series, 3625S,4183-4186A) after I had completed my Evidence-in-Chief in March 2009 the Tribunal determined that they did not need to hear any further evidence from me, on 22 October 2009, on my “reasonable belief” on A340 – protected disclosures PD22, PD23 and PD24.

Perhaps this is a good opportunity to explain “reasonable belief” – as set out by Magellan’s counsel Mr Lynch QC in some extracts of his written Submissions to the Tribunal to date –

A) Para 8 – What the ET is not required to determine, and it would be wholly unfair and inappropriate to expect it to determine are ………
B)  Paras 12 , 13 and 14    “Reasonable belief”   ………

I believe the UK Employment Tribunal role and “reasonable belief”  is consistent with what I explained during the Q & A at the MAC AGM in May 2009 – page 8 and 9 and the reason for my resultant  suggestion and my decision to now finally publicly comment and provide the relevant information to shareholders etc

2)   Documents  Disclosure     -    

The UK rules on disclosure are stated in the Ministry of Justice Practice Direction 31, 31A & 31B and are helpfully summarized in the seminal book on Whistleblowing  –  Law and Practice at page 235:

10.29 

“The principles of standard disclosure under the CPR require a party to disclose those documents on which he relies, any documents which support or adversely affect his or another party’s case, and any other documents which a party is required to disclose pursuant to a relevant practice direction.”  ….. 

10.30

“The general rule is that a document is relevant which it is reasonable to suppose contains information which may, not which must, either directly enable the party to advance his own case or to damage the case of the adversary (including) a document which may fairly lead him to a train of inquiry which may have either of these two consequences”

 

The record shows most visibly over the last 3 years that the Document disclosures track record of the Respondents has been tardy, begrudging, unreasonable  and even obstructive whilst deliberately withholding crucial documents . This has occurred, despite their legal obligations and despite their solicitors’ (PinsentMasons) remarks in their letter of 16 February 2007 (document 3130).  This stated

“For the record, my clients have made it clear to me that they intend to fully and properly comply with any order for the disclosure and exchange of all relevant documents.  I have had sight of the documents that are referred to in the Responses but they are not assembled in such a way that they can simply be run through a copier and sent to you.  I do not believe that it is in accordance with the over-riding objective that my clients should incur the time and cost of my firm compiling and sending to you documents in advance of the CMD.  Such piecemeal overall disclosure only serves to increase costs.  The documents referred to in my client’s responses will form part of my client’s overall disclosure in compliance with the anticipated Order.

I totally refute your suggestion that my clients’ conduct of this case is unreasonable.” 

Additionally my solicitors email (3160A) on 14 March 2007 (after the Employment Tribunal CMD1 on 7 March 2007 and the documents / index disclosure Order for 4 April 2007) also stated “And on the subject of discovery, don’t forget the laptop PC as a source of relevant documents for your discovery exercise. That ball is now in your court given that you have not made it available to our client to find the relevant documents for both sides benefit.  We still expect access to check through on the dates suggested previously. “

{BL observation – At this juncture I would now ask the reader to note before proceeding any further the document creation dates by MAC of key documents in the A340 case listed at Section C on the website and the dates between this solicitors letter (16 February 2007) and the CMD1 Court order for disclosure of all relevant case documents/index (Court Order for 4 April 2007) . For example in website Section C .  Documents 3605  MAC A340 forecasts – Aeronca-Aircelle Inc A340 Program – Actual/Estimated Quantities – produced on 14 February 2007 – disclosed after a further Tribunal Order in December 2008. An update of this document title/format which it is asserted by Mr Dekker was then sent to E&Y (3605B/D) and PwC (3605E/G – which was not included in any reference or Exhibit within the PwC report) and on 1 March 2007 – finally disclosed in court on 8 June 2009.  A further copy of this document format was produced showing a total production build  of 135 A340-500/600 a/c with final Aeronca production deliveries at the end of 2009 (similar to the February 2006 and a August- October 2006 case of 150 a/c expressed by me and part of my CMD4  Request 16 below) which was dated 14 March 2007 and sent to PwC (3605H – which was not included in any reference or Exhibit within the PwC report) and now projecting a minimum “886”  Spares which as instructed by Mr Neill would largely arise from the replacement of exhaust system units in service by no later 40,000 flying hours -– disclosed on 27 August 2009. There are other key documents such as at 1830A,1831A,3597/3598 and 3598A-C which were produced and sent to PwC and E&Y? just before the publication of the FY2006 MAC Financial statements to the TSE Etc and also not disclosed until 2 years later in 2009.  All of these documents were finally produced by the Respondents from May 2009 -   when they should have been in April 2007 in accordance with the Respondents legal obligations and before my Requests 15 and 16 above.  All of these documents are similar to what I had written to the Tribunal about when I said in January 2009 about a series of other document disclosures.  Furthermore, please also note that NOT ONE of these documents, although addressed to PwC and in most cases E&Y, before the FY2006 accounts were published are included in the C$3m+ PwC report or its 5 A340 Exhibits.} 

When the Documents/index was disclosed on 4 April 2007 in accordance with the CMD1 Order it was immediately clear that many key documents were not listed by Magellan. As a result it eventually became necessary at the Tribunal CMD 4 one day hearing on 6 June 2007 to formalise a number of “shopping list” requests for documents disclosure.

My legal team told the Tribunal at CMD4 in their Opening Skeleton at para 15If the Tribunal were not to hold the Respondents to the normal disclosure obligations (which is all that is required by the Shopping Lists), the Claimant will effectively be forced to fight his case almost entirely upon his own evidence. This will undoubtedly prejudice the ability of the Claimant to fairly and properly argue his case. “ One outcome was that this included the Order for the disclosure of the Final Draft PwC Report relied upon by MAC management in their 11 May 2007 financial statements and as another relevant example for the A340-500/600 at Shopping List Request 15 & 16 I requested documents disclosure of

Request 15 “Copy of the Aeronca management accounts for each quarter from Q1/2004 – Q4/2006 with the detailed inventory (NRC) and production inventory schedules at the end of each quarter. Please split the detail between the three Airbus programmes – A340, A380 and A318. Copy of final auditor submissions of Management accounts for FY2004, FY2005 and FY2006.

Request 16 “Supporting analysis for the expected recovery of NRC s and estimated contract profitability against future production levels – certs etc. Any analysis prepared by management to assess the commercial or financial impact to the Group of the three scenarios discussed in August / emails of October or DIR4December documentation (DIR44). Copies of all minutes of Audit Committee meetings, which formally discussed this subject from 1 January 2006 to present. Copies of all external marketing reports used by the company in support of the assessment by management after 31 December 2006 and the provisional auditor accounts provided to Ernst and Young.”

Mr Lynch QC , for the Respondents, stated that for these Requests 14,15,16 &18 - “Once again, these requests relate to the most extensive and detailed documentation in regard to the Respondents business and transactions relating to the Boeing 737 and Airbus contracts. The requests include all the management accounts with “relevant correspondence”, quarterly slides, management accounts for each quarter of 2004-2006 with detailed inventory and schedules, financial analysis documentation , marketing reports and minutes of meetings. Quite apart from, once again, the reference by the Respondents of various matters to PwC, the documents sought would be very, very much more appropriate for a full scale forensic accountancy enquiry …..”

Given that the PwC report was supposed to be a full scale forensic enquiry then it ought to have been reasonable to assume that PwC, as a minimum, would follow the Canada Standard Practices for Investigative and Forensic Accounting Engagements published shortly before this “independent forensic investigation” in November 2006.  Amongst many other relevant standard practices and observations

200.04: IFA practitioners should have reasonable assurance that the IFA engagement team collectively has the necessary expertise, competencies, resources and time to perform the engagement.
   
400.04: IFA practitioners should consider the relevance of all information that arises during the course of an IFA engagement.
400.05: IFA practitioners should identify, analyze, assess, and compare all relevant information, assess substance over form, and develop and test, as needed, hypotheses for the purpose of evaluating the issues in the engagement.
400.11: Where IFA practitioners receive estimates and assumptions that are outside of their competence and expertise, and IFA practitioners intend to rely on such estimates and assumptions, they should consider the reasonableness of those estimates and assumptions.
400.12: IFA practitioners should review all information received during an IFA engagement, and consider its relevance, reliability, reasonableness, completeness and consistency with other known engagement information
   
500.01: IFA practitioners’ working papers should contain or have a reference to all information used and relied upon in carrying out an IFA engagement, including the following documents or summaries thereof which would usually be retained on file:
(a)  research    etc etc  (page 12)
   
600.03: Prior to the issuance of the report, IFA practitioners should be satisfied that there is sufficient support for the content of the report, including any findings and conclusions reached.
600.04: IFA practitioners should present their findings and conclusions in an objective and unbiased manner.
600.05: IFA practitioners should confine their findings and conclusions to subject matter, principles and methodologies within their competence, including their knowledge, skill, experience, training and education.
600.06: IFA practitioners should consider all relevant information that could impact their findings and conclusions.

Mr Stafford stated in his Submission at  CMD5 in July 2007, in paragraph 8 

It can be seen, therefore, that the Respondents deliberately decided to exclude from their list of documents a large number of documents which they knew were relevant to the fair disposal of proceedings. It will be recalled that, at the last CMD4 {6 June 2007} counsel for the Respondents told the tribunal that neither he nor his instructing solicitors had seen a copy of the PwC report. That is entirely credible, because no reputable lawyer would have considered the documents listed in the PWC report and then concluded that they should not be disclosed to the Claimant. This also needs to be seen in the context of the history of non-co-operation by the Respondents over discovery which have previously been an unfortunate feature of this case”.

After CMD4 on 6 June 2007 Employment Judge Ms Christiansen issued an Order for the disclosure of the PwC report relied on for that MAC 11 May 2007 public release. After the most cursory review by us it was very clear
(a) The disclosure which the tribunal ordered at the first CMD (by 4 April 2007) required the Respondents to list and produce all documents relevant to the issues raised by the Claimant. The documents produced to PWC were those relevant to the whistleblowing allegations which are in issue. Indeed, the first document produced to PwC was the ET1. In relation to whistleblowing the two lists should have been identical. There should have been no document produced to PwC which had not also been listed and produced in disclosure to the Claimant. The difference between the two lists is striking. There are some 60 out of the 89 relevant documents produced to PWC which have never been listed or produced in these proceedings “ – extract from my counsel CMD5 Opening Skeleton paras 6 and 7.
(b) that the final Draft PwC Report contained a number of factual errors and substantive omissions for A340 etc – e.g only 5 document Exhibits. In fact there had NOT been the full scale forensic accountancy enquiry referred to by Mr Lynch at CMD4 in June 2007 and most certainly that Final Draft PwC report did NOT include all of the documents I identified as necessary in Request 16 above. It was for this reason and in light of the CMD4 Order that my counsel applied for an affidavit signed by a Director (he felt strongly about this Affidavit from MAC Directors - having read the PwC Draft Final Report and my CMD4 shopping list requests- and told my solicitors he had never had to do so in his career before in an Employment tribunal) as set out in his CMD5 Opening Skeleton.

I understand that it was briefly argued by Mr Lynch QC at the CMD5 on 2 July 2007 that this 9 May 2007 Final Draft PwC report was not the FINAL PwC report and that Requests 9 -16 for documents disclosure would be covered, if the requested information was obviously judged relevant by PwC, in their Final Report ---- in effect he argued that no Order for documents disclosure for Request 9 -16 was again necessary. My counsel Mr Andrew Stafford QC presented this “documents disclosure” matter comprehensively in the Claimants Skeleton argument for CMD 5 on 2 July 2007 (document 71C-71K). In addition to recording at para 4 “The PWC report was eventually disclosed on 20th June 2007. It comprised a narrative, a list of about 100 Exhibits (5 for A340) and a series of appendices. When disclosing the report, only the narrative and appendices were made available to the Claimant. It was necessary for the Claimant’s solicitors to press the Respondents in order to secure disclosure of the Exhibits. The Exhibits were only disclosed on 22nd June 2007 , 89 of those exhibits related to issues raised by the Claimant in his Grounds of Complaint.”  

Mr Stafford QC stated under the heading Verification of the Respondents disclosure at point 10 “In the light of the history of this matter, and in particular in the light of the Respondents clear and deliberate failure to disclose to the Claimant the same documents as had been produced to PwC , it is submitted that the Respondents are clearly in breach of the tribunal’s order for disclosure…….. through to Point 22 “the Claimant presently makes no application for cost in relation to the tortuous process which disclosure has become, but intends to in due course”. Instead of Ordering an affidavit from a Director, which Mr Stafford QC had sought at paras 10 – 14, the Employment Judge Ms Christiansen ruled that “No order is made for a director of either Respondent to serve an affidavit in relation to their disclosure requirements” (document 70) but Ms Christiansen, I understand,……….. firmly reminded both sides of their duties and responsibilities in regard to disclosure under UK law.

Ms Ball then in answers to cross-examination questions on documents disclosure in January 2008

Mr Little

Regarding disclosure you are PinsentMasons interface as well as Mr Dekker?

Ms Ball I had many discussions with PinsentMasons. Our responsibility was taken very seriously regarding the disclosure of documents. Every document requested was not necessarily given and it was discussed with legal counsel. and later
Mr Little       My PC doc3160A    -  Mr Dimma had Mr Little’s PC from 24 September 2006
Ms Ball        Yes
Mr Little      

When was it returned

Ms Ball        3 rd November
Mr Little     

And Mr Little asked for it to assist with the PwC report on 11 January 2007

Ms Ball        He asked for it on many occasions. I didn’t want to relinquish it ………..
Judge         All he wants to know is if the PC was requested before 11 January
Ms Ball        I can’t remember, we didn’t want to release it

<BL Observation – when my PC forensic files were sent by PwC to us in mid April 2007 to assist their investigation Mr Lynch QC for the Respondents acknowledged at CMD 4 on 6 June 2007 at Para 29 “A list of some 156 new documents from the Claimant’s laptop which are allegedly relevant was sent under cover of the letter of 29 May 2007.” This excluded the further relevant documents which I recovered from my PC following the “swarm of misconduct allegations – see 3) below in late October/November 2007.>

Mr Stafford questioned both the MALUK resident Directors about specific documents disclosure and their understanding of their legal duty and responsibilities in that regard.  

 

Mr Phil Underwood’s oral evidence from Nov 2007

   
Mr Stafford  Asked to produce documents that are relevant
Mr Underwood Relevant to my witness statement
Chairman Is your notebook with you
Mr Stafford You were asked to produce documents - relevant
Mr Underwood Yes
Mr Stafford When asked to produce documents that were..
Mr Underwood Only looking for documents that were relevant to my witness statement
Mr Stafford Is that what you understood your task to be?
Mr Underwood The issues around the business – those were the issues I was looking for specifically – the relevant documents I was looking for
Mr Stafford Were you given guidance by MALUK’s lawyers
Chairman Were you given guidance?
Mr Underwood No – I don’t believe I was.   I started from the beginning.   I didn’t realise that this meeting was something that I needed to find documentation for  

Furthermore  after the normal duties and obligations for document disclosure the Respondents counsel Mr Lynch QC also stated  “I want it to be clear (and I’d like this recorded) that any documents that were the subject of a CMD we advised on”. This included CMD4 Request 5 for the MALUK weekly cash flow statements from 24 July 2006 to 17 November 2006.

In his written submission on 6 June 2007 Mr Lynch QC stated that “As the Draft List of Issues reveals, it is not disputed that, at least on a number of occasions, the Claimant discussed concerns about payment of creditors and the financing of the business.   Most especially in the light of that, and the issues before the Tribunal in these proceedings , it cannot with respect, be right that the kind of microscopically detailed investigation of the day to day funding and cash position of the Respondents in these requests is necessary or proportionate or helpful to the Tribunal and the proceedings.”       Initially at CMD4 the Employment Judge Christiansen rejected our Application for disclosure.   This was reversed by her at CMD5 less than a month later.  These weekly cash flow forecasts were extensively used in cross –examinations …such as 

then Mr Little reads from notes of Mr Smith’s oral evidence (MALUK CFO) from November 2007
   
Mr Stafford  Vol5/1896 <MALUK weekly cash flow forecast to end FY2006>  One of the things the  Claimant says MALUK in doubtful solvency – this  document is relevant
Mr Smith Yes
Mr Stafford When organising disclosure – why did you not disclose this document?
Mr Smith Not requested
Mr Stafford  It was relevant
Mr Smith  I was playing a secondary role
Mr Stafford You did not view this document as being one that MAC thought was relevant
Mr Smith That was a matter for MAC
Mr Stafford When a request was made
Mr Smith MALUK and MAC refused to disclose this document <CMD4/5 Request 5>
I did not get involved – can’t comment
Mr Stafford As a Director of MALUK – how could you not get involved?
Mr Smith I was not close enough to the case – being dealt with in Canada – including John Dekker
I assumed they were taking the appropriate steps
Mr Stafford Should I be addressing these questions to Mr Dekker ?
Mr Smith Not me
Mr Stafford But someone in MALUK was involved? Mr Underwood?
Mr Smith Not a MALUK question. Dealt with in Canada.

then the Judge

We know the coordination of disclosure was done by Canada.

And then Mr Dekker’s oral evidence on document 1830 (the A340 Q2.2006 EAC and disclosed at Exhibit 8.3 of the PwC report but NOT disclosed by MAC in accordance with the CMD1 Tribunal Order on 4 April 2007 with a $5.3m gross loss)

I have set out a summary on document disclosure and the failure of the respondents via an extract of the relevant correspondence from the point of my termination in September 2006.  This document was updated on the 3 June 2011 following further disclosures on the 4 May 2011.

Vice President Finance (CFO) and Corporate Secretary - Mr Dekker - His oral evidence on 4 April 2008 (see Report P79) including

Vice President Finance (CFO) and Corporate Secretary - Mr Dekker - His oral evidence on 4 April 2008 (see Report P79) including

 

 

Mr Little

A340-500/600 aircraft programme was the largest product except the  super jumbo Airbus A380 ?

Mr Dekker

It is one of the largest

Mr Little

In terms of the MAC Balance Sheet, C$40+?

Mr Dekker

Approx that yes

Mr Little

This is probably the biggest single item to be a management issue from the inventory?

Mr Dekker

I don’t think I can dispute this                                  and shortly thereafter

 

 

Mr Dekker

I’d go through with Mr Neill the certificates and identify remarks of that nature. We need to be sure we’re fully versed. I saw this (referring to document 2006) and Mr Neill said he’d talked to Mr Little already. Issue re enough product from Aeronca.    It was not my expertise. I’d just leave that to him.

Judge

What he wants to know is did you have a discussion with Mr Little?

Mr Dekker

It was noted

 

 

Mr Little

Would you expect Mr Little to be obliged to look at the accounts,  Aeronca EAC (BL referring to document EAC.Q2.2006.1830 etc) to satisfy himself?

Mr Dekker

The self-certification process is laid out fairly clearly

Mr Little

Can you specifically say you’d be expecting me to satisfy myself?

Mr Dekker

I’d be disappointed if you didn’t

Mr Little

Can we look now specifically at document 1830 for Q2.2006

Judge

Have we left PD22? We know what and why, what’s 1830 got to do with it?

Mr Little

It would have been one of the documents I would have looked at

Judge

You don’t need to justify…. Mr Lynch QC interrupts

Mr Lynch

And Mr Neill has been fully cross examined regarding this

The Respondents actions in accordance with UK disclosure and natural justice arose again, part-way through the hearing process in an interlocutory hearing in arguments put by Mr Lynch QC on 28 November 2008 against the disclosure, amongst others, for Requests 13-15 and 21.  As above as a QC he carries the trust of the court to decide the relevance of his client’s documents to the case.

That his vigorous arguments were set aside for example by the Tribunal in the Order dated 3 December 2008, so that now we have sight, for example of the MAC/Aeronca A340/Trent 500 production, spares and repairs schedule in February 2007 /March 2007 (document 3605 series) along with for example Request 14 - the E&Y letter of 11 July 2007 to the Directors of MALUK for the FY2005 statutory accounts, (2B above) demonstrates to us that those legal responsibilities for disclosure and consequentially justice have not been met. Many other relevant documents referred to on A340 above have now been disclosed subsequently by Magellan Aerospace –often through Tribunal involvement - reluctantly.  It is arguable that had these document disclosures not been blocked I should not have had to forfeit my home of 400 years and bring such distress to my family.

As a result of the above disclosures I wrote at Mr Stafford QC’s request to the Employment Judge Walters at Bristol Tribunal stating that

“ The Tribunal will recall in my email of 24 October 2008 that I said

………………On this occasion in October 2008 I have tried to provide plenty of Notice, the information etc so that this may be properly addressed at the ET procedural hearing on 28 November 2008. I would respectfully suggest that the respondents should bring a schedule (perhaps circulated in advance) for each of the remaining document requests stating clearly

  1.     That they do exist and have been located and why after Mr Lynch QC review of them he considers them not “legally” relevant for disclosure
  2.    That where they cannot be located what efforts, including documentary support that they have been searched for in accordance with previous orders. The example at Request 9 (which is no longer required as a result of Mr Baigent’s provision of the attached documents when these, as Baigent 1 shows, were in his Personnel file as I had been saying since 7 September 2007). This unfortunately is just another example of the “Disclosure” history in this case.”

Following the documents disclosure (to date) after the Tribunal 3 December Order I have discussed this matter further in a consultation with Mr Andrew Stafford QC and in light of my 24 October 2008 email to the Tribunal and 5 October 2008 letter to PinsentMasons.

Resulting from that consultation and to provide the precision which the respondents expect I have written to them yesterday, having selected  Requests 13 , 14 and 15 for the present,  the following extract

“   ….    For the Tribunal Order dated 3 December 2008   

Request 13      “We mentioned in our letter of 4 October (2007- 3275) about expecting a request for further documents relating to the preparation of the financial statements for Fy2005, which is of course relevant to  a number of protected Disclosures and then formally as below on 19 October 2007 .    Please disclose to us the draft financial statements prepared by the First Respondent dated 26.10.06 and 1.5.07           (now documents disclosed following Court Order at doc 3548-3565),

Request 14       Mentioned in my solicitors letter of  4 October 2007 and formally requested precisely and specifically from Mr Charles Rae of PinsentMasons in a 19 October 2007 (3276) email  “……We mentioned in our letter of 4 October about expecting a request for further documents relating to the preparation of the financial statements for FY2005, which is of course relevant to a number of the Protected Disclosures. Please disclose to us the draft financial statements prepared by the First Respondent dated 26.10.06 and 1.5.07. Also Ernst and Young’s letter to the First Respondent’s directors around 11.7.07.”  My solicitor also asked Mr Rae about the disclosure of these at the start of the first hearing in late October 2007.    Despite the fact that the Directors addresses of that 11 July 2007 E&Y letter - Mr Smith, Mr Underwood and Mr Dekker – had a legal obligation for its disclosure as a relevant document (as above 10.29 and 10.30)   Mr Rae as their solicitor also failed to search for this crucial letter/document.

 “Also Ernst & Young’s letter to the First Respondents director around 11.07.07 (relates  to Fy2005 statutory accounts    (now documents disclosed following Court Order at doc 3566-3575) ,

During that 28 Nov 2008 Tribunal hearing Mr Lynch QC, the Respondents counsel, re-stated that “I want it to be clear (and I’d like this recorded) that any documents that were the subject of a CMD we advised on”.

For this Request 14 the following had been stated by Mr Lynch QC (p12)

Mr Lynch

Request 14:  EY signed off the accounts.  There is no reason to believe EY actually had suspicions despite signing off on the accounts.  Therefore, this is a classic fishing expedition. 

Disclosure should not be ordered because evidence is lacking.  There is no reason to think EY did mention anything relevant in the letter, therefore there is no reason for disclosure.  This is a fishing expedition and disclosure would be at odds with the overriding objective and the heightening of the test of necessity.

This is an application being made almost in December 2008.  The Respondents’ evidence is almost complete.  If these documents are produced, BL’s witnesses will be able to comment but the Respondents’ witnesses will not.  Litigation does not work like that.  Applications should be timely.  This would prejudice the Respondents.

Mr Stafford

On 19 and 22 October 2007, Simon Jeffreys of CMS Cameron McKenna wrote to Pinsent Masons seeking these documents.  There was no disclosure by the Respondents.  So, it is unwise for the Respondents to say this is a late application.  The application was made over a year ago.  Disclosure has been like pulling teeth in this case.

Companies must file a return including their accounts.  If that process is tortuous, it shows the difficulty the auditors had arriving at a true and fair view of the company’s affairs. 

There is the suspicion of a tortuous process.  Mr Little’s evidence includes concerns that would have been concerns for the auditors.

If we knew precisely what the documents said, we would not be asking for them.  Disclosure would assist a fair disposal of the case and cast light on the situation looked at by the auditors at the time.

Mr Lynch It is not a question of BL knowing what is in the documents.  To cross the line between fishing and non-fishing you must demonstrate some evidence of relevance.  These documents were mentioned in a telecon, it was not an application.  We stand by the lateness point.
Chairman You are submitting that if the auditors had difficulties, it goes to whether BL had reasonable belief that the Protected Disclosures (“PDs”) showed breach of duty.  Which PDs do these apply to?
Mr Little PDs regarding the engineering overheads, the bonuses and solvency.
Chairman

Requests 13-15:  We cannot decide on these Requests in 2 minutes.  Move on please…

and later following a recess

Chairman 

Requests 13-15 and 21:  Disclosure ordered.  These documents could potentially or could well be relevant to the issue of reasonable belief.  Regarding Request 21, we were swayed because the MAC financial statements state there was reliance.  Regarding Requests 13-15, we were swayed because, if concerns were expressed and recorded, that would support the reasonableness of BL’s belief.

We would just say in passing that BL should have passed on such concerns to the auditors, but that may be something for evidence in due course.

and then following the disclosure of this E&Y document  dated 11 July 2007 at the commencement of the January 2009 hearing following an Application in regard to this one of  four documents
Chairman We’ve looked at the aide memoire and note your comments but the docs starting at 3566 ought to have been disclosed earlier. The Respondents can explain delay but if not we may draw adverse inference but do not think it necessary to take heavy-handed approach at this juncture.
Mr Stafford Agree with pragmatism but there’s been a tortuous history to get these documents.  Asked  by Ms Christiansen to get in writing an order (affidavit), declined as entirely legitimate to expect Respondents to act properly.  These documents came to light very late against the difficult background.  Adverse inference should be drawn against whom?   Who’s been dragging heels?   All or some of Respondents witnesses?  If not appropriate to make an order nonetheless we’ll say if no detailed explanation then a cloud will be held over every director.
Chairman Nothing surprises me there but we’re really wasting time. Seems an explanation will be called for in due course and it’s probably appropriate at Submissions.
Mr Stafford  Looked at 28 Nov hearing that was based on general principles of disclosure. It’s important re costs/time to clarify disclosable documents. Want to make clear that was the basis of our persistence. Doesn’t reflect on Respondents.   Like to emphasise that any application for disclosure……..interrupts
Chairman We’re not going to draw any adverse inference until we know why. The documents identified by the Claimant are also documents that we think should have been disclosed and quite accept that explanation is needed.

and  Mr Dekker in his role as a Director of MALUK in his oral evidence on 10 June 2009

Question 5A    When and on what basis did MAC decide not to disclose this EY letter dated 11 July 2007 to the Directors of MALUK on the 2005 Audit of Magellan Aerospace (UK) Limited (document 3566 – 3575).

Supplementary – Did you, on behalf of MAC decide not to disclose this document?  If not you, who in MAC decided not to disclose this document shortly after 11 July 2007,  given the extensive document disclosure already underway following CMD4  (document 67-69) and Ordered  for disclosure by 19 July 2007 (see document 3905/3904)?

Mr Little

Okay, now, Mr Dekker, can you confirm you gave your evidence on 1 to 4 April 2008

Chairman Well, that’s right
Mr Little Okay, we’re all comfortable with that
Chairman Yes
Mr Little Okay now I’d like to turn to document 3566 to 3575, and you’ll find that in volume 9.
Mr Dekker Pages again?
Mr Little 3566- 3575. This is a letter to the directors of Magellan UK. Yes?  Do you have it?  Okay  (Pause)     Are you ready now , is everybody ready?  Are you ready Mr Dekker?
Mr Dekker Yes
Mr Little

Okay, I think this is a slight rephrasing of Question 5A and I hope you have a sense of that. 

Why was this document not disclosed until after your evidence was given, as you were a director of the UK?

Mr Dekker (Pause) I’m just trying to recollect when this document was released and the circumstances that directed us to this. I cannot recall the specific details as to what led us to this document and when.
Chairman Somebody has a mobile phone somewhere
Mr Rae  It was mine, I have switched it off. I apologise. (Respondents solicitor)
Mr Little  Just again, Mr Dekker, obviously the phone went off, you said?
Mr Dekker I cannot recall the specific circumstances of when this document was released and submitted.
Chairman Okay
Mr Little  This would now be one of my supplementaries because of the response. This document was released as a result of the tribunal order to disclose documents that was issued in December 2008, and was disclosed thereafter. Does that help in any way?
Mr Dekker  Well, I do remember that we located this document and at the same time we were tentatively searching for another like document, that might have been issued over in Canada, the Magellan Corporation auditors, I do remember that search for documents , yes, I do.
Mr Little Do you remember when you actually first saw this document or circulated it, by Mr Smith to you?
Mr Dekker This specific document, I don’t have that date in my mind, no.
Mr Little So I’m now going to the second part of it.  Did you, on behalf of MAC, decide not to disclose this document?  If not you, who at MAC decided not to disclose this document, shortly after 11 July 2007, given the extensive document disclosure already underway following CMD4?
Mr Lynch That’s not a question
Chairman That’s not a question, that’s more of a statement
Mr Little Okay
Chairman The question is, did you or anyone else that you know decide not to disclose this document?
Mr Dekker  No, Sir

Request 15      the First Respondents notes of the audit closing meeting with Ernst and Young on 10 February 2006.   It is most likely Mr Smith as the Finance Director would have made these minutes.   (now E&Y minutes/document disclosed following Court order at doc 3545-3547 as PinsentMasons advise that Mr Smith took NO notes at the only FY2005  Directors Closing Audit meeting) and then

CRUCIALLY also then for North America/MAC re  A340 on 12 January 2009 the MAC selected example at  “Point 4  For the Tribunal order dated 3 December 2008  Request 21  document 3605 - Aeronca Inc – Aircelle Programs – Actual /Estimated Production Quantities (engine Sets)  dated 16 February 2007 where by reference to the email to the Tribunal dated 9 January 2009 at 08.51.  my QC asked me to formally put in writing……

“Having regard to the issues in this case (especially the reasonableness of Mr Little’ beliefs) and to the evidence which the Respondents advanced in their witness statements and oral evidence , these documents were manifestly disclosible . The failure to disclose these documents at the outset and subsequently , calls for an explanation because

(A) it is relevant to the bona fides of the Respondents conduct;
(B) it is relevant to the reliability of their evidence;
(C) it is relevant to whether the Respondents’s conduct of their defence is and has been unreasonable
(D) it is relevant to whether the conduct of the defence by the Respondents lawyers has been unreasonable

Consequently , the explanation to be provided should include an explanation as to

Question 1   Who, on behalf of the Respondents decided not to disclose this document
Question 2   when the respondents decided not to disclose this document;
Question 3   on what basis the Respondents decided not to disclose this document
Question 4   whether the decision not to disclose this document was made with or without legal advice”

The Respondents have failed to answer these questions yet,  although the Tribunal Chairman did comment on 19 January 2009 that  “We’re not going to draw any adverse inference until we know why. The documents identified by the Claimant are also documents that we think should have been disclosed and quite accept that explanation is needed   ………   seems like an explanation will be called for in due course and its probably appropriate at submissions.“     Following all of the above  I  had and maintain  records since April 2007 of the analysis of document disclosure by the Respondents/ Magellan with regard to the Claimant’s and Respondents case, which will form an essential component in my Rule 34 Cost claim.    I think the A340 is the best-known example and I can vividly highlight the analysis /chronology for the creation and disclosure of the A340 documents by Magellan.     

As the reader will observe under the left hand column heading  % of Units Justification  the “identical” quantities  information from FY2007-FY2021  for Trent 500/A340  Production of  60 + 661 = Sub-total = 721   and Spares and Repairs =   6 +166 = Sub-total = 172  to that contained and submitted to PwC and E&Y  in the Aeronca document 3605 dated 16 February 2007 referred to above was then to appear in May 2009 (See my A340 Written and oral evidence at Report:P79-80 in April 2008 and further A340 document (doc3605A) – in May 2009 – with a comment from the Magellan UK solicitors in which they state………

“As you know both Ernst and Young and PricewaterhouseCoopers were comfortable with the manner in which the Respondent justified the quantity of units expected to be delivered. For the sake of clarity, we also attach (at page 2 – 3605A) a document that our client has recently prepared which At a glance the assessment that would have been carried out by the auditors in order to satisfy themselves that the accounting on this matter was appropriate”    

With the assistance of Deloittes I  Extended the At a Glance  to include the other relevant MAC representations and other PwC / Brian Little information.

I believe that the business world - and the analysts who comment on and value companies - often are sleep-walking into a position where they accept the findings of audit firms such as PwC and E&Y as "gospel" - to be accepted at face value and without any evaluation of their methodologies and, indeed, without investigation of  any potential underlying motivation or interest which may have coloured their findings. Since, therefore, it is unlikely that their probity and accuracy per se will be challenged, audit firms can head off any criticism or suspicion by assembling a well-practised screen of words and concepts which enables them to disarm any critic by confining debate only to the issues of character credibility, lack of "specialist" knowledge and communications skills. However, through a personally-destructive process of attrition and perseverance, I have managed to penetrate this screen in the cases of PwC and E & Y. By examining the actual base material of contemporary documents - grudgingly provided to me through the tenuous British judicial system without Affidavits - and painfully analysing the processes by which these two firms produced the findings of fact and conclusions they did, I have been able, in my opinion, to cast serious doubt on those fundamental qualities of integrity and accuracy so valuable to the profitability of audit firms and their position in society and which seem increasingly and, to me, ingenuously, taken for granted by the financial markets, by UK tribunal members and by the public at large.

UPDATED  16 NOVEMBER 2011 :  Following a constituency surgery meeting with my MP on 11 November 2011 he brought to my attention some points on further document disclosure which he and his aide has concluded following an extensive review of documents and evidence and accounting regulatory inputs  since July 2011.

As a result I wrote to Magellan’s legal team on 14 November 2011 requesting further disclosure

3) A swarm of “misconduct” allegations 

As my Leading Counsel, Mr Andrew Stafford QC, stated at the first UK hearing in October 2007 “Moreover it is important to appreciate that Magellan’s  approach is entirely consistent with the way in which whistleblowers are treated;   first ignored,     then demonized,    then dismissed and then        publicly rubbished.”

Earlier in my business career you can read references from Sir Roy McNulty at Shorts/Bombardier PLC, Mssrs Per Neilsen and Bill Gallagher at Harland and Wolff PLC, together with some personality profiles PAPI and SIMA.  Many other references are also available on request, although I now include a Selection of  12  Quotes from various letters , emails , cards (157) from staff to Brian Little on exit from MAL / MALUK  in September 2006 / October 2006.

As further examples of what was on the mind of the former President and CEO Mr Neill in his written evidence to the UK court (RAN20) stated that Brian was an experienced operator in the aerospace industry, with excellent links with key figures (such as Ken Brundell – should be Brundle at Bombardier– and indeed many others) …and (RAN22)
It was clear to me that the Claimant had lots of experience and knowledge of the industry. He had a good technical understanding of the issues, a good grasp of contractual issues (which led me to believe he would be a strong negotiator) and a sound strategic approach” 

BUT,  for the first time in my life read (RAN55) and heard that someone, in this case Mr Neill, believed that Brian operated badly on points of detail…..“ and (RAN11) “Far from being a financially dubious or badly or carelessly managed group, Magellan was and is a solid performer in an extraordinarily challenged market backed by major shareholders who are involved and patient”……….

Shortly after Mr Neill’s retirement as CEO and several months after PwC completed their Final Report MAC announced on 31 March 2008 for FY2007 “Accounting errors and mis-statements in accounts receivable were uncovered at one of the Corporation’s divisions during the course of an ongoing process to collect outstanding accounts receivable on a timely basis. This prompted an internal investigation that uncovered the overstatement of various assets on the balance sheet resulting from improper accounting and also discovered unsupported and unrecorded transactions. This was for a sum of C$7m + and took place over the period when Mr Neill was President and CEO ( Mr Dekker CFO)  from 2003 -2007.

This is against a background that the MAC Board mandate states “the fundamental responsibility of the Board of Directors is to appoint a competent executive team and to oversee the management of the business with a view to maximizing shareholder value and ensuring corporate conduct in an ethical and legal manner via an appropriate system of corporate governance and internal control.” whilst the Corporation consistently lost money in nearly every quarter whilst he was CEO , had paid no dividends to ordinary shareholders and the MAC stock market capitalisation on the TSE had fallen by 90% from approximately  C$2.5 billion in mid-2002 to circa C$250 million when he retired at 31 December 2006.  Astonishingly, the MAC Board also approved annual executive bonuses throughout.

Furthermore on customers, the above-referenced Mr Brundle , the Vice President of Operations at Bombardier Aerospace in Montreal, wrote to me in his email on 9 October 2003 (doc 756A) that “I advise you strongly to look at Magellan before you get involved again. Magellan have started their relationship with Shorts in a disasterous way, so much so, that I have severe doubts whether they are the type of Company we want to do business with.”………  Today, although both are Canadian-owned aerospace companies, they do no business with each other.

Given that there was no discussion with me about any of the pleaded defence case at paragraph 8 and “Claimant misconduct” allegations (para 9) with Mr Neill (my boss/MAC CEO and the Dismissing Officer) and I knew that there was nothing on any of this in my Personnel File, my legal team and I produced a Request for Further Particulars (Rfp) on 28 March 2007 (3171/3) in which we asked, amongst other items, for full particulars of the specific incidents which supported their defence / “demonisation” of me.   In both their solicitors letter responses on 4 April 2007 (3182/3) and again on 23 April 2007 (3222/3) their legal team refused to provide any further particulars.

This was after my solicitors reached a verbal agreement with Magellan’s solicitors to “knock the corners off the defences”, which my solicitor subsequently recorded in his letter dated 9 March 2007, following the first Tribunal Case Management Discussion (CMD1) in early March 2007.       My leading counsel raised the Close of pleadings / allegations in CMD2 – 19 April 2007) at para 28 on page 11/12 and in CMD3 on 17 May 2007 at para 23 on page 13/14.  It  is important to also record here that once again at the Tribunal CMD4 my counsel Mr Stafford QC asked that the Tribunal press the Respondents to confirm their case (Claimant Skeleton : para 43 – Close of pleadings – 1 June 2007/{69A1-7}) and once again at Tribunal CMD5 ( Claimant Skeleton para 21 – Close of Pleadings – 2 July 2007/{71K})n their letter dated 13 August  2007 {3236} PinsentMasons again responded regarded clarification of Responses  - 

”As to our position as to whether (as you have requested us to confirm) there are any other matters that we wish to add to this paragraph 9, we made our position clear on this in our letter to you of 23 July. (Document 3223). There are not.  I reject your entirely unwarranted comment that this will mean our client is to conduct a defence by ambush. I reiterate, the grounds and reasons why our clients dismissed your client are crystal clear. The evidence as to why our clients reached the view that your client should be dismissed is a matter for witness statements, although we have stated in the response the principal incidents that my clients took into account.  (Note their 23 July letter stated  – “We have asked our client to confirm again that it will be standing by all of the assertions at paragraph 9 of the response and to confirm whether there are any other specific points that it wishes to seek to add to the response. I will revert to you again on this point shortly, but for current purposes please proceed on the basis that the response will remain as drafted (save for paragraph 9.3 as explained above.”).  The result was that no additions were made to the ET3 by Mr Lynch QC.

When the witness statements were finally exchanged, just eight working days before the first UK hearing in October 2007, a “swarm” of "misconduct" allegations – now totaling 56+ - were put forward by Magellan Aerospace.  My Counsel described this to us as Magellan choosing to conduct its defence via the “thick” case – a classic diversion from whistleblowing to “character assassination”.   This has led to much more cost and time in written and oral evidence in rebuttal – including from some of those witnesses actually involved in the “misconduct allegations” (such as Keith Baigent – MALUK Finance , Jim Fairbairn – Airbus UK , Stuart Wilkins – MALUK Supplier MD , Raymond Semple – MALUK Supplier MD) etc and of course myself.

Given the Tribunal’s role, and that the Tribunal legal process is not yet complete, at this juncture I will solely record that Employment Judge Ms.Christiansen Ordered in June 2007  the disclosure of my “Complete Personnel File of Brian Little, March 2002 to present” as these documents “would be relevant to the issue of the Claimant’s conduct (whether good or bad) during his employment with the First and/or Second Respondent. Accordingly , it directly relates to the reason for the Claimant’s dismissal”.  Following that June 2007 Court Order when my Personnel file – docs 533-584 - was disclosed it contained NO formal or informal complaints about my conduct and NO formal or informal warnings (Section 5 doc 533-584) from my boss and the dismissing officer Mr Neill, or indeed anyone at Magellan or its predecessor. Additionally none of the people who had left Magellan Aerospace had left because of me, or indeed been critical of me in any way when writing their “exit notes/interviews” with Magellan HR.  Most importantly, since my promotion by Mr Neill and Mr Edwards/MAC Board on 12 June 2005 to the Senior Vice President and Senior Officer position in Magellan, Mr Neill as my boss and CEO ONLY raised

  1. in discussion a “misconduct” allegation against me in raising business and legal matters regarding Employment contracts terms for MALUK Engineering Management employees and related bonuses (see below/Allegation 32 which was NOT pleaded in the ET3 Defences by Mr Lynch QC as a central matter in the mind of Mr Neill when he instantly dismissed me AND, and on which I had also partially relied on the Magellan UK solicitors ( PinsentMasons)  document -830F – which I had read in early 2005) and
  2. in an email exchange, on 15 September 2006 during my annual summer holidays, following the provocation in difficult circumstances of the UK CFO and Company Secretary Mr Smith, in unfairly criticising me for seeking and then achieving an agreement to commercial contract variations which deferred cash payments totaling £585K by MALUK by 12 days from 15th  to 27th September 2006 to two major suppliers to MALUK (All Metal Services and Apollo Metals –see Mr Wilkins witness statement Page 3 para 1-4) -   (Allegations 33/49)   Mr Smith was fully aware/involved in that process, as he should have been and indeed he finally wrote to the MALUK Treasurer when forwarding the  prior email trail – “See below. The payment is to be made on the 27th. Thanks”  Mr Neill confirmed in his oral evidence that this approach of seeking payment deferrals through agreed commercial contract variations with suppliers was “consistent with the instructions from Canada” for at least the past twelve months and most certainly was in the best business interests of Magellan Aerospace Corporation (MAC)  and Magellan Aerospace UK (MALUK).

{Mr Neill also confirmed in his oral evidence to Employment Judge Walters/Tribunal members that although he had read the MALUK policy and UK statutory procedure on the morning of my termination he chose not to take Ms Ball / Ms Walker’s local HR advice or properly seek any legal advice (from the Engineering Employers Federation, PinsentMasons LLP or Eversheds LLP) before instantly dismissing me at Toronto Airport in breach of those statutory procedures and business/ethical  sense.      Ms Ball (MAC VP – Human Resources) confirmed that obviously she was aware of the UK statutory procedures  and told the Tribunal that “it was discussed openly with Mr Neill …..   and he didn’t see the need for the expense.   I was discussing it with him and said we should. He said not, but he’s my boss.”}

Naturally a number of witnesses and other people/readers have asked about “settlement”. Initially on the day of my instant dismissal (18 September 2006) Mr Neill presented a letter which was in breach of UK employment law with the terms which you can read (2372), including particularly their anxiety about recovering my PC immediately, as I had sent him a number of crucial documents in the seventy two hours before my instant dismissal and just 24 hours before a companywide Strategy meeting of senior Magellan managers in Toronto. Since then there have been two direct efforts made by Mr Dekker on behalf of Mr Edwards and Magellan. One on the 23 October 2008 at the Aztec Hotel in Bristol (in advance of the interlocutory documents disclosure Application on 23 November 2008 and the Tribunal Order for further documents disclosures in December 2008) and the other on 1 April 2009, immediately after Mr Edwards completed his evidence in the UK court – in this instance his contact was via a former business colleague, Mr Robert Beckett at the court and before further A340 documents disclosures (e.g. At a glance auditors etc ) and Mr Bobbi’s witness statement and evidence was admitted and heard in the public court. The content and style of these “settlement” approaches has been solely one of “fait accompli financial offers” with no admission of any fault on the part of Magellan or credible “comfort” on A340 etc . For a number of substantive reasons, (not least his subsequent “apparent” prior failure to remember the substantive content of important conversations about my Protected Disclosures on 11 and 15 August 2006 – 15 minutes - and 14 September 2006 – 29 minutes) I considered it necessary to record the eleven minute nature and content of the 23 October 2008 settlement interaction which will give a sense as to why our “fait accompli” assessment.

My Public Supplementary Witness Statement 1 (my ET-limited 30 page response to their "56" allegations) (Word Doc) attached

(BL Note : I am unable to attach publicly a copy of my initial 235- page Supplementary witness statement 1 - which provided my evidence on the further 46 unpleaded misconduct allegations not included in the ET3  Magellan defence - as it was not admitted as evidence to the court, as the Tribunal considered it too comprehensive etc, and instead asked for my limited evidence for each allegation for a max. of 30 pages as above. Also my Supplementary Witness Statement 2 -  SWS2 dated 15 January 2009 - 3904/3919-  is not included here , which dealt with some of my evidence in support of my Rule 34 Costs claim has not been admitted or heard yet in Court and in any event requires further update following the further March 2009 and subsequent document disclosures.)

Both parties are now providing what are called Closing Submissions (of some 250 pages) and will present this orally in a single day public hearing on Tuesday 23 February 2010 at the Bristol Employment Tribunal. Currently it is expected that a Liability judgment would be available in May /June 2010. (UPDATED JULY 2010 – hearing postponed due to my nervous/mental breakdown which had been primarily finally triggered or caused by the Respondents acting solicitor in the week of 8 Feb 2010 – to be reviewed again by my medical advisors and the Tribunal in September 2010)

UPDATED 17 DECEMBER 2011  :  Final Hearing day for Oral Closing Submissions on Wednesday 29 February 2012 at 10.30 am in Bristol Employment Tribunal.   The written submissions have been exchanged and the Respondents QC  has moved away from the template provided by also attacking the evidence and credibility of some “Claimant” witnesses.  I was not expecting this and indeed was shocked with what I read on November 10 -14 and then asked those people if they wish to comment or not.  That Rebuttal  summary can be read in this document

My solicitors have already lodged an Application for Costs under Rule 34 with the Bristol Employment Tribunal – on 19 July 2007 and 16 January 2009. This would be heard by the same Tribunal panel members, most probably in Q4/2010.  My Costs claim is to cover part of the £ 1.55m in fees incurred in the UK Employment Tribunal case (doc 3892/3904 - which were financed from all the proceeds of the sale of our ancestral home/ land at Fortfield), for the reasons cited above and the unreasonable conduct of this employment case by Magellan Aerospace.  We have no longer been able to afford to incur any further fees from my UK legal team and I am effectively forced to try and represent myself in the case for the foreseeable future.  

Leading Counsel        :    Andrew Stafford QC (Chambers UK 2010 described as “stellar employment barrister , fantastic courtroom                                        demeanour, a really good lateral thinker and responsive, user friendly & immensely practical”. )

Junior Counsel           :    Andrew  Edge    
UK Solicitors              :    CMS Cameron McKenna

Added line: 16 NOVEMBER 2011:  I produced a response/submission to the “misconduct allegations”

Added 5 March 2012 :  The final oral submissions Liability hearing took place in Bristol on Wednesday 29 February 2012.  We were advised by the Judge at the conclusion that the panel were scheduling to have the Judgment by the end of April 2012. 

Mr Robert Toone  -  KBW Chambers                 Mr Paul Moore   - Moore Carter /HBOS whistleblower

The following documents have been submitted since 1 July 2011

My written Closing Submissions – 175 pages - on 1 July 2011                        (see allegations above) 

The written recap/rebuttal submission (1) by Mr Paul Moore – 21 February 2012

A chronology setting out the timing / documents associated with my whistleblowing / R allegations  - prepared by my Direct Access CFA barrister  Mr Robert Toone  on 21/26 February 2012

The written recap/rebuttal submission (2) by my barrister Mr Robert Toone – 21 February 2012
Extract of our submissions on PwC report  – Part 6    - Mr Robert Toone – 21 February 2012

A Composite Protected Disclosure (PD ) schedule prepared by Mr Toone – 29 February/6 March 2012

The Oral submissions on 29 February 2012 by Mr Robert Toone.   In relation to the PwC report/A340 these can be found at pages 10 - 15.

{BL Observation :  In addition to the Business and Accounting issues I would expect from a ordinary shareholder MAC perspective that the C$3+ million paid to PwC (and TORYS LLP Canadian legal advice to the MAC Audit Committee chaired by Mr Dimma) when added to the UK legal fees paid to Mr Lynch QC and PinsentMasons by Magellan from late October 2006 – April 2010 (which I comfortably estimate would be a further C$3+ million)  would now probably, at this total cost of C$6m +, or certainly shortly, exceed the Total value of my maximum December 2006 / Original Claim (£2.34m  Option 1 – doc 3281 – Deloittes LLP Schedule of Losses - although this would now be grossed up and adjusted for the UK new 50% income tax rate from April 2010 to £2.58m etc) and a portion of the costs incurred by me under my Rule 34 costs claim referenced above at the Employment Tribunal.  .  As some readers may have noted Magellan address the value of my claim in the careful wording written, for the first time in their FY2007 (p21) and subsequent Balance Sheets, in a Note to their public financial statements ( FY2007 – Note 22 (b) –  Contingencies – page 50). I think it is very unlikely, but cannot be certain, whether Magellan management have secured from PinsentMasons LLP any acceptance of any contingent fee risk on the case and Rule 34 costs claim outcome.

When challenging my working in Magellan business interests, it is also noteworthy from a business / MAC shareholder interest perspective, as I and others state in the detailed written evidence and underpinned by the contemporaneous documents, that I had secured for MALUK- MAC   

(1)   in the 60 days prior to my termination, as per  my witness statement at Para 65 – 68, that by “going over the head” of middle UK procurement management (Mr Vandersteen) to the top management at Airbus UK (Mr Brian Fleet and Mr Dave Micklewright) an increase in  pricing for 77 components at 100% of our price increase request/target which would generate “Over the course of the remaining contract to 2010 .. an increase in profitability for MALUK of some £10m +”  - see Jim Fairbairn (Airbus Commercial Manager – Procurement witness statement paras 11-15 and Mr Vandersteen of Airbus procurement letter dated 21 August 2006 .              {This would equate to an approximate contribution of £2m per year within the MALUK/MAC  gross /operating profit which was of course then included in the total  a. MALUK FY2006 statutory accounts: Operating Profit = £0.4m  b. FY2007 statutory accounts: Operating Profit = £2.7m  c. FY2008 statutory accounts: Operating Profit = £2.9m  and should be for those for FY2009 (£x.xm filed no later than by October 2010) and for FY2010 (y.ym filed no later than by October 2011. I would expect also that the contract extension by a further two years ( from December 2010 to December 2012, and just before the sale of Airbus UK Filton and novation of current Airbus contracts with Magellan UK to GKN) – announced by Magellan on 1 May 2008  - will also have the benefit of at least that approximately £2m per year sum in “increased pricing”, gross profit and operating profit for those 77 parts in future MALUK public statutory/financial reporting}  

2)  and just three weeks before my termination including, whilst on my annual holidays, by going this time to the Airbus UK Managing Director  (Mr Iain Gray) I successfully prevented some A380 Airbus senior programme management and middle procurement management (Mr Vandersteen and others) seeking to obtain a further seven figure NRC investment / amortization in the A380 from Magellan, which in any event, when combined with the continuing poor financial performance of the MALUK Manufacturing business, managed by Mr Butyniec and Mr Underwood, was simply unsustainable.  Indeed Mr Underwood emailed me on 13 September 2006 (doc.2197) “Brian..  What’s going on?  They are not honoring the last agreement never mind more! Regards  phil ”  Instead MALUK  were promptly paid – some in advance of commercial contract payment terms –  a number of outstanding A380 engineering monies. { This Request for further A380 amortization was after I had already recommended (and been accepted by the MAC Board – doc 247 – on 11 May 2006) that Magellan should definitely NOT increase any further our A380 NRC investment or sales revenue per aircraft ( it was already now C$1.5m per A380 aeroplane)  and instead we would focus my and our Business Development and sales efforts on trying to improve Magellan presence (of less than $67K per aircraft revenue on the increasingly successful  twin-engine Boeing 777, - which was now winning nearly every airline sales campaign against the four –engine A340 – 600)  and in particular strategically secure at least $500K for every aircraft sold in the twin aisle market in the next two decades (effectively  $500K + revenue per aircraft on both of the new twin aisle/wide body products - the Boeing 787 and Airbus A350}.      As the contemporaneous documents show (email trails exchange between Mr Gray and Mr Little from 25 August 2006 – 21 September 2006 and Mr Gray confirms  in his witness statement at para 18/19  he authorized the payment of all those outstanding A380 Engineering monies in mid September 2006 and all discussions with Airbus UK about further Magellan amortization on A380 then ceased. 

(3) and a month (18 August 2006-2062/2062A)  before I was terminated the MALUK CFO and Company Secretary Mr Smith emailed his and my UK resident director colleague Mr Phil Underwood, who was functionally responsible for all the Manufacturing operations, that based on the MALUK Daily Cash balances  “As you can see from this, as we stand we are currently still 172K short of meeting our commitments next week , namely the payroll.  As we stand we are therefore still not in a position to release any more cheques to creditors, thus where we are on stop currently we are not going to resolve this yet”. Within days I was also to receive the third written Airbus letter of complaint written by Mr Vandersteen in nine months (See also website Part C: 2075/6) stating amongst other matters his concerns that the manufacturing delivery performance in his and Airbus’s view was still not underwritten by a robust production system.   In part it was clear that the delay in materials and parts not starting on time was leading to a delinquency in deliveries and any “intelligent inventory buffer” being built to prevent Airbus assembly delays.

In accordance with my own experience and UK Directors duties and responsibilities and consistent with the President and CEO Mr Neill’s instructions from Canada  – as the Chairman Mr Edwards had instructed Mr Dekker after the August 10 MAC Board Meeting, which he reiterated to the attendees of the weekly MAC staff meeting on Tuesday 15 August 2006, that “No more cash to the UK” / no further MAC parent company funds would be provided – were also to seek payment deferments by agreed contractual variation with suppliers.  I was able with my UK director colleagues involvement and agreement to seek and obtain a deferral of £575K of contractual  payments with MALUK’s two large raw material suppliers for 12 days in September 2006.  Both their Managing Directors were able to confirm to the Tribunal in their evidence that they had agreed to these payment deferrals e.g Stuart Wilkins witness statement:page 3 .  This £575K deferral and Airbus special pricing payments outside the normal weekly payment process of £329K on Thursday 14 September (doc 2196)  provided the potential for Mr Smith to now discharge our MALUK substantially overdue contract debts for other trade creditors and in so doing meet our contractual obligations and MALUK statutory supplier payment policy, whilst certainly, for some of those suppliers, it would enable the release of further materials for September /October 2006 production and sales/ cash recovery and Airbus complaints re Manufacturing delivery performance.   I also successfully obtained with my engineering staff, after agreement with Airbus top management, an acceleration in payments of £738K (2311A-C) ahead of the contract payment due date for some Engineering work carried out by my division at the end of August/mid September 2006. These were all important actions from a business and legal perspective in MALUK circumstances  --  all of which was just days before my instant sacking by Mr Neill at Toronto Airport.

(4)   and immediately before, during and immediately after my termination at Toronto Airport on 18 September 2006 by Mr Neill, as I state in my witness statement at paragraph 327,  I also secured agreement with the MD Mr Gray that Airbus UK would now additionally pay for the entire £207K of Engineering work for the A380 Freighter A and B Design scheme work, which had been the subject of a prior 2003 Mayflower commercial agreement and then Magellan A380 Sales Reserve £200K release – see Clive Renson (Airbus Procurement Manager – A380 Engineering witness statement paras 6 and 9-11. And Paul Nokes – Supplementary witness statement para 13)  The impact of this agreement and resultant 20 September 2006 invoice and payment - which despite my termination I ensured was raised in MALUK and then processed within Airbus (doc 2546-M432) - was to increase the profitability of MALUK Engineering by some £209K in profits in Q3.2006 and cash flow (doc 2647-2649).   

Whilst this did not adequately compensate for the £2m deficit to the FY2006 budget in the manufacturing operations (Mr Underwood/Mr Butyniec) it did enable the Engineering division ( Mr Nokes and my functional control) to end the quarter with a better than budget EBIT of £334k Q3/YTD:FY2006 financial result . This EBIT would have been higher if we had not been  forced to also absorb the unbudgeted engineering management bonuses of £52K for FY2005 in FY2006 (re Claimant Misconduct allegation 32 /PD16 above), though I do accept that I agreed to Mr Edwards personal challenge to cover that additional cost by superior budget performance in Engineering, in a discussion after the MAC Board Meeting in May 2006.    

  When reported though to MAC in the September MALUK engineering management accounts (doc 2548) this £209K ultimately had the effect of enabling MAC to report a C$221K net income in the Q3/2007 accounts – the first publicly “reported” net income rather than loss for many quarters at Magellan Aerospace Corporation.  {Subsequently we now know from the PwC report  – see final part of Part F on website -  that Mr Neill and Mr Dekker continued to take further profits of US $200K in Q3/2006, in contravention of the MAC Revenue Accounting policy and my protected disclosures – PD19,PD20; there were also continuing – since 2003 - accounting errors and mis-statements in accounts receivable etc. at one of the MAC business units for which I had no functional responsibility and that MAC/Aeronca  failed to produce a Q3/2006 Estimate at Completion (EAC) for the A340 -500/600 program – PwC para 8.58 – despite my Protected disclosures PD22,PD23 and PD24 in August/September 2006 to Mr Neill, Mr Edwards, Mr Dekker and subsequently Mr Dimma’s “internal investigation” in September/October 2006.}

 

These examples of contemporaneous facts merit consideration alongside the publicly-stated mandate of the Magellan Aerospace Corporation Board which has always been  “ Board Mandate

The fundamental responsibility of the Board of Directors is to appoint a competent executive team and to oversee the management of the business, with a view to maximizing shareholder value and ensuring corporate conduct in an ethical and legal manner via an appropriate system of corporate governance and internal control.

Added April 2010 :  As my wife and I are ordinary shareholders of MAC ourselves and we have just read the Management Information Circular to shareholders for the MAC AGM on 14 May 2010.   I observe that the answers to two questions posed by another attendee at last year’s AGM have now been disclosed – on directors salaries (page 7)  and the Management bonuses “earned” in 2008 of almost C$500K (page 12 : the total compensation column maths sums are wrong) in a year in which shareholder value fell by 85% ( and MAC continued again with a “Going Concern” declaration)  and by a similar percentage fall from the same Board of Directors and senior management team in the last three years (page 11).  As you can read in the Circular to shareholders a Bonus total of approximately C$1m was listed for the five Named Executive Officers (NEO’s) in 2008 and 2009.  We have watched the MAC company market value on the TSE fall from the date of the filing of the ET3 Defences in this UK case (January 2007) to one point in March 2008 when  it was only 2% of that January 2007 TSE value. Indeed at that point the TSE Magellan Market Value (C$5m)  was less than the total costs incurred by Magellan  for the PwC report and Canadian and UK legal fees – as in BL observation above.

I retain the public record for the only MAC Named Executive Officer (NEO)  to have never been paid any  bonus in the prior 6 years of MAC public reporting (see Management Information Circular – 2006/FY2005 – pages 11/14). FY2005 was a year in which MAC made a net loss of C$6M+ although the functional Engineering division in MALUK, which I led, made an operating profit of  approximately C$2.2m and a 16% return on sales revenue when the Directors finally reported, as part the total MALUK statutory financial statements public filing, for FY2005 in the UK.  This “FY2005 business/profits success” was part of the misconduct focus/discussion of Allegation 32 by Mr Neill and others.  {I have also recently learned from Magellan customer and competitor reliable sources that the MALUK Directors have tried to sell this profitable MALUK Engineering unit - which will in turn will strategically revert Magellan Aerospace to a civil “operations” business. }        Nor as a matter of record did I ever seek or receive financial compensation for working some 30% / 50+ more working days in 2004 and 2005  than required by my 150 working days per annum employment contract.  Furthermore Magellan Aerospace would have been aware from my Personnel File (docs 563-568) that the Magellan Aerospace UK predecessor company (Mayflower Aerospace UK)  had in fact compensated me accordingly in mid-2003 for additional days and I donated more than the entire after-tax bonus sum of £25,000  to our local Ballywalter Church. This contribution was by no means unique.  As my lifelong accountants/auditors, (McCreery, Turkington and Stockman LLP in Belfast)  can verify my wife Jackie and I made other anonymous donations to various Northern Ireland organisations and charities from earlier management bonuses. e.g.  ex Bombardier / Shorts – which Ernst & Young (Belfast) and Mr Laurent Beaudoin could also confirm.}

Added May 2010 

In addition to the MAC remarks above many other people and a number of website readers have also asked whether the UK Employment Tribunal have any responsibility to provide my “whistleblowing” evidence and documents to the appropriate regulatory authorities for a proper investigation.   One person indicated that they believed that the UK law now set that responsibility with the Tribunal.  I raised this matter with the Respondents in April 2010 and received the following reply from their UK solicitors on19 April 2010 –

“There is just one point I would make.  I note your comment/threat that you "will therefore ask the Tribunal to pass the relevant information / documentation and my A340.Final. Report.15.December.2009 to the relevant regulatory organisations (with addresses and current contact names)....".  As I understand it, you seem to suggest that the recent Employment Tribunals (Constitution and Rules of Procedure) (Amendment) Regulations 2010, which came into force on 6 April 2010, would oblige the ET to carry out such an instruction.  I am familiar with this change in the law and would point out that:-

1. The change in the law is not retrospective and only applies to PIDA claims lodged with an Employment Tribunal on or after 6 April 2010 (which yours was not); and

2. The Regulators whom the ET can notify is a specific list and, in particular, the Ontario Securities Commission and the Royal Canadian Mounted Police Commercial Crime section are not specified Regulators.“

So there is NO requirement for the Tribunal in the present legislation to refer this case and in any event the legislation is not retrospective. I would have to pass the relevant evidence and documentation to the relevant authorities as an individual. Jackie and I had a meeting with our Member of Parliament on Friday 14th May 2010 so we intend to ask him about this further – particularly for international cases, such as Magellan. This is of course timely given the international banking crisis and the relevance of some of the conduct of people and global organisations prior to those problems and the well-publicised view of the new UK Coalition Government Cabinet Business Secretary of State, Mr Vince Cable MP.

After Mr James Shannon MP and his Parliamentary aide had read parts of my website and my two reports  - A340.On.the.record.Final.Report.15.December.2009  and PwC.A340.Forensic.Deceit - ,  we also believe that the list of regulators may need to be added to and discretionary power should be given to the Employment Tribunal Service as to whom or what such information/evidence is referred to in the future.   Mr Shannon is now studying and taking advice and inputs (AGO.Dec.2010) from others (SRA & Bar Council.Dec.2010) on the subject of document disclosure duties and responsibilities in national and international whistle blowing cases, based on the  Ministry of Justice Practice Direction 31, 31A & 31B, on the conduct and standards expected from a  Respondents  legal team in relation to the Bar Council Standards and the Solicitors Regulation Authority (SRA) Code of Conduct etc. for England and Wales.   The existing UK legislation introduced in April 2010 includes these UK regulators

  1. The Financial Reporting Council Limited and its operating bodies the Professional Oversight Board, the Financial Reporting Review Panel and the Accountancy and Actuarial Discipline Board.

  2. The Secretary of State for Business, Innovation and Skills.
  3. Civil Aviation Authority

UPDATED JULY 2010 : We have had a further meeting with my Member of Parliament (MP) on Friday 25 June 2010 and one planned for 23 July 2010 when we will conclude what actions may be taken by him directly on our behalf on this and other matters during the remainder of 2010.

Updated 19 November 2010 and 18 January 2011 for UK

A colleague also brought to our attention the 4 October 2010 Financial Times Article
(AADB)     Regulator starts probe into PwC and E&Y

whilst a former PwC partner drew my attention to this 16 October 2010 PwC video clip
PwC ………. Trust in Business ……Building and Sustaining Trust    following  Mr Powell’s speech on “Building Public Trust”  
and his public commitment in the UK  Financial Times paper.

whilst again on the same day this quote from Warren Buffett  was brought to my attention  by a North American  website reader
“It takes twenty years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently”.

  1. Audit /Forensic investigation practices and the AADB / FRC

1.A    Mr James Shannon MP has now initially written – 7 October 2010 – to  PwC 
         PwC -  PwC International Chairman Mr Dennis Nally      and 
         to PwC UK   Chairman & Senior Partner  -  Mr Ian Powell

Copy of letter for information only, at present, to Ernst & Young UK -    Mr Scott Halliday 
Copy of letter to Accountancy and Actuarial Discipline Board  (AADB)  Chairman -Mr Timothy Walker

(Mr Walker replied on 15 November 2010 stating “Brian Little.  Thank you for sending me a copy of your letter of 7 October to PricewaterhouseCoopers.   I note that you have asked that he investigate your complaint and respond to your comments. I am sure that this is the right course.” 

and then

1.B on  18 November 2010 to the Five major UK audit and forensic practices   -
       
PricewaterhouseCoopers LLP (PwC),     …...  No response .. follow up letter 15 Dec.2010

Subsequently a PwC response was received from a PwC lawyer on 6 January 2011.

Mr Shannon MP has since replied and put fifteen supplementary questions in his OPEN LETTER dated 12 January 2011 directly to Mr Ian Powell and Mr Dennis Nally.

Following my input Mr Shannon MP has also forwarded two further supplementary questions (SQ6A and SQ12A)  in his email dated 14 Jan.2011 to Mr Powell and Mr Nally.

UPDATED  25 February 2011    :    On 22 February 2011 Mr Shannon MP received a response letter dated 16 February 2011, on behalf of Mr Powell, the Chairman of  PwC UK, and his UK partners, which set out their reply.  I recommend that this 16 February PwC letter is read in full.  I extract a few paragraphs here

PwC define an “independent perspective” or independent evidence as that “which is unaffected by influences which compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional scepticism.   An objective mindset is one of the characteristics of independence and is a fundamental principle of our forensic work.  We would agree with you that having a duty to a client or to a Court in the context of an Expert witness engagement would not change the documented findings of fact in an engagement”.

“While I understand the questions that you have raised concerning the Canadian regulatory oversight of forensic investigations in SQ5 - SQ7, I do not propose to discuss the adequacy, relevance or application to the UK of a foreign jurisdiction’s regulations, of which I do not have a detailed working knowledge”.

Documentation sources and records/bibliography   “SQ9 and SQ10 question whether in the course of a forensic investigation we would describe, in a detailed bibliography, each piece of evidence that has been reviewed.  It is our practice generally to describe in a report the documents we refer to in that report and we would normally list in a report the documents we refer to in that report and we would not normally list in a report every other piece of evidence considered. As mentioned above, the extent that we refer to a bibliography does not alter if the point of instruction is different. “

“You also raise certain question in SQ11 to SQ15 concerning the use of forensic reports, the sources of information and the involvement of “material parties” in relation to the finalization of a report. As you will be aware from my earlier letter, our objective during the conduct of any forensic investigation is to obtain sufficient independent evidence to address the scope agreed with the client. Once our investigation is concluded and reviewed to our satisfaction, we would not conduct further work unless instructed to do so by our client.”

“I note that in your follow up email of 14 January 2011 you supplement your questions by those of Mr Little. These are specific to our involvement in matters which were and remain confidential to our client”.   Those two questions were  
SQ9A       Can you please provide a Copy of the Index of documents obtained,  reviewed and considered by PwC on the A340 during that seven month investigation from January 2007 to August 2007 in accordance with your internal Guidance procedures and/ or the minimum standard practices set out to protect the public by CICA.IFA in November 2006.
Clearly the reservoir of relevant documents and information in developing findings of fact and derived conclusions are central in any “independent” forensic investigation      and
SQ12A     The concerns over this report was brought to the attention of the most senior leader of the PwC UK business.  That internal Quality review , if conducted,  has been completed by now.  Eighteen months has elapsed since Mr Little published his A340.ON.THE.RECORD.FINAL REPORT 15TH DECEMBER 2009 and  PwC.report.A340.forensic deceit reports .   Can you now provide me, formally with the list of ANY substantive  “inaccurate and incorrect statements” in either of these two reports or on his website. Welcome to Fortfield.com so I, and others, may properly consider this matter further from all the evidence available to us.

PwC response   “It is not appropriate for us to answer them or provide documents in response. I understand that Mr Little is currently engaged in Employment Tribunal proceedings with his former employer and doubtless in the context of those proceedings he will have the right to whatever legal recourse is available.”

Whilst these matters are, in part, being addressed through the Employment Tribunal neither PwC nor Magellan have sought to rebut any detail in my reports and website or challenge it legally or otherwise elsewhere.   As you can read below, at this juncture, and in light of this response and the prior FRC/AADB Chairman input on 15 November 2010 and Employment Tribunals legislation / regulations etc. my MP and I will probably now file further formal complaints in the UK etc.  This is in addition to the specific complaint lodged with the ICAEW in Mr Shannon’s letter dated 9 February 2011 (acknowledged on 22 February 2011) against their individual member Mr John F Tracey on breaches of the majority of the five principles in the ICAEW Code of Ethics etc.  Mr Tracey is currently Chairman of the PwC Fraud Academy and you can watch his 31 January 2011 video “Whistleblowing arrangements as part of a speak up strategy” here.

UPDATED 14 March 2011: Mr Shannon MP sent a follow up letter dated 2 March 2011 to Mr Ian Powell

UPDATED 7 April 2011:  Following Mr Shannon’s reminder on 28 March 2011 he again received a reply from PwC Counsel Mr Jack Naylor on 30 March 2011.   Mr Shannon sent his email reply on 1 April 2011 and attached a copy of the formal complaint to the FRC/AADB dated 18 March 2011.                         Mr Shannon’s final formal letter to Mr Powell is promised this month in which I understand he intends to set out his view of his experience in dealing with Mr Ian Powell at PwC since 24 September 2010.

Readers will recall that Mr Walker, Chairman at the FRC/AADB, had advised Mr Shannon MP on 15 November 2010

“Brian Little.  Thank you for sending me a copy of your letter of 7 October to PricewaterhouseCoopers.   I note that you have asked that he investigate your complaint and respond to your comments. I am sure that this is the right course.”    

 

Ernst and Young LLP (E&Y),           …….  No response .. follow up letter 15 December 2010                    

A Letter of Response was received by Mr Shannon MP on 17 January 2011. I understand that Mr Shannon MP is in the course of determining some supplementary questions which arise from the E&Y response.    As you can read the E&Y response includes

“There is no “standard” approach to independent forensic investigations. Forensic accountants within Ernst & Young are engaged to carry out a wide range of “independent forensic investigations”, from quick and fairly informal internal investigations to detailed and far-reaching investigations in respect of civil or criminal litigation and /or regulatory investigations. The approach we adopt in respect of each investigation will be tailored to meet the purposes for which the investigation is being carried out. However, in each and every investigation we undertake, all our people, whatever their discipline or expertise, apply the policies and standards that have been developed within the firm, policies and standards which we believe to be market leading in the UK but which we also believe are consistent with the highest global standards.

There are, as you recognise, no professional standards specific to forensic engagements to which forensic accountants in the UK (or in most jurisdictions) are required to adhere when carrying out independent investigations. Consequently, we can only describe the standards followed by forensic accountants within Ernst & Young and not those followed by forensic accountants in other practices. However, we take the view that any forensic accountant seeking to carry out the highest quality investigation would, at the very least, adhere to the standards of the professional bodies to which they belong (e.g. ICAEW professional standards). In substance, this will require that the forensic accountants’ work should be objective and should consider and document whether he has had access to all relevant information before completing his report. To the extent that there has been any limitation to the identifiable evidence (documentary and/or witness) to which the forensic accountant has had access and which he considers relevant, such limitations should be clear on the face of the resulting report.”

Q1.  Terms of Reference and wider considerations of “independence”

“The wide range of purposes for and circumstances in which clients may conclude that an independent forensic investigation is required mean that terms of reference vary between engagements. It is true that the clients’ purpose in commissioning the investigation will significantly determine the terms of reference of that investigation. However, for forensic accountants within Ernst & Young, the professional requirements of objectivity, the need to reflect in the report the extent to which access has been given to all relevant evidence, as well as the internal Ernst & Young principles to be followed in investigations (see below) will impose a significant constraint on a client’s ability to determine unilaterally the terms of reference of an investigation.

Where the restrictions are imposed on the materials and / or individuals to which an Ernst & Young forensic investigation accountant is given access (..) , this will be noted in the report, together with any consequential limitations on the completeness such restrictions have on the resulting report. Where the restrictions are so far-reaching as, in the forensic accountant’s professional opinion, to prevent an effective investigation being carried out, it is likely that Ernst & Young would refuse the engagement. 

As we have already described, the scope of an engagement will be jointly determined by Ernst & Young and the client, which will control the materials and individuals to which we are given access. We would normally expect to have access to all materials and individuals relevant to the scope of our investigation and any lack of access would be reflected in our report. As we have already described, if access is restricted to the extent that we doubt our ability to compile an effective report, we would be unlikely to accept the engagement.”

Q2+ Q3.  Established methodologies and underlying principles

“Ernst & Young has developed a Fraud Investigation & Dispute Services Global policy Manual (the Manual) which is used in respect of all fraud investigations and dispute services carried out by Ernst & Young. The Manual comprises 108 pages of detailed policies to be considered by Ernst & Young personnel engaged in forensic investigations, plus a number of appendices. Given the wide variety of forensic engagements and circumstances, these policies must allow for discretion on the part of the senior personnel running the engagement. We are not able to disclose a copy of the Manual as the guidelines it sets out represent the intellectual property of this firm as to how it carries out independent investigations.

Our website contains a wealth of publicly available information about how we go about engagements and the values that are fundamental to Ernst & Young as an organisation. In addition, our Global Code of Conduct, applicable to all situations, lists a clear set of standards for our business conduct, providing an ethical and behavioral framework on which we base or decisions every day… We also carry out regular quality reviews to ensure that the standards and policies are applied consistently and appropriately. Additionally, there are publications that can be consulted which set out “best practice” regarding independent forensic investigations.

Accountants’ professional bodies in the UK have not laid down guidelines to be followed specifically in the case of independent forensic investigations nor have they identified fundamental principles specifically for such engagements. However, the Code of Conduct of the ICAEW applies to members in every professional engagement.

In such circumstances, you will understand that we can comment only on the principles accepted and applied as fundamental at Ernst & Young. However, we would expect similar principles to be followed by any professional seeking to abide by the highest professional standards.  The principles regarded as fundamental at Ernst & Young are set out in the Manual, supplemented by guidance such as the AICPA guide. These principles include but are not limited to:

a.  Integrity and objectivity (see for example . sections 110 and 120 of the ICAEW Code of Ethics in the 2011 Members Handbook);

b. Professional Competence (undertake only those professional services that can be completed with professional competence) (see for example , section 130 of the ICAEW Code of Ethics in the 2011 Members Handbook) ;

c. Sufficient relevant data: obtain sufficient relevant data to afford a reasonable basis for conclusion or recommendations in relation to the services provided.“

Q4.  To what extent does your firm documents in its final reports the sources of information consulted, in the form of footnotes, bibliographies, appendices and the like? For example, will you produce an Index of documents which contains those documents provided to your firm, obtained by your firm, reviewed by your firm and finally considered by your firm in the findings of fact and your conclusions?

“The extent to which a report is accompanied by a more or less detailed list of sources referred to will depend on the nature of the engagement and the client’s requirements. For example, if the engagement is to carry out an initial high-level investigation, a detailed list of sources is unlikely to be appropriate and a more general description of the types of sources of information would suffice. However, it is generally the case that the more contentious the matter, the more detailed the list of sources is likely to be, with detailed lists being provided for reports prepared for regulatory investigations and / or in contemplation of litigation. 

Whatever the nature of the report, however, it will set out clearly the basis on which it was prepared including, in broad terms, the materials and individuals to which access was granted and, if relevant, refused. It is only by delimiting such issues clearly on the face of the report that we can try to ensure that those having regard to our reports, and the public more generally, can understand the task carried out, its scope and limitations, and, consequently, have confidence in the basis for and meaning of any conclusions reached. We also regard the clear delimitation of such issues as a necessary part of our own risk management procedures.”

Q6.  Do you allow parties other than your commissioning client to see the draft report of the investigation?  Is there, in fact a “draft” report stage given the implied absolute nature of such investigations and the opportunity extended to all parties to comment on your findings of fact before the Final Report and conclusions are produced.

“There is no “implied absolute nature” of independent forensic investigations. Their nature depends on the scope of our instructions and the materials and individuals to which access is granted, all of which should be clearly reflected on the face of the report.

Our normal practice will be to prepare a draft report which the stakeholders within the client will be given the opportunity to review and comment upon.  In addition, where the report reproduces information or opinions provided by individuals, we may send relevant sections of the draft report to those individuals to ensure that the representation of that information or those opinions is accurate.”

Updated 31 January 2011:   You can now read Mr Shannon MP’s follow up letter on 19 January 2011 to Ernst & Young with supplementary questions

Updated 25 February 2011:  Mr Shannon received the EY reply dated 1 February 2011 and in a further letter dated 9 February 2011 to clarify matters received a final reply on 21 February 2011 from E&Y UK in a letter dated 17 February 2011.  Mr Shannon’s final letter to E&Y UK was sent on 23 February 2011.

As you can read E& Y UK declined to comment on any of his supplementary questions SQ1- SQ12.
In the intervening period, on 18 February 2011, Mr Shannon MP also wrote to a Mr Otty. This had resulted from the input of one of Mr Shannon’s parliamentary colleagues in drawing his attention to the E&Y Managing Partner, Mr Otty, who signed the open letter to the Financial Times in September 2010 on “Financial Leaders Pledge Excellence and Integrity”.

UPDATED 14 MARCH 2011: Mr Shannon MP sent a follow up letter dated 2 March 2011 to Mr Mark Otty

KPMG LLP,  .…….   letter formally acknowledged by Mr Griffith Jones on 22 November 2010.   No response since…… follow up letter 15 Dec. 2010.  KPMG initially advised they had not received the 18 November 2010 letter but have now accepted they misplaced it and promise their reply by the end of January 2011. 

A letter of response was received on 27 January 2011 from the KPMG Head of UK Forensic partner.

“KPMG globally has seven core values by which all partners and staff members are expected to abide in their professional lives.  These core values include three of particular relevance to independent forensic investigations for clients which we articulate as follows:

We seek the facts and provide insight:

We are open and honest in our communications: and

Above all, we act with integrity.

Acting with integrity is our pre-eminent value, and underpins the more detailed code of conduct and the underlying Ethics and Independence rules of KPMG which have been developed. Partners and staff from all disciplines undergo Ethics and Independence training within three months of joining and periodically (currently annually) thereafter.  Partners and staff are also required to confirm on an annual basis that they understand and have adhered to the specific requirements of the Ethics and Independence policies.

In addition to our own internal standards and rules, we are subject to a wide range of ethical standards and rules promulgated by different professional bodies and regulators which have specific independence requirements (which we reflect as appropriate in our internal standards and rules). These include: the International Federation of Accountants: the Auditing Practice Board: the Institute of Chartered Accountants in England and Wales and other members of the Consultative Committee of Accounting Bodies: the Financial Services Authority for certain parts of the business: the Securities and Exchange Commission (“the SEC”) and the Public Company Accountant Oversight Board in the USA for SEC registered audit clients.

Q1.  Terms of Reference and wider considerations of “independence”

“In summary, therefore, terms of reference for independent forensic investigations are drawn up in consultation with our client and at times other parties such as regulators. These will generally be drawn up so that the scope of the investigation is sufficient to obtain the necessary facts to enable well informed decisions to be taken on how to proceed. We perform our work in accordance with our terms of reference and consistently with our values and professional standards.”

Q2. + Q3.  Established methodologies and underlying principles

“We have mandatory procedures when taking on clients and agreeing engagements which include independence and conflicts of interest checks. We also have mandatory procedures for all forensic engagements which also involve planning, carrying out and delivering work. This includes peer reviews of work and quality control procedures.

In addition to these mandatory procedures, we also have a Global Investigations Methodology which includes guidance to those involved in carrying out independent investigations. This includes planning and management, information gathering, analysis of information and deliverables.

You will appreciate that our mandatory procedures and Global Investigation Methodology are commercially sensitive internal documents which are not intended for external communication as they contain a considerable amount of intellectual property.

We are not aware of any principles accepted as fundamental by the accounting professions solely relevant to the conduct of independent forensic investigations, although there are of course, as already noted, professional standards of independence and objectivity, professional competence etc. generally applicable to all our work issued by the accounting institutes.”

UPDATED 14 MARCH 2011:  In March 2011 correspondence with Mr Shannon MP  KPMG advised “Before addressing your supplementary questions 1 to 5, you asked, as a follow up question to Question 2 of your original letter, whether the Standard Practices for Investigative and Forensic Accounting Engagements (“IFA”) adopted by the Canadian Institute of Chartered Accountants are reflected in our own procedures within the UK. I can confirm that our Global Investigation Methodology (“GIM”) and internal risk procedures conform with the practices outlined within the IFA standard.”

Q4.  Documentation research and sources / documents log

“This will depend on the nature of the engagement and what is specifically required under the terms of engagement.
When reports are likely to be used in criminal or civil proceedings, we are required to comply with respectively, the Criminal or Civil Procedure Rules published by the Ministry of Justice. These rules require reports to contain details of any literature or other information we have relied on in producing the report.

When a detailed investigation report is required which is not intended for Court, our general approach is that:

…   factual statements are supported and appropriately cross referenced to attached documents / appendices or work schedules:

…   summary schedules included in a report are backed up by detailed supporting information on work files: and

…   facts not known and documents or interviewees not available are stated.

An index of documents will often be provided but this would depend on the requirements in each particular case.”

Q6.   Draft reports and opportunity to consider findings of fact 

“Before we enter into an engagement, it is important that we understand the purposes and to whom any report produced is to be disclosed to.  Primarily, this is an internal risk issue which must be addressed in all engagements.

There is usually a draft report stage where the client will see details of the report prior to it being finalised primarily so that the facts on which the report’s conclusions are based are checked. There are occasions when we agree with our client that our draft reports, or relevant extracts thereof, can be provided to other parties for comment as part of the factual accuracy checking process, prior to the report’s finalization, but the extent to which this happens with the specific circumstances of the case. There will usually be some degree of discussion about facts and findings but the final report will remain our own and will be prepared independently and objectively and in accordance with our values and professional standards , and will state any key limitations to our work.”

You can now read Mr Shannon MP’s follow up letter on 31 January 2011 to KPMG with supplementary questions.   Mr Adam Bates -  KPMG UK Head of  Risk and Compliance and KPMG Global Head of Forensic led the KPMG investigation at HBOS into Mr Paul Moore’s whistleblowing allegations in early 2005 and produced the 21 page independent forensic investigation report in Part M.

Mr Shannon MP also sent a letter to Mr Paul Moore –posing certain similar questions.  Mr Moore is the well-known ex HBOS whistleblower following his Treasury Committee evidence in February 2009 in Part M.1A

Mr Paul Moore’s responses to Mr Shannon MP includes

“It seems to me that, in any civilized and developed society, if we cannot be satisfied so that we are sure that we can trust and rely on the competence, integrity and independence of our professionals – people who are supposed to be the best educated, brightest and most honest people in society – we are in real trouble.

I have been a professional all my working life. As you know I am a lawyer (barrister) by original training who practiced as an in house lawyer for many years. I have also been a partner at KPMG working closely with auditors, forensic investigators and other disciplines. I have specialised for over 25 years in financial sector risk management, governance, regulatory affairs and ethics.

If I combine all my professional experiences with the personal experience I suffered as a result of the “independent KPMG investigation” following my dismissal from HBOS, I have developed a strong concern about whether fees comes before independence, objectivity (or sometimes, even competence) in important parts of the accounting profession. I also think that the evidence, from a range of sources, seems more and more to support this conclusion.

I should say that I do not think this only applies in the field of forensic investigations conducted by accountants. I think that trying to combine all sorts of advisory work with statutory audit and setting accounting standards is also a very serious problem.

I am sure that many ordinary people (as well as professionals in other spheres) must think that statutory audit is practically pointless (if not worthless) if it was not able to red flag any part of the risk of the banking crisis in advance. On this point, I entirely agree with the latter part of paragraph 221 of the House of Commons Treasury Select Committee report on the Banking Crisis: reforming corporate governance and pay in the City published on the 15 May 2009 which stated 

We have received very little evidence that auditors failed to fulfil their duties as currently stipulated. The fact that some banks failed soon after received unqualified audits does not necessarily mean that these audits were deficient. But the fact that the audit process failed to highlight developing problems in the banking sector does cause us to question exactly how useful audit really is. We are perturbed that the process results in “tunnel vision” where the Big Picture that shareholders want to see is lost in a sea of detail and regulatory disclosures.”

It was, of course, unlikely that any of the self-interested parties were going to volunteer any proper evidence to the TSC in 2009 in support of the first part of that paragraph 221, on auditor failure in their Going Concern duties and responsibilities.  Having said that the evidence revealed during the House of Lords Economic Affairs Committee cross-examination of the Big 4 audit leaders on 23 November 2010 and captured in the headlines such as “Lords accuse auditors of deceiving investorsand Lawmakers attack auditors over bank statements”, fully supports the point I was making.

I suspect that many people would find that this even more worrying if they knew that it seemed to be common knowledge amongst accountants before the crisis that some of the international accounting standards were not really giving a “true and fair” view of the numbers.

The debacle over the “forensic investigations” commissioned by the FSA to be carried out by PwC into RBS and, if true, EY, into HBOS are yet further examples of the problems with which we are dealing. In my view, I do not think it was appropriate for the FSA to commission such an investigation when it is clear that they failed themselves.

As an expert in regulatory matters, I should add that the mere fact that dishonesty was not found by the FSA / PwC does not mean that the FSA should not take disciplinary action because under the FSA’s Principles for Approved Persons, ”bad decisions” (Lord Turner’s own words) are actionable under Principles 2, 5, 6 and 7 and there is very strong inference from the facts that there was , at the very least, a clear failure to act with due skill, care and diligence.

So why has there been no disciplinary action, except for Northern Rock Directors? The problem lies, in my view, with the fact that the FSA are rule maker, supervisor, investigator, prosecutor...and to a large extent the manager of the tribunal as well, and if the FSA took action against directors of RBS or HBOS, it might very well lead to their own failures coming to light. This surely creates a conflict of interest in the FSA carrying out the investigations in the first place.

I suppose the point I am trying to make here is that, although you may start your own investigation specifically with forensic investigations, we should not see that as the end of the matter. There is a great deal more to do.

However, returning to the narrower subject of forensic investigations, what is abundantly clear to me is that things must change.

Certainly, in relation to the sorts of issues which were raised by Brian Little at Magellan and me at HBOS, it must be self-evident to any fair-minded person that the system of relying on supposedly independent forensic investigations by firms of accountants whose independence (and even competence) to carry out such investigations is highly questionable. … etc continued

In any event, it seems to me that if any firm of accountants (or lawyers for that matter) are going to do this sort of work then the engagement must follow commonly accepted principles and procedures of fairness and justice e.g. terms of reference should be jointly agreed, the sources of documentary and witness evidence should be agreed, the investigatory process should be jointly supervised, rights of reply should be given throughout , drafts should be provided to both parties, final submissions should be kept on record and the reports should deal very closely with what evidence is accepted and why and what evidence is disregarded and why. In other words, the process should follow a judicial process with pleadings, disclosure, examination in chief, cross examination and re-examination, final submissions and judgement.

In relation to my own case, apart from the obvious unfairness’ which were self-evident from the report itself and our legal response to it, how could KPMG ever have though that they were independent (let alone competent) to carry out such a forensic investigation of my allegations when they were also the auditors of HBOS?    … etc continued

Now, to return specifically to the matters you raise in your letter, although I am not sure I can add very much more than the responses you have already received and the comments I have made above.”   I thoroughly recommend that you now read pages 5 – 11 in Paul Moore’s letter.

Since my attached press release on 13 March 2009 -   “Indeed, I have sometimes considered the possibility of instigating a formal complaint about the KPMG work into my allegations at HBOS.  I did not do this before I went public because I was subject to a “gagging clause” in my settlement agreement. I did not do it after I went public in February 2009 because I fully expected that the allegations I made to the Treasury Select Committee would be fully investigated and all these points would come out. Indeed Gordon Brown himself said that the reason that James Crosby had to resign from the FSA was because he would have to contest the allegations I made.  This is a direct quote from PMQT on 11th February 2009:

The allegations that were brought before the Treasury Select Committee were investigated by the independent KPMG in 2005.  The allegations made by Mr Moore were found not to be substantiated. That was an independent review that was done by KPMG and reported to the Financial services Authority.  However, it is right that when serious allegations are made, they are properly investigated. No doubt the Treasury Select Committee will want to look at them and no doubt the Conservative Party will want to wait to see how that investigation takes place

It is interesting to note that, although the firms protesting that their work is only for the benefit of the client (i.e.e the firm who pays), it certainly appears that the Prime Minister himself felt he could rely on KPMG’s independent report when commenting on matters of intense public interest!

I should add that given the enormous publicity surrounding my evidence to the Treasury select Committee and, in particular, the strength of my allegations about the KPMG investigation neither being independent nor capable of withstanding independent scrutiny, I have been surprised that the ICAEW and other relevant professional bodies which regulate the accounting profession have not investigated KPMG of their own accord and taken disciplinary action against those involved. I have not met a single person who has thought that KPMG could have met independence criteria in conducting the investigation into my allegations.

I can tell you that ex-partners of mine at KPMG (who cannot be named for obvious reasons) have agreed with me that the firm should not have accepted the engagement because they were conflicted but also did a very bad job as well!” 

BL input  : Some two years later we can now read that Prime Minister Gordon Brown MP quoted Mr Moore favourably, if briefly, in his new book ‘Beyond the Crash’.  Please see page 101:    “HBOS’s head of group regulatory risk, Paul Moore, warned that, without a change to its sales-obsessed culture and inadequate internal controls, the bank would collapse. HBOS, he said, was ‘going too fast’ and was ‘a serious risk to financial stability and consumer protection’.” See also “Why Turner got it wrong”

Earlier this month I have made further efforts in my initial submissions to the Banking Commission.

UPDATED 14 MARCH 2011   

Capital is worthless if the culture is wrong  -   London Evening Standard – 2 March 2011 – Anthony Hilton

Police dossier says former HBOS directors failed to act on fraud allegations - Herald Scotland – Ian Fraser

Moving the PwC forensic investigation story along at RBS.   Three page spread in Sunday Telegraph 

Sadly, the FSA is risking failure on RBS - Telegraph – 6 March 2011

FSA delays RBS inquiry as new evidence emerges - Telegraph – 6 March 2011

Shareholders must flex their muscles – London Evening Standard – 10 March 2011

And before then Ian Fraser (independent journalist) and Daily Telegraph December 2010 articles

Ian Fraser » The FSA/PwC investigation into RBS ‘bad decisions’ is a joke, right? Comments Feed – 3 December 201

FSA's report into RBS merely seals the regulator's fate - Telegraph – 3 December 2010

FSA's refusal to publish RBS report just shows how out of touch it is - Telegraph –  9 December 2010

Whistleblower alleges Widows policyholders cheated out of £1.5bn – (Auditors – PwC ) 20 February 2011

UPDATED 7 April 2011:  Following the KPMG LLP response on 11 March 2011 to Mr Shannon MP’s letter dated 31 January 2011 he wrote an important letter directly to the KPMG Chairman and Senior Partner Mr John Griffith Jones on 18 March 2011. 

Separately a few remaining points were sent in Mr Shannon’s letter dated 18 March 2011 for which he received a reply from the UK Head of Forensic on 5 April 2011.  

Deloitte LLP            ….. Comprehensive four page response received from Mr Mark Tantam the leader of the Forensic Investigation team in the UK and the Global Forensic Investigation group of some 1400 professionals in 30 countries, including Canada.

<Amongst other points the Deloitte LLP response records

Q1. “Deloitte is a member firm of the ICAEW, and I can best relate to the regulations of that institute, which guides all our professional work.  The ICAEW has a Code of Ethics that applies to all professional work. Under that code a professional accountant is required to comply with the fundamental principles of Integrity, Objectivity, Professional competence and Due Care, Confidentiality, and Professional Behaviour.  Key to your query (independence and terms of reference) is the principle of Objectivity. That principle states that “A professional accountant should not allow bias, conflict of interest or undue influence of others to override professional or business judgments”.  I will not repeat the rest of the Code here, but state that all the principles are fundamental to the conduct of all professional accountancy work including forensic investigations.”

Q2.Furthermore:  “Our Forensic and Dispute Services Practice ..has a Practice manual that sets out the principles and guidance under which our partners and staff are expected to operate when conducting investigations.  Matters covered include, inter alia, Independence and Objectivity, establishing the terms of reference, Confidentiality, Documenting our work, Acquisition and Preservation of evidence, Reporting.

Under the principle of Objectivity, our reports should make conclusions that are justified in light of the gathered evidence and not conclude on the basis of insufficient evidence or make determinations outside our competence or jurisdiction.”

Q4.Q5 Furthermore:  An investigator, under the Objectivity principle, will be expected to consider whether the evidence available is balanced and whether other evidence is required to bring balance to his investigation.”>

UPDATED 14 MARCH 2011: In subsequent correspondence Deloitte LLP advised Mr Shannon MP that “Our standards, with which the CICA standards are entirely consistent, are the same whatever the nature of the investigation we are conducting.    ...  In my view, the public interest is served in the context of forensic accounting investigations – by having such investigations conducted by professional accountants collecting and scrutinising evidence with independence, objectivity and integrity and applying their professional judgment . To that end the CICA standards are a useful codification of guidance which, if adopted by the ICAEW, might provide greater consistency and more clarity on the expected standards for all involved in investigations.”

Grant Thornton LLP  ……Comprehensive four page response received from their UK leader, Mr Scott Barnes and his UK head of Forensic,
                                     Mr Steve Cornmell.

< Amongst other points the Grant Thornton response records

“The ICAEW has a code of Ethics that underpins the professional standards of its members and employees of member firms” see  ICAEW response below.  Furthermore they pointed to “ the ICAEW Forensic Group that provides practical support to chartered accountants working as forensic accountants and expert witnesses, including various on line resources and guides (the ICAEW Forensic website provides a useful link to the Canadian CICA/IFA practice standards issued in November 2006 to protect the public by ensuring consistency with a minimum standard of practice”). Whilst Grant Thornton don’t record the existence of similar minimum standards documentation across UK forensic firms they did state, as one example in their UK practice:   “It is standard to maintain a document log of all information received, however this list of documents is not typically stated in the report, although it can be made available to the client if necessary.  Finally Grant Thornton LLP stated “..  in all circumstances we require to be independent, whether or not there is an underlying dispute, and be seen to be independent. In order to maintain co-operation with all parties , we will seek to ensure that we are perceived by all parties as independent and impartial. This includes providing training to staff as to how to conduct interviews and how to maintain positive relationships with clients, stakeholders and witnesses.”> 

UPDATED 14 MARCH 2011: In March 2011 correspondence with Mr Shannon MP, Mr Cornmell,  the Head of UK forensic,  advised that  “I have re-read the Canadian standards and confirm that they appear to establish a minimum standard for the conduct of forensic investigations. I confirm that all substantive matters included in the Canadian standards are dealt with in Grant Thornton’s UK forensic practice manual.”

UPDATED 5 MAY 2011: Mr Shannon MP wrote an important follow up letter on 13 April 2011 and I recommend reading it in its entirety.  As you can read it dealt with these subjects “Detailed Regulation of forensic investigations”, “Complaints statistics” and “Specific cases”.  A partial response was received from the ICAEW on the first subject on 27 April 2011.

I also note that you have confirmed that what you describe as the eight ”audit firms” have specific methodologies and guidance for the conduct of forensic investigations in the UK. I am not clear whether these firms you refer to include the two firms that conducted the investigations that impacted on your constituent and Mr Moore. However, as both are “Big 4” firms, I would expect this to be the case and that such guidance would be consistent with the substantive standards issued by CICA.

It was brought to Mr Shannon MP’s attention, from FRC / ICAEW sources, that the introduction of a new Audit firm Governance Code in January 2010 (and in recognition of the fact that three other firms had forensic practices and were subject to that new Code) should also be provided with the opportunity to receive and comment on his 18 November 2010 letter. These were received by those firms on 9 December 2010.

Updated 25 February 2011

Baker Tilly LLP                 …letter formally acknowledged on 15 December 2010. Reply promised.   Letter of reply from Baker Tilly lawyer received on 31 January 2011.    Mr Shannon MP wrote a further letter on 7 February 2011 and received this reply shortly thereafter.    Mr Shannon sent his final letter on 23 February 2011 to this firm.

BDO LLP
.. no acknowledgments or responses to Mr Shannon’s three letters.. signed for as received in First Class House of Commons envelopes by BDO  e.g . delivered 10 Feb signed for by Sam 08.42.
PKF LLP  .. no acknowledgments re responses to Mr Shannon’s two letters. . signed for as received in First Class House Of Commons envelopes by PKF   e.g . delivered 27 Jan signed for by Michaels  10.58.


Copy of 18 November 2010 auditor letters to the Institute of Chartered Accountants in England and Wales (ICAEW)

CEO  - Mr Michael Izza    -with a separate letter on 18 November 2010 addressed to Mr Izza  

Mr Tony Bromell – Head of Integrity and Markets - replied on behalf of Mr Izza in their ICAEW letter dated 6 December 2010.   As you may read this includes

“However, although we do not have specific requirements relating to the conduct of forensic engagements, the core principles and requirements of our Code of Ethics apply to all our members’ professional and business activities (including forensic work), whether or not those activities lie within a regulated area.  The Code set out five fundamental principles; integrity; objectivity; professional competence and due care; confidentiality; and professional behaviour, the spirit of which must always be complied with. It requires members to consider whether actions or relationships might constitute threats to adherence to those principles and where these are significant, requires safeguards to be implemented.  The Code includes a number of sections and case studies covering situations that members might be likely to encounter and suggests, or in some cases requires, specific courses of action.”

A number of attachments/website links were provided which included ICAEW Forensic Group Helpsheet issued March 2007.  ICAEW.forensic.  Forensic Accountant and Expert Witness Accreditation. ICAEW Practice Assurance – Guidance on the Principles-Based standards etc. ICAEW.Regulations. Ethics Overview  and ICAEW Code of Ethics. In it the ICAEW provided on the first page  Section 100 Introduction and fundamental principles of their Code of Ethics Part A

“100.1  A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest.
Acting in the public interest involves having regard to the legitimate interests of clients, government, financial institutions, employers, employees, investors, the business and financial community, and others who rely upon the objectivity and integrity of the accounting profession to support the propriety and orderly functioning of commerce.  This reliance imposes a public interest responsibility on the profession.  Professional accountants* should take into consideration the public interest and reasonable and informed public perception in deciding whether to accept or continue with an engagement or appointment, bearing in mind that the level of public interest will be greater in larger entities and entities which are in the public eye.
Therefore, a professional accountant’s* responsibility is not exclusively to satisfy the needs of an individual client or employer.  In acting in the public interest a professional accountant* should observe and comply with the ethical requirements of this Code.”

whilst on the principle of Objectivity the ICAEW state this is mandatory in all activities

“1.0   Safeguarding objectivity

1.1  In order to safeguard their objectivity , members should consider certain matters before deciding whether to accept any appointment.  The matters to be considered include those under the following headings:
the expectations of those directly affected (and entitled to be affected) by the work;
the public interest and its bearing on the work;
the threats to objectivity which may arise actually or potentially;
the safeguards which are or can be put in place , overt or otherwise , to offset the threats

These headings are discussed in more detail in the following paragraphs.

1.2  The responsibility for seeing that the above matters are properly considered resides ultimately , in the case of members in practice, with the engagement partner who takes responsibility for signing the report for the client concerned. Firm should establish reliable procedures to ensure that these matters are properly addressed.”

Mr Shannon MP sent a follow up letter to ICAEW with supplementary questions on 5 January 2011.        A letter was also sent to the Canada institute of Chartered Accountants.IFA Board Chairmen on 19 January 2011

Updated 25 February 2011.  The ICAEW in their letter of reply dated 1 February 2011 includes

“ Summary  Observations
Allow me to make our position on forensic investigations clear: I apologise if this was not clear in my previous letter. Our members are accountable for their standards of ethics and competence in all of their work, regardless of whether there are regulations and standards pertaining specifically to such work. All work has to be carried out in accordance with the high standards of the code of ethics and is subject to our complaints and disciplinary processes and all members in practice are subject to our Practice Assurance process. “ …

We have reviewed the CICA standards for forensic accountants. Clearly they provide a significant amount of detailed commentary, but in terms of the key requirements we see these as being that, in essence, the practitioner carrying out the assignment should

-  agree the terms of engagement
-  plan the assignment
-  supervise staff
-  collect and document relevant information
-  assess objectiveness of others whose work is being relied upon
-  write the report
-  refer in the report, if independence could be queried, to the practitioner’s relationship with the   parties involved, including a conclusion on    the practitioner’s independence.

Should these core requirements not be met and the outcome adversely affected as a result, we believe that the general requirements in our code of ethics for, amongst other things, integrity and competence, would provide sufficient grounds for complaint.

Our current view is that, from a public interest perspective, given this and the options it opens for holding members to account for detailed regulation in this area would not achieve extra protection to the public and as such would be unnecessary and disproportionate. I return to this point below.

Our Practice Assurance visits focus on the overall quality control environment.  Thus, while they do not specifically target forensic work they will cover the control environment applicable to such work and may include such files on a random basis (or specific basis if a particular weakness is identified).  

Our regulatory and disciplinary arrangements are not confined to activities about which there are specific regulations, such as audit. This is a key point: any professional and business activity of our members is subject to the requirements I have outlined above and in the previous letter. Members are accountable for their actions and if anyone feels that in the course of that work being carried out the requirements of the code have not been complied with, complaint to ICAEW about that work is open to them.  This correspondence has been about regulatory standards and processes rather than individual cases but such a course may be an option in the particular case that you have engaged with. The complaints process is fully explained at www.icaew.com/complaints.”

Should these core requirements not be met and the outcome be adversely affected as a result, we believe that the general requirements in our code of ethics for, amongst other things, integrity and competence, would provide sufficient grounds for complaint.”
Mr Shannon MP followed this up with the ICAEW in his letter dated 9 February 2011, which I recommend reading in full.   As you will read part of this letter  includes the specific complaint lodged with the ICAEW (acknowledged on 22 February 2011) against their individual member Mr John F Tracey on breaches of the majority of the five principles in the ICAEW Code of Ethics.  Mr Tracey is currently Chairman of the PwC Fraud Academy.

UPDATED 14 MARCH 2011:  On the 9 February 2011 formal complaint to the ICAEW Mr Shannon MP wrote in his email dated 2 March 2011
“Mr Weatherill

I am now up to date with all the email exchanges since last Wednesday to and from my constituent,           Mr Brian Little.  I note your responses, including the exchange below, and Mr Naylor at PwC on behalf of Mr Powell, and would endorse Mr Little’s remark referring you to his website for further information.  I read much of it and the supporting documents during the parliamentary recess last summer.

Also, as I stated in my email to you last Wednesday, please ensure that I continue to be aware of the progress in the ICAEW review.   I look forward to receiving a copy of the draft complaint setting out your and the ICAEW understanding of the basis and evidence in support of the complaint against Mr Tracey.

I will also be interested to see if the ICAEW, following that strategic and detail review,  consider that any further individual ICAEW members or individual member firms (such as PwC and E&Y) should also be subject to a proper investigation and disciplinary action.

Jim

Jim Shannon, MP for Strangford”

UPDATED 7 APRIL 2011:   Mr Weatherill responded on 17/18 March 2011 and you can read this response with the complete email trail here.   Mr Izza also sent a letter dated 18 March 2011 to Mr Shannon MP which arose as a result of Mr Shannon MP’s email to him on 18 March 2011. 
That email is included within the email trail of exchanges trail here between 25 February 2011 and 29 March 2011 and I recommend reading it in its entirety from Mr Shannon’s initial email to Mr Izza on 25 February 2011.

A reply to Mr Shannon’s complete letter dated 9 February 2011 was received from Mr Bromell  / Mr Izza on 4 March 2011.  This can be read here.

Mr Shannon MP wrote a follow up letter dated 10 March 2011 directly to the ICAEW CEO and it can be read here.  A substantive response from the ICAEW to this 10 March 2011 letter was sent on 1 April 2011 and can be accessed and read here.   

UPDATED 5 MAY 2011: Mr Shannon MP wrote an important follow up letter on 13 April 2011 and I recommend reading it in its entirety.  As you can read it dealt with these subjects “Detailed Regulation of forensic investigations”, “Complaints statistics” and “Specific cases”.  A partial response was received from the ICAEW on the first subject on 27 April 2011.

UPDATED 25 MAY 2011:  Mr Shannon MP sent a follow up letter dated 9 May 2011 to the ICAEW on the remaining items in open correspondence whilst enclosing a copy of the Canadian Institute of Chartered Accountants booklet “Standard Practices for investigative and Forensic Accounting Engagements; November 2006”.  On 23 May 2011 he received a reply on a number of the outstanding matters but not all of them.  That reply can be read here.

Canadian Institute of Chartered Accountants (CICA)

A letter was also sent by Mr Shannon MP to the Canada Institute of Chartered Accountants.IFA Board Chairmen on 19 January 2011 .   Mr Shannon MP received an email reply on 23 February 2011 which stated

“Please note that the Board of the Alliance for Excellence in Investigative and Forensic Accounting discussed your request at our Board meeting last week.  We are very interested in being of assistance. Currently we are reviewing protocols on the form of our response with the Canadian Institute of Chartered Accountants. We hope to be in a position to respond more substantively in the near term.”

A further email and positive reply was received from the Chair of the CICA.IFA Standards Board on 21 March 2011  which they then followed up in a formal letter on 15 April 2011 offering positive support to the UK regulatory bodies from the CICA,  which I recommend you read in its entirety.

The CICA also have a Code of Ethics which is almost identical to that for the ICAEW.  In Canada the Ethical standards are based on five fundamental principles that govern the behaviour of all Chartered Accountants - professional behaviour, integrity and due care, professional competence, confidentiality and objectivity.

UPDATED 17 DECEMBER 2011

Following guidance from HMG Business Secretary Dr Vince Cable MP in his letter dated 26 October 2011 to Mr Shannon MP he proceeded to file a complaint  (FULL LETTER) with the CICA in regard to E&Y Canada for the MAC audits and a number of individual CICA members from Magellan Aerospace , E&Y Canada and PwC Canada on 1 December 2011.  I also forwarded a copy of my email to Mr Powell of PwC Canada in which I requested that PwC refund the C$3m in fees it charged Magellan Aerospace and its shareholders for the “independent forensic investigation”. Readers may recall the Chairman Mr Murray Edwards evidence to the UK court on 5 June 2008

And then Mr Edwards immediately continued in cross-examination (p20)
   
Mr Little Why were my points, especially on the A340, not included in the PwC report
Mr Edwards A large amount of money was spent on the external auditors E&Y and the third party PwC. They were of high repute. They reported to the Board and the Audit Committee, it was acceptable to rely on them.
Judge “How much money was spent on the PwC Report?”  
Mr Edwards “Too much!!   The shareholders struggle with the fact that the amount spent on that report could have been used for creating jobs etc….it cost in excess of C$3m. It is a substantial amount, but it was at the instruction of the Audit Committee, which is made up of fully engaged independent directors.  It was a standard and detailed report.  

Financial Reporting Council

The Chairman of the FRC/AADB, Mr Walker, responded to Mr Shannon MP’s letter dated 7 October 2010, in his letter dated 15 November 2010 and advised

“Brian Little.  Thank you for sending me a copy of your letter of 7 October to PricewaterhouseCoopers.   I note that you have asked that he investigate your complaint and respond to your comments. I am sure that this is the right course.” 

Copy of these five 18 November 2010 auditor letters were also sent to the Accountancy and Actuarial Discipline Board (AADB) Chairman   Mr Timothy Walker together with a direct 19 November 2010 letter to him.

Subsequently copies of these five 15 December 2010 auditor letters were sent to Mr Timothy Walker – AADB Chairman with a direct 15 December 2010 letter to Mr Walker with various enclosures – including a copy of Mr Shannon MP follow-up 15 December 2010 letter to Mr Dimma at MAC.    

You can read Mr Shannon’s follow up letter dated 26 January 2011 to Mr Timothy Walker , Chairman of the AADB.   Copy to Dr Vince Cable MP, Business Secretary.

UPDATED 14 MARCH 2011:

Financial Reporting Council - Welcome  and Auditor Scepticism press release dated 10 March 2011

To download the Audit Practices Board (APB) Feedback Paper select this link

Having read the Financial Times article “Audit firms wary of FRC proposals on Scepticism” on the morning of the FRC press release Mr Shannon MP sent an email the following day.

Mr Shannon MP email dated 11 March 2011 to the Audit Practices Board, Chair of the FRC and others

“ Thankyou for the email below .   I have briefly read the APB Feedback Paper last night.     Although our email exchanges were with the APB in January 2011, as a result of your ill health, I do think they should be published on the FRC website, as per your email below.    I would wish to suggest to Mr Grant the website title link should state        Mr Jim Shannon MP with his constituent Mr Brian Little. 

Can I also ensure that Mr Grant and the Auditing Practices Board / FRC are also aware that I do not believe my constituent’s case to be an isolated example.  My parliamentary aide and I have been gathering quite a bit of relevant evidence in the last 4 – 6 months.  To assist in underpinning the “not a single case” point can I refer you to a letter to the ICAEW sent by me early this morning ( already copied to Baroness Hogg and Ms Colban/Mr Walker)  where you can see I also refer to Mr Paul Moore and  Mr Graham Milne’s website at pages 10 -15.  I would be surprised if there are not other legitimate examples known to the ICAEW and the FRC.

Finally two initial observations on the subject of “presumptive doubt”.   Firstly, regardless of the conclusions/outcomes of the FRC/APB work for auditors in “normal” audits on Auditor Scepticism I think it should be prescriptive that auditors in the case of senior- level whistleblowers and/or regulatory/internal audit personnel should be afforded the respect of an auditor adopting a “presumptive doubt” mindset in the public interest, as per the ICAEW Code of Ethics, in the audit of those accounting matters and the related management assertions.       Unequivocally it should be a “presumptive doubt” mindset in a “independent forensic investigation” by an accounting firm, if such engagements continue to be permitted to be undertaken by the UK accounting profession by the ICAEW and FRC. If the audit firms are not prepared to approach and document the “independent forensic  engagement”  in that manner then the ICAEW/FRC regulations should not permit the firm to accept the engagement.

Secondly I find it remarkable, as a layperson,  that any ICAEW auditor is not required by the POB/APB current processes to have documented in writing in  their audit files their partner  justification and basis of their audit judgments for significant risk, accounting matters and any whistleblowing claims.     That omission doesn’t seem to me to be the sign of a professional approach.   Whilst I can understand why the audit firms may inappropriately say, at para 35, “retaining review notes would increase the audit firm’s litigation risk” it is remarkable that the documentation of the key professional audit judgments is even a matter for serious debate within this profession.    I doubt if it would be tolerated in others.  

In the end what do the regulators/ investors/public believe the auditors are responsible for; if in arriving at a company financial statements “true and fair” view, they can’t and don’t even document their audit testing, thinking and judgment on key company risks and accounting estimates.     Quite extraordinary.  How does the publication of that fact earn credibility for the profession with the investors / public,  which is at an all time low.!!   Transparently some of those audit firm inputs to the FRC paper are from the  same UK audit firm leaders who signed a “words” pledge, published by the Financial Times at the end of last September “ Financial leaders pledge excellence and integrity”,  which would seem, to me, to be “actions”  which profoundly  undermine the public’s perception / reality  of those integrity and excellence “words” from the profession.

I consider that both of these matters need to be addressed by the FRC/APB as soon as practically possible with the ICAEW and the audit profession.
In the meantime I must formally record that I am delighted to see that the FRC is continuing to pursue this Audit Scepticism subject matter and the Financial crisis “lessons learnt”, with the announcement of the Lord Sharman enquiry.    I will endeavour to coordinate a response to the APB

Feedback Paper from a number of us.

For completeness,  Mr Grant - when is the POB/APB  latest input date on this Feedback Paper  from us; together with the current  expectation of the release of the Final Paper and FRC implementation plan on “Auditor Scepticism”?

Thanks
Jim

 Jim Shannon, MP for Strangford”

UPDATED 7 April 2011:

Following the various inputs Mr Shannon MP formally lodged a complaint against both ICAEW individual members (Mr John Tracey and Mr Ian Powell) and member firms (PwC and E&Y) with the Chair of the FRC, Baroness Hogg, and Chair of the FRC/AADB, Mr Walker, on 18 March 2011. This was acknowledged on 25 March 2011 by Mr Walker. Since then all the same files provided / requested by the ICAEW, documents and a documents index have been forwarded to the Secretary of the Board of the FRC/AADB.

2.  Secretary of State (Dr Vincent Cable MP) for Business, Innovation and Skills. 

(including the UK Companies Registry and Companies Investigation Branch and James Shannon MP letter dated 5 January 2011)

28 November 2008 hearing Request 4

Mr Stafford QC

The accounts are also relevant to the £10m intercompany loan. In October 2006, the MALUK books were brought back closer to balance by the intercompany loan. Mr Little says this was an attempt to rewrite history after the event. At the time, the loan was not properly accounted for. We are requesting the accounts themselves to see whether they glossed over or revealed financial difficulties. Request 4 ; This relates to the intercompany loan

Judge

What are you looking for regarding the intercompany loan?

Mr Stafford

The loan appears in the formal Companies House documents as at 18 October 2006, which refer back to a MALUK Board meeting on 28 April 2005. The Respondents say that is when the loan swop was approved.   We are requesting the Notice and minutes of that MALUK Board meeting to prove or disprove the timing of the loan. These have never been disclosed. If there is no contemporaneous evidence of the intercompany loan in April 2005, that will have an obvious bearing on issues relating to the solvency of MALUK. Such issues may have been solved by the intercompany loan transaction, but where is the documentation?

Judge

We would like every application to be followed by response by Mr Lynch QC. We may be able to make a decision on disclosure after each request.  

Mr Lynch QC

On the face of it, these are applications for documents which are exactly the type of excessive applications which should not be acceded to. It would be wholly inappropriate to duplicate the complete forensic accounting already done by PwC. The test is whether the document are necessary and for what reason. For example, if we were told why it was suspected that the document would reveal a relevant or helpful fact, then we would reconsider our position. On the face of it, these are classic examples of yet more scrambling for documents with no necessity and no suspicion of what they would reveal.  If there were a more focused application with clearer reasons, the Respondents would give it proper consideration. Therefore we will not provide these documents at present, but we would give a more focused application proper consideration…

Mr Stafford QC

As a brief response to Mr Lynch : suppose there was no intercompany loan transaction in April 2005 nor subsequent papering over the cracks. This would have an obvious bearing on whether Mr Little is correct regarding the solvency issues in 2005/2006. It would have an obvious bearing on whether the MALUK employees’ evidence is true, or whether the papering over the problem was known but not acknowledged at the time.

Judge

(Panel Discussion) 

Requests 1 to 4:

These should be disclosed. We consider these documents are relevant. We are satisfied as to their relevance by the reasons given by Mr Little.   Ordered See further information at Part A.  2A/2B

Companies House / Registry - Chief Executive – Mr Gareth Jones 

Letters exchange   24 September 2010 / 13 October 2010 / 16 November 2010

My Member of Parliament, Mr James Shannon MP, has also since written to Mr Dimma on 17 November 2010 on this and the A340 subject of PwC findings of fact (Q1). No response has been forthcoming, yet.

On 10 December 2010 I received a letter in which it was stated “MAC will reply to James Shannon MP in regard to this is due course”. I wrote directly about this to Mr Dimma on 11/12 December 2010 at Point 2.  Mr Shannon MP decided to follow that up in a letter to Mr Dimma dated 15 December 2010 and received an email within a couple of hours in which Mr Dimma wrote

“From: Dimma, William <William.Dimma@brookfield.com>
Subject: RE: www.fortfield.com Brian Little A340.on.the.record.final.report.15.december.2009 EMAIL FOLLOW UP
To: "JIM SHANNON" <jim.shannon1@btopenworld.com>
Date:
Wednesday, 15 December, 2010, 16:12

Mr. Shannon:  Receipt of December 15th letter is acknowledged. Date of reply will be determined by my immediate interaction with Magellan management and our legal counsel.

 Bill Dimma”

Mr Charles Rae, of PinsentMasons LLP (Magellan’s UK solicitors), replied on behalf of Mr William A. Dimma later that evening.   Mr Shannon MP sent his reply immediately.

“Dear Mr Rea

Thank you for your response.  Mr Shannon MP does not agree and indeed the position taken in your letter seems inconsistent with that of Magellan’s counsel Mr Lynch QC and your own prior correspondence on Mr Little’s website. It is also inconsistent with our experience and knowledge of UK law and recent Employment Tribunal 2010 regulations.  I thank you for your prompt response, however I will be continuing to pursue this in January 2011.

Kind Regards and have a lovely Christmas.

 Jim Shannon, MP for Strangford

Office - 028 9182 7990 - 34a Frances St, Newtownards, BT23 7DN

On 24 December 2010 in part of an email to the Tribunal I have recorded -  

“Following Mr Shannon’s input I have now asked last night that Mr Rae should properly provide the Employment Tribunal and Employment Judge Walters formally with the letter he sent, on behalf of Mr Dimma , to Mr Shannon MP  (not copied to me) on 15 December 2010 , together with Mr Shannon’s two preceding letters to Mr Dimma , as a matter of court record.  I do not know and cannot say whether Mr Rae sought or gained approval from Mr Lynch QC for the contents of that letter before it was sent directly to Mr James Shannon MP on 15 December 2010”

Since then I have learned that when Mr Shannon MP read the 15 December reply to him from Magellan’s lawyers (Mr Rae at PinsentMasons), rather than Mr Dimma, he vividly recalled, amongst other documents on this website, having previously read the written submissions at paragraphs 7 & 8 to the Employment Judge on 1 June 2009 from Mr Rae and Mr Lynch QC.

They can be read here and both documents then considered together to understand why Mr Shannon MP responded as he did above and why I asked Mr Rae at PinsentMasons above to provide a copy to the Bristol Employment Tribunal and thence to Employment Judge Walters.

UPDATED 7 APRIL 2011  : Mr Rae did not provide a copy to the Tribunal so I forwarded a copy together with an email with various letters in which Mr Shannon MP filed formal complaints with the relevant Regulators which are all disclosed in this website. 

Furthermore after the release of the MAC FY 2010 Financial statements Mr Shannon MP followed up his November and 15 December 2010 letters to Mr Dimma in his email dated 6 April 2011; in a part of which you can see he records that there is no evidence that PwC repaid any of its C$3m fees to MAC and its shareholders.

Updated 25 February 2011:  Following Mr Shannon MP’s letter dated 8 December 2011 we received confirmation on 21 January 2011 that the information and files from the Companies Registry had been passed to the relevant person in the Companies Investigation Branch.  Their correspondence also advised that they had not received satisfactory responses from Magellan UK on the questions they had recently put.

As part of a letter from the Companies Investigation Branch (CIB), dated 9 February 2011, they advised Mr Shannon MP on the basis of the January 2011 information / dossier available from the Companies Registry, etc. etc. that they would now also be engaging Section 30 (3) of the Freedom of Information Act 2000 Section 31 (1) (b) which states

Information held by a public authority is exempt information if it has any at time been held by the authority for the purposes of any investigation which is conducted by the authority and in the circumstances may lead to a decision by the authority to institute criminal proceedings which the authority has power to conduct.” and Section 30 (3) FOIA states : “The duty to confirm or deny does not arise in relation to information which is (or if it were held by the public authority would be) exemption information by virtue of section (1) or (2).”  

This Companies Investigation Branch letter continues “Investigators are empowered by section 447 (3) of the Companies Act (“CA 1985”) to investigate companies where, following a vetting exercise, there is good reason to do so. ………   Due to the prospect of criminal proceedings arising from a section 447 (3) CA 1985 investigation, section 30 (10 (b) FOIA is engaged.  It follows therefore that section 30 (3) also applies.”  Mr Shannon MP sent a follow up letter on 23 February 2011 to clarify certain factual matters.

UPDATED 25 MAY 2011:    Mr Shannon MP and I had a 75 minute meeting with the Director of Investigations in which we were able to clarify the nature of the complaints about Magellan Aerospace UK, Ernst & Young LLP and PinsentMasons LLP.   Some further contemporaneous documents were also highlighted, whilst Mr Shannon MP explained the status of the complaints with the FRC/AADB, the SRA and their current and likely future linkage with that raised with the CIB. We also approved any discussion he would wish to have now with those regulatory bodies. As per the previous CIB letter quotes above the further CIB work will remain confidential although MALUK, E&Y LLP and PinsentMasons LLP are obviously aware of the complaint to the CIB given its public airing to the Employment Tribunal.

UPDATED 28 NOVEMBER 2011:  Mr Shannon MP and I received an email from Mr Burns and we replied. In the reply we advised the CIB that Mr Shannon MP and I had now provided the relevant documents – 21 November:Item 3 – on this to the SRA on 23 November for solicitors (SRA Complaint Number POL/1023406-2011) and the ICAEW on 25 November 2011 for accountants E&Y UK (Complaint 85023)



At 3. Civil Aviation Authority  (CAA)
- Chair : Dame Deirdre Hutton

“The Civil Aviation Authority is the UK's specialist aviation regulator. Through its skills and expertise it is recognised as a world leader in its field.”

You will recall from my Website at  Part D  and Part E that Mr Lynch QC has consistently pursued the line of questioning and argument which asserts  Spares replacements for the A340-500/600 exhaust systems at not greater than 40,000 flying hours.  Provide copies of the transcripts from the oral cross-examination by Mr Lynch QC (taken by the Court of Appeal appointed shorthand writers) on 8 June 2010– in particular pages 61 -73. MAC apparently have  not instructed him that he was falsely pursuing a wrong line in his cross-examination.  Summary :
Mr Lynch QC (Magellan Aerospace) counsel in his cross-examination of Mr Bobbi (8 June 2009) (with Mr Lynch QC interpretation and his client/MAC instructions re Mr Neill’s 29 March 2007 email –doc.3597)


Mr Lynch

We have Mr Neill's email to Mr Moore of PricewaterhouseCoopers.  I know it’s a bit compressed in its typescript. Tribunal, of course there is a bigger version in the bundle, if that's a bit small to read.  (Pause). 

 

Mr Bobbi, you can see, can't you, looking at the two substantive paragraphs -- it actually is a feature of both those paragraphs -- that Mr Neill makes it expressly clear that Magellan is simply basing its calculations for accountancy purposes on spares or replacements, he's not included anything to do with repairs.

Mr Bobbi

That's right.

Mr Lynch

Good.    

Mr Lynch

….  And that information would indeed, because it related to lifespan, that information would  indeed provide the basis on which PwC could rightly conclude that indeed these would involve new units that would be sold, that's right, isn't it?

Mr Bobbi  

No, that's not.  Because a component has a "lifespan" does not mean necessarily it will be replaced by something new, it can be repaired.

 

 

Mr Lynch

Yes.  Well, no, I think the whole point is this, it's not, Dr Thamburaj's point was not a question that they will need repairs after that period, Dr Thamburaj's point was that around 40,000 flying hours was indeed the lifespan of the unit.  That after that, its lifespan was spent and should be replaced.  That was the point.

For information  :  Dr Thamburaj is the Manager of Advanced Engineering Services at MAC and was neither interviewed by PwC during their independent forensic investigation nor either member of the UK legal team.
 
Furthermore the MAC/Respondents’ UK solicitor (Charles Rae of PinsentMasons LLP ) are  “On the record” stating in his PinsentMasons LLP letter
extract dated  27 August 2009 In regard to the likely need for spare exhaust parts, the Respondents case has always been (and remains) that Dr Thamburaj’s work gave rise to a calculation of the likely life span of the parts. This allowed an estimate to be made as to the likely demand of such parts. Dr Thamburaj’s work concerned this and not some regulatory, mandatory requirement, that the parts be replaced after 40000 flying hours.  Indeed, Mr Neill made this expressly clear in his email to Mr Furbay at pages 3597/8 
And then in PinsentMasons letter extract - 14 September 2009 – “As you well know, our view is that Magellan’s position on the likely, predicted need for spares (based on Dr Thamburaj’s research) is clear and consistent.”
And then in PinsentMasons letter extract – 29 September 2009 “The Respondents’ views as to the need for potential spares and replacements has not changed” 
And then in PinsentMasons letter extract – 6 October 2009“That case is and was that Dr Thamburaj’s research allowed MAC to make commercial predictions as to the likely need for replacements.”   

Given all the evidence and the continuing position stated in correspondence I wrote in an unprecedented action directly to Mr Lynch QC as a litigant-in-person on 30 September 2009 – see subject 2 on pages 5 – 10 and specifically the warning on page 8.

8 June 2009 Mr Mark Bobbi – Aerospace Consultant evidence

Mr Little

Is there any regulatory requirement in terms of CAA or FAA or anything?

Mr Bobbi

Not on these components

Mr Little

If there were a limited life on the product, would there be?

Mr Bobbi

If these were life limited parts? 

Mr Little

Yes

Mr Bobbi  

If they were life limited parts, first of all they would be designed differently, tested differently, manufactured differently, they would be certified, qualified by the customer and certified differently, all through FAA or EASA process

Judge

So there would be a regulatory factor in the process?

Mr Bobbi

Yes

Mr Little The Airworthiness organisations?
Mr Bobbi Yes

The final A340 600 aircraft (97th – MSN1122) was delivered to Iberia on 16 July 2010. The last A340 500 aircraft off the Toulouse assembly line (MSN1102) will be delivered by year end.  Once the annual Airbus Press Conference in early January 2011 has been completed, and again in the absence of the current Tribunal having the power to do so, or any correction in the MAC lawyer position,  I understand  that it is Mr Shannon’s intent to write to the Civil Aviation Authority and formally refer this matter  (with their counterpart European Aviation Safety Agency – EASA) so that a proper investigation by the competent and relevant regulatory authority can take place into the presented evidence.

As Mr Mark Bobbi said in his written and oral evidence  (confirmed as at July 2008 by Aircelle, MAC’s customer) all the other evidence – other than Mr Neill’s 29 March 2007 email - within the aerospace and airline industry states that the A340 Exhaust system is an “on Condition” repair item – i.e. checks scheduled at certain intervals – 20000 flying hours – with repairs carried out if required.  Some of the initial and oldest A340 – 600 aircraft in daily airline service (total = 19) are operated by the UK Virgin Atlantic operator (total A340 600 fleet = 19) and Virgin Atlantic do have four aircraft (MSN383,391,416,449) which have now operated in excess of 35000 flying hours in daily airline service.

Following their lawyers confirmation that the Magellan Aerospace Corporation position was unchanged on 11 January 2011 Mr Shannon MP has now formally referred the A340 exhaust system spares replacements and service life policy and practice to the Chair of the CAA in his letter with enclosures dated 24 January 2011 for their investigation.  

Updated 25 February 2011:  Mr Shannon MP received this 8 February 2011 letter in acknowledgment from the Chair of the CAA.

UPDATED 5 MAY 2011:  The Director of Safety Regulation at the CAA wrote a letter in reply on 8 April 2011 which should be read in its entirety. Whilst a comprehensive response the CAA is unaware of “the suggestion that there may be a problem with the titanium alloy used in the reverser, which may underpin the Magellan decision, is something that should have been discussed with Airbus and EASA to determine if the information had any bearing upon the continued certification of the aircraft”. As you can read in Mr Shannon’s follow up letter on 18 April 2011 he has now asked for the equivalent regulatory contact details at EASA (European Aerospace Safety Agency) and that the documentation / files are now passed to EASA, by the CAA, in order that he can follow this matter up directly with EASA and Airbus.  

Updated 16 NOVEMBER 2011:

The CAA answered his five supplementary questions and provided the contact within EASA in their letter dated 11 May 2011, received in Mr Shannon’s constituency office on 10 June 2011.   Mr Shannon MP then followed up this letter from the CAA as advised by them to EASA and Airbus on 16 June 2011. The CAA passed their files for the remaining updated answers to the relevant EASA contact.

EASA letter dated 1 August 2011 sets out their initial findings and interim conclusions. Mr Shannon MP sent a clarification letter to EASA dated 11 August 2011 which was then followed by EASA letter in response dated 15 September 2011 with their further assessment and actions.

Finally EASA advised Mr Shannon MP on 14 November 2011 of their final conclusions from their investigation since mid June 2011 in which, as you can read below

Airbus has no tangible data or fact that may question the full life capability of the Exhaust System.

Therefore, Airbus confirms that there is no reduction of the original A340-500/600 exhaust design life of 100.000 Fh.”

Start of email
From: Copigneaux Frederic <frederic.copigneaux@easa.europa.eu>
To: JIM SHANNON <jim.shannon1@btopenworld.com>
Sent: Monday, 14 November 2011, 11:30
Subject: RE: RE: Re: Your letter dated 11 August 2011

Dear Mr. Shannon,

Thank you very much for your email. I have also received directly parts of this email directly from Mr. Little.
The situation is presently as follows:

  • Magellan has so far not sent us any form 44, nor contacted us directly. I understand from your mail that they have no further technical information to give to us and that they will not contact us by means of a form 44,
  • We have in between proceeded with additional technical investigations with Airbus, which have liaised with Aircelle. The conclusions of these investigations are:

Quote
 The Trent 500 Exhaust System has been certified for a fatigue life capability of 20Kcycle (equivalent to 100K flight hours for average A340-500/600 mission type). It shall be noted that the results provided at the time of certification showed the effect on ductility and on structural strength capability associated with thermal cycle exposure representative of A340-500/600 specified thermal environment. The material allowable used to size the exhaust system was based on these results.

Airbus has no tangible data or fact that may question the full life capability of the Exhaust System.

Therefore, Airbus confirms that there is no reduction of the original A340-500/600 exhaust design life of 100.000 Fh.”

Unquote
Following the present state of the case taking into account:

  • the previous investigations,
  • the lack of in service events related to this exhaust system,
  • the above quoted statement from Airbus, which is not challenged by any fact,
  • and the lack of further technical communication by Magellan or other parties,

we stick to the conclusion reached earlier this year that there is no safety issue nor any maintenance related issue with the A340-500/600 exhaust system and that no further action is needed from the Agency.

This conclusion was already communicated to you on 1st August 2011 (letter D53751) and further confirmed on 15th September 2011 (letter D54474).

We would therefore close the case, but it could be reopened if new safety related information is brought to our attention.

We do have regular continued airworthiness review meetings with Airbus on all their programmes and safety related issues are brought to our knowledge during those meetings. This is an obligation set by CE regulation 1702/2003 (part 21A.3A) onto the type certificate holder (Airbus) and the complete implementation of this obligation is duly and continuously checked by EASA in the frame of its on-going surveillance of the Airbus design organisation approval.

I remain at your disposal for any additional information.

Best regards, Meilleures salutations, Mit freundlichen Grüßen

Frédéric Copigneaux  “  End of email

UPDATED 22 NOVEMBER 2011

Following the completion of the EASA investigation setting out their findings of fact and conclusions Mr Shannon MP wrote