Evaluation Of Current Risks And Viability Of Carnegie Clean Energy Company

We have chosen the following article, “Company admits to ASX its 'world leading' wave farm is under threat” as it addresses the current risks and viability of Carnegie Clean Energy, an ASX-listed company based in Perth. The company won a contract substantially funded by the government to undertake a wave energy project. However, the viability of the project is currently at risk due to the suboptimal performance in meeting its funding milestones. As a result, there are audit risks which are currently present and should not be dismissed by the auditor in their investigation.

Carnegie Clean Energy (Carnegie for short), is currently working with the State Government of Western Australia in developing wave technology as an additional alternative to solar and wind renewable energy. Carnegie have commenced a project called the Albany project, which is currently in progress in developing wave technology called ‘Carnegie CETO 6 Technology’. The Australian Renewable Energy Agency states that the project aims to demonstrate Carnegie’s CETO 6 wave energy technology off the coast of Albany since it has one of the most consistent wave energy resources across the world. Further it also describes that Carnegie’s 6th generation CETO wave energy unit (CETO 6), will be more efficient and deliver increased power generation compared to the CETO 5 units, which is the fifth generation. Upon completion of the project, the ambition of Carnegie and the government is that CETO 6 technology is commercialised in terms of the production of wave energy and be the forefront leader of wave technology.

The first business risk is that there is uncertainty in government funding. As Carnegie is heavily supported by government funds to run the project, the level and certainty of funding is contingent on objectives/milestones achieved throughout the duration of the project. This increases the inherent risk of the audit. As a result of the uncertainty in government funding, there is increased risk that the Research and Development Asset (Intellectual Property) may be incorrectly valued and misclassified. Furthermore, it was suggested that the effect of the $35 million write-down was material, given that the write-down was applied to Carnegie’s ‘most valuable asset, the intellectual property of its CETO technology”. This highlights significant risk to the auditor as the CETO 6 is a significant item on the balance sheet and any misstatements will have a material impact. Given the complexity in valuing the asset due to changes in research and development incentives, negative publicity regarding the declining profitability of the company, there may be a potential overstatement of the value of the asset on Carnegie’s Balance sheet. In terms of classification, the $35 million write down on intellectual property provides Carnegie’s management incentive to overstate intangibles. As a result, this presents a substantial audit risk as Carnegie may overcapitalise its research and development costs which may overstate the assets on Carnegie’s Balance Sheet and understate Carnegie’s expenses. Management may be incentivised to do this considering the negative publicity regarding the feasibility of the project.

The second business risk is that there is an increase in market competition of alternative renewable energy technologies. Considering the increasing cost competitiveness of alternative renewable energy technologies, particularly wind and solar, Carnegie’s profitability may decrease, and size of market share may fall. As a result of the increase in market competition, there is substantial risk for Property, Plant and Equipment (PPE) to be either incorrectly valued and whether it physically exists. An example of PPE in Carnegie’s Balance Sheet is the CETO 6 buoy used to test the CETO 6 technology. The CETO 6 compromises part of the PPE carrying balance and since PPE is a material account for Carnegie’s Balance Sheet, the auditor should investigate whether the PPE exists and whether they have been valued appropriately. This is because a substantial increase in PPE on Carnegie’s balance sheet indicates that realistically, the PPE should exist and that the auditor should investigate to confirm their existence. A substantial increase in PPE may occur because management may want to overstate the balance sheet in light of negative publicity.

Whilst both business risks will be analysed further, it should be briefly mentioning that there are inherent issues affecting the audit. For instance, the political nature of the federal funding and potential changes of government and tax laws means that there is a risk that government funding may not be guaranteed and that the amounts funded may be contingent as determined by the government and agreement. It was mentioned earlier in the main article that the project was being affected by proposed changes to the Federal Government's research and development tax incentive. This means that the inherent risks involved in auditing the value of the project increases due to changes in how the government will provide funding to Carnegie.