Deloitte helps hobbled
industry

Deloitte Australia has set up a task force to deal with one of
the worst sporting tragedies to hit the country this year – equine
influenza. Arvind Hickman speaks to thoroughbred
owner and task force leader Stephen Harvey about a tragedy that has
stopped a nation.

Horse racing, one of Australia’s favourite pastimes, is an
industry on its knees. At a time of the year when thousands of
thoroughbred enthusiasts usually flock to racecourses for
Australia’s Spring Carnival, several grandstands are empty and
gambling revenue has plummeted.

On 24 August, an outbreak of the equine influenza (EI) virus was
discovered at an animal quarantine station in the Sydney suburb of
Eastern Creek. It is the first time the virus has entered the
country and within a week it spread across the state of New South
Wales and southern parts of Queensland, forcing a 72-hour lock-down
of every horse-related activity in the country. Since then,
hundreds of horses have been hit with a bout of the flu.

Financial hit

In response to the disaster, Deloitte Australia has set up a team
of ten partners, who are able to draw upon more than 3,000
professionals, to tackle the financial repercussions of the EI
outbreak. The leader of the task force is Deloitte assurance and
advisory partner Stephen Harvey – a successful owner/breeder of
thoroughbreds, member of the Australian Racing Board and chairman
of the Controlling Body for Thoroughbred Racing in South Australia
(TRSA).

“Having lived and breathed the risk of it happening for the last
six years since I’ve been on the board [of the TRSA], this was
almost our worst nightmare, turning up when it did,” he says, while
adding that the racing industry directly or indirectly employs
160,000 people and contributes A$8 billion ($6.8 billion) annually
to Australia’s economy. “Some observers are estimating the impact
of EI will [remove] 15 to 50 percent [from the value of the
industry] in this year alone, which is an economic impact of in
excess of A$1.5 billion,” he says.

Although severe strains of EI are capable of killing foals, its
affect on mature horses is similar to the human flu. Harvey says
the real devastation is to the racing and other recreational
horse-related industries, which have ground to a halt in some
areas. “Revenue streams are substantially impacted as race meetings
are cancelled resulting in reduced totalisator revenue, which funds
the engine of racing through prize money,” he explains. “The
breeding industry is also hard hit as horse movement is banned or
restricted resulting in decreased revenue to studs and stallion
owners, while mare owners could lose out from future sale of
progeny.”

Gathering troops

To help assist the industry get back on its feet
financially, Harvey gathered Deloitte colleagues with racing
industry know-how, including audit partner Helen Hamilton-James,
who is heavily involved in equestrian events, Peter Forester, who
has done a lot of work for Racing NSW, and corporate reorganisation
partner David McCarthy. The team is largely composed of insolvency
and financial modelling experts who could manage cash flows in
times of crisis.

“We’ve got people who can sit down with owners of a stud and
[calculate] if you have stallions that are unable to serve, [we
look at] what that does to your income and cash flow, what it means
in relation to your commitments to your financiers and suppliers
and all that,” Harvey says. “That might end up with restructuring
borrowings, restructuring payments and doing it properly, and not
waiting for the last minute.”

This service is equally important to trainers, whose income is
dependent on the winnings of the horses they train. Sydney’s
premier stable at Royal Randwick Racecourse was hardest hit by the
virus, which had an impact on high-profile trainers such as Gai
Waterhouse and Bart Cummings. Deloitte’s other clients include
totalisator companies, industry controlling bodies, race clubs and
jockeys.

Counting the cost

Another level of expertise the firm offers is forensic accounting,
which could be used to help quantify losses if a
government-commissioned independent inquiry determines someone is
at fault. “There will be the issue down the track as to whether
anybody is responsible for this and there may be potential claims
against the government or other parties. Our forensic accounting
people are heavily involved with legal people… there will be the
need for our people to try and quantify the impact on various
individuals,” Harvey says.

In describing his team’s relief work, he adds: “It’s not like a
tsunami or an earthquake, there isn’t a spectacular visual look
[to] the disaster. Essentially what you see is horses with runny
noses or an empty racetrack. The issue will be very much about
looking at the financial impact of EI.”

At the time IAB went to press, Sydney’s lucrative 2007
Spring Carnival was on the brink of being cancelled due to EI.
However, the outbreak doesn’t appear likely to affect the Melbourne
Spring Carnival, which features Australia’s blue ribbon race – the
Melbourne Cup – in early November.

Deloitte warns the full extent of the disaster won’t be felt for
another five years when reduced foal numbers start depleting the
quality and quantity of racing stock and it becomes clear how the
strain will affect the fertility of prized stallions.