Hi, there are 3 study cases that I have attached through, each case they need us to read and identify the theme, issue and applying theory such as agency theory, legitimacy theory, stakeholder theory

Slater and Gordon

The Rise and Demise of Slater and Gordon

The company

In early 2015 Andrew Grech, Managing Director of Slater and Gordon, was at the peak of his professional success. Grech had come from a very modest working-class background to head up what was described as “the world’s biggest listed law firm” (Fyfe, 2016). The success of Grech was reflected in his earnings which in 2008 were $375,000 and by the end of 2017 had jumped to more than $866,000 per annum.

This was a far cry from the humble beginnings of Slater and Gordon in 1935 when the two founding partners, Bill Slater and Hugh Gordon, commenced the business working primarily on workers’ compensation cases in the offices of the Australian Railway Union. They soon developed a name for themselves in battling for the underdog.

Back in 2001, after changes to the Legal Professions Act allowing law firms to structure themselves as limited liability companies, Slater and Gordon incorporated their business to become Slater and Gordon Ltd. Prior to this, most law firms including Slater and Gordon, typically operated as partnerships. Throughout the years Slater and Gordon (SGH) had enjoyed several successes on very high-profile cases involving workers’ rights, negligence and product liability claims. These cases included long, drawn out battles against Australian and multinational companies such as British American Tobacco, BHP Billiton, CSR and James Hardie Industries just to name a few. Whilst these high-profile class actions were very positive for the firm’s brand and marketing they were said to provide ‘lumpy revenue’ (Shapiro and Eyers, 2015).

By 2005, SGH had put their ‘growth by acquisition’ strategy into high gear. Such was the extent of this strategy, coupled with a booming share market, SGH decided to float the company in 2007. By this time much of the SGH profits came from much smaller litigation cases predominantly in the areas of personal injury and workers’ compensation claims. This area of the practice accounted for approximately 65 per cent of the total revenue. The firm was indeed continuing to prosper. SGH was a household name in Australia. This was primarily due to a concentrated media campaign promoting their ‘No win, No fee’ business model. Under this type of agreement, the law firm took on a plaintiff’s case, and if unsuccessful, then no fee was charged to the client. Whilst this may seem attractive to the client, the underlying issues of billing and revenue recognition can be problematic for the firm. As the firm worked on individual cases, it increased its Work in Process (WIP) account and credit to Revenue.

Accounting challenges for professional services firms and billing include the need for considerable estimation, and at times, gazing into the crystal ball. This is further exacerbated as cases for personal injury and the like, can often take years to settle. (A similar example of problems with revenue recognition was seen in the administration of Knights Insolvency Administration, an accounting firm, which required a write-down of nearly $7million to Work in Progress in the 2005 financial year (Perret and Askew, 2005). After listing on the ASX just two years earlier, Knights Insolvency Administration itself became insolvent).

The applicable accounting standard AASB118 Revenue, in hindsight at least, appears to have allowed flexibility in the interpretation of the recognition of revenue.

Back to the Float

The float of Slater and Gordon Holdings Ltd in 2007 signalled warning signs to some potential investors surrounding conflicts of interest, particularly with respect to the company’s duty to act in the best interests of the shareholders. To this end, SGH included a specific clause in their prospectus:

“Lawyers have a primary duty to the courts and a secondary duty to their clients. These duties are paramount given the nature of the Company’s business as an Incorporated Legal Practice. There could be circumstances in which the lawyers of Slater & Gordon are required to act in accordance with these duties and contrary to other corporate responsibilities and against the interests of Shareholders or the short-term profitability of the Company.” (SGH Prospectus 2007, p9).

The above clause effectively meant that after the duty to the courts first, then to the clients, that a duty to shareholders would rank third. In May 2007 the $35 million capital raising by SGH made international business headlines. SGH was the first law firm in the world to list on a securities exchange. On the back of glowing forecasts from Managing Director, Grech, the market embraced the listing with the $1 shares opening at $1.32. SGH advised via its prospectus and presentations to the market that nearly $15.5 million of the capital raised would be used to fund an acquisition program together with increased advertising and promotion.

Over the next few years SGH continued with its acquisition strategy. Grech continued to be held out as a ‘market darling’ with investors happy and encouraged by the continual upward forecasts. Between the years of 2007-2011 SGH acquired in excess of twenty firms across Australia. In 2012 SGH commenced their foray into the United Kingdom where they acquired 7 law firms by the end of 2013 (Shapiro and Eyers, 2015). In 2013 SGH was the best performing stock in the top 200 in Australia.

The transformative deal

This insatiable hunger for growth however was to be the beginning of the end of their moment in the sun1. Whilst some analysts working quietly behind closed doors of various investment firms suspected some issues were brewing with the SGH accounts and forecasts (Fyfe, 2016), the company was on the cusp of launching its biggest acquisition yet – a firm by the name of Quindell, operating in the United Kingdom.

Quindell was a professional services firm essentially offering a one-stop shop for vehicle accident claims, and subsequently, personal injury claims. Prior to the April 2015 takeover, SGH undertook intense due diligence of Quindell’s operations, sending tens and tens of its Australian-based lawyers to the UK. A small army of auditors were also seconded for the project.

SGH was satisfied with its investigation of Quindell and subsequently on Monday 30th March made an announcement to the market. The deal, which Grech described as ‘transformative’ was to acquire a major part of Quindell Professional Services for $1.2 billion. The deal did prove to be transformative but not in the way SGH had envisioned. Grech and SGH convinced the market of the wisdom of the deal and had a successful capital raising of $890 million to fund the acquisition, which resulted in a market capitalisation catapulting SGH into the ASX100.

The key group of senior executives at SGH, known as the ‘gang of four’, all experienced significant growth in their own personal wealth, which on paper had soared to over $30 million each. Staff at SGH were not immune to the excitement and anticipation of further promised success. The majority all had faith in and trusted Grech to the extent where some staff even mortgaged their own homes to purchase shares in SGH.

But not all staff were so caught up in this perceived fast lane of fortunes. A number of senior staff who had been with SGH several years were not as star struck with the self-beliefs of the gang of four. However it appeared that there was no longer anyone at senior executive level that would stand up to Grech, let alone say “No”. The last person known to stand up to Grech, a former partner of the firm and subsequent director, left the company some years earlier.

But from the outside not all were convinced this was such a great deal for SGH and this was not limited to Australian observers and analysts. In response to the publication of a scathing report into Quindell written by a young analyst David Yu in April 2014, Dan McCrum of the Financial Times in the United Kingdom, raised several questions regarding the deal. He noted that there was to be a review into what was described as Quindell’s aggressive accounting policies by PwC. These questionable accounting policies, similarly to SGH, related to WIP and revenue recognition. Of particular interest to McCrum was the 53,000 Quindell cases of industrial deafness being taken on by SGH. These cases for personal injury damages were made against (past) employers for hearing damage sustained in the workplace, predominately manufacturing, industrial or construction related work environments. These types of cases are very lengthy coupled with significant challenges in establishing the extent of injury and ultimate liability of the employer. The firm recognised revenue on a 70 per cent success rate. Many advisors described these claims as dubious. The industry average for revenue recognition of legal cases was 40 per cent (Fyfe, 2016). Further issues associated with the Quindell acquisition were the legal reforms put in place by the UK government, which made the success of smaller personal injury cases much, much harder to achieve.

Just weeks after the SGH and Quindell deal announcement, SGH share price rose to near high of $8, giving the company a market value of $2.7 billion. But the old adage of ‘what goes up must come down’ held water where SGH is concerned. The decline was evident within a few short months.

Back in the UK, the PwC review into Quindell accounting practices was conducted into the December 31, 2013 accounts. The review revealed that former auditors KPMG, had failed in two areas of the audit, one being revenue recognition for legal services.2

By September 2015, ASIC were investigating SGH. The focus of their investigations was on not only the Quindell acquisition, but also, much closer to home, into their policies and valuation methods of revenue recognition and valuation of WIP.

November 2015 saw SGH share price fall by 50%. This reaction by the market was in response to an announcement by Grech at the 2015 AGM that no additional UK law reforms were forthcoming. Just six days later the UK government did in fact announce additional reforms which would result in further excluding lawyers access to previously high-volume compensation cases.

By the end of February 2016 SGH revealed a first-half loss of $958 million. Approximately $800 million related to the impairment of the Quindell-related goodwill arising from the $1.2 billion Quindell acquisition. In apparent response to ASIC’s investigations, another $118 million of WIP was also written off. SGH did its best to window-dress the write-down of the WIP, publicly claiming to adopt a more conservative approach to valuing WIP and the early adoption of AASB15 Revenue Recognition (Exhibit 1). The final 2016 accounts of SGH reported Net Cash from Operating Activities of ($104,244) million (Slater and Gordon Holdings Ltd, 2016).

In defence of the SGH acquisition of Quindell, Grech maintained that they had acquired only the professional and legal services divisions, these being the standout divisions of the company. However it was these divisions that were riddled with suspect accounting practices and declining profitability due to the UK government reforms. The UK had the highest level in Europe of compensation claims for injuries such as whiplash. The government’s aim was to curb, or reduce this inordinately high volume of litigious activity by raising the bar on establishing liability in such cases. These facts alone raise doubts as to the depth of the due diligence undertaken, and whether Grech had in fact read the ‘scathing’ report by Daniel Yu. McCrum of the Financial Times had also asked the question “Why would anyone buy this company outside of bankruptcy.” It was widely known that Quindell was definitely in serious decline.

The 2016 calendar year did not improve for SGH. In a market update the Chairman reported that the company had syndicated debt facilities of GBP375 million (equivalent to approximately $670,000,000 Australian dollars) and $90 million. Lenders such as Westpac and National Australia Bank were becoming increasingly nervous. By mid-November 2016 the share price of SGH had plummeted from its March 2015 high of $7.85, to just 31 cents. By this time, it was not only shareholders predicting doom and gloom for SGH, but lenders too. In March 2017 one of the syndicated lenders Barclays sold off its debt exposure of over $100 million in SGH for just 22 cents in the dollar. This was shortly after SGH had reported an interim loss of over $425 million (Thompson, 2017).

The start of 2017 revealed SGH shares to be nothing more than a penny stock. Negotiations between SGH and their primary lenders, Westpac and the National Australia Bank were seemingly at a stalemate. The banks could either send in the liquidator or become the owners of a law firm; neither of which appealed. By mid-year the banks subsequently agreed to sell off their debt to a hedge fund collective Anchorage Capital Group.

The rescue package

Anchorage and SGH then proceeded to negotiate a deal to save the company, the details of which were announced in late August 2017. SGH later announced a full year after tax loss for 2017 of $547 million (Exhibit 4)

Anchorage Capital is a private equity group. They are not new to Australia. Another recent high profile Australian acquisition was that of Dick Smith Electronics from Woolworths Limited. Private equity firms typically re-package and dress the acquired company as an attractive investment which they later list on the stock exchange.3 The deal with SGH, announced in late August 2017, would see Anchorage Capital take control of SGH, holding 95 per cent of the issued shares. The capital restructure was finalised in November and if agreed to by existing shareholders would result in the consolidation of a 1 share for 100 shares (see Exhibit 2). SGH’s 347.2 million issued shares, would be consolidated down to 35 million. With the share price (prior to the restructure) trading at approximately 35 cents, the effect of the restructure would render their value to around 0.3 cents. The reconstruction also saw many of SGH senior executive’s wealth plunge. Grech whose portfolio peaked at approximately $50 million was, after the reconstruction valued at a mere $180,000 or so.

Anchorage agreed to remain with SGH for at least three years. As part of the agreement, the Board was also spilled, and new directors, chief financial officer and chief executive officer were appointed.

Bob Wilson – a shareholder

Bob thought of himself as a reasonably astute investor and was initially very optimistic about the prospects for SGH. Bob’s son, as a result of an accident, was severely disabled and Bob managed his son’s modest investments with the aim of providing him with long term financial security. In early 2015 shortly after the announcement of the ‘transformative’ deal, Bob purchased shares in SGH. He was confident as to the wisdom of the investment, as, after all, they were the world’s biggest law firm. He also believed in the firm’s history of standing up for the little guy. However, by November 2015, Bob, like many others, was having doubts about his share investment in SGH. So, on a November morning in 2015 Bob decided to attend the SGH Annual General Meeting. Managing Director, Grech, once again managed to woo the crowd, confidently advising the forum that he estimated group revenue to be in excess of $1 billion for the financial year ending 30 June 2016. Buoyed by Grech’s presentation, Wilson purchased several thousand additional shares in the few days following the AGM.

Unfortunately for Bob, and his son, a week after the AGM, and Grech’s positive outlook for SGH, damaging announcements relating to the UK arm of the business saw the share price fall by 50 per cent. Mid December, only weeks later, SGH revised their profit forecasts on a massive scale. So much so, in February the firm declared a $958 million loss for the half year ending 31 December 2015. Bob could not believe this course of events and the staggering hit the share price had taken. Surely the managers or directors of SGH should have seen this coming?

Later in 2016 Wilson had to make another decision regarding his share-holding in SGH. Maurice Blackburn, a long-time combatant competitor of SGH, was bringing a class action against SGH on behalf of shareholders. The irony, that it was indeed Maurice Blackburn bringing the action, was not lost on Bob. The action Maurice Blackburn commenced was a class action against Slater & Gordon Holdings Ltd on behalf of the Applicant, Matthew Hall, and all persons who acquired an interest in fully paid ordinary SGH shares between 30 March 2015 and 24 February 2016 (Hall Class Action) (Maurice Blackburn)

In response, SGH advised the market that if the Maurice Blackburn class action was successful, the company would not have assets to settle the claim. SGH’s now auditors, Ernst & Young, expressed concern in the 2017 audit report as to SGH’s ability to remain a going concern (Exhibit 3). Bob was frustrated with this possible outcome, given where shareholders rank in a winding up. As further details emerged, Bob realised that if shareholders did not vote in favour of the Anchorage bailout, the only option was to wind up the company. Reluctantly he, like the majority of shareholders, had no other choice but to vote in favour of the proposal and see their investment reduced to one hundredth of its value.

After the events of December 2017, Bob recalls the clause added to the initial prospectus. With the benefit of hindsight, Bob now questions whether this ‘conflict of interest’ as he sees it, could have ever worked out any differently. Bob’s last hope of any financial compensation lies with two legal firms, Maurice Blackburn and Johnson Winter and Slattery. These firms have launched class actions on behalf of shareholders, against SGH’s former auditors Pitcher Partners. Maurice Blackburn alleges that in the 2015 financial statements of SGH assets relating the Quindell acquisition were overstated by more than $700 million. The firm further alleges that by signing off on these statements, Pitcher Partners misled shareholders and should be liable. The action brought by Johnson Winter and Slattery alleges that WIP was overstated by more than $130 million in the years 2014 and 2015 and should not have been signed off by Pitcher Partners. Pitcher Partners are defending the matters.

Jess Lentini – an employee

Shortly after graduating with a bachelor’s in commerce/law, majoring in accounting, Jess was successful in securing a graduate position with SGH. Commencing in early 2013, Jess was very excited and enthusiastic about her new role where she could utilise both her accounting and law qualifications, and with such a large and well-known company.

As a graduate, Jess was rotated through many different departments within the company. It was not until she was in the accounting department that she started to have doubts about some of the accounting practices within the organisation. Her main concern was regarding the ASIC investigation and the major write-down of WIP. During her time at university Jess had studied AASB118 Revenue. She could not understand how the adoption of AASB15 Revenue Recognition could have such an impact on the valuation of WIP. Jess recalls the excitement around the office when the ‘transformative deal’ was announced. Yet in just over twelve months the impairment losses relating to the goodwill of the acquisition have crippled the firm. How could Slater and Gordon’s fortunes have reversed so quickly?

In her relatively short time at SGH, Jess had experienced a complete change in the culture of the firm. There seemed to be a divide between many of the senior lawyers and others based on how many shares they owned and their new individual net worth. The pressure on staff to produce had also increased dramatically with lawyers and staff seen as purely revenue generators. Staff were managed by spreadsheet. Colleagues had commented to Jess that subsequent to the float, there had been a big increase in staff turnover across all levels of the firm. Included in the staff turnover more recently has been the Chief Financial Officer (CFO). When the initial agreement was reached with Anchorage Capital, and the Board was to be spilled, this also included the departure of Bryce Houghton. Houghton had been the CFO since only late November 2015 when his predecessor Wayne Brown stepped down from the role after eleven years. Houghton had come from another listed company whose core business was also in the provision of services, Navitas Ltd. At the time of his appointment he was highly regarded for his technical accounting skills. In September 2017 Belinda Nuficora became the new CFO. Jess particularly liked Belinda. However, she too has left the company and as of the end of August 2018 her replacement had not been announced. For such a senior and critical role in an organisation there seems to be little stability. Also added to this appearance of instability is the change in auditors from Pitcher Partners to Ernst & Young. This shift in corporate culture appears to have tarnished the earlier image of a firm that was willing to both challenge the law and act for the underdog.

Jess was also troubled about the nature of their work at the firm. Were they merely profiting from others’ misfortunes? Her close group of friends had commented that she worked for ambulance chasers, or more accurately, millionaire ambulance chasers. After the recent events of December 2017 and the share consolidation, Jess wonders whether Anchorage Capital Group are in fact the real ambulance chasers.

References

Ferguson, A, (2017), ‘Hedge funds to take control of Slater and Gordon’, The Age, 31 August, https://www.smh.com.au/business/markets/hedge-funds-to-take-control-of-slater--gordon-20170831-gy82cj.html

Fyfe, M, (2016), ‘The Undoing of Slater and Gordon, Sydney Morning Herald, 24 June, https://www.smh.com.au › Lifestyle › Good Weekend

Han, M., (2017), ‘Pitcher Partners dragged into Slater & Gordon class action’, The Australian Financial Review, 14th November.

Han, M., (2018), ‘Pitcher Partners sued over Slater & Gordon audits’, The Australian Financial Review, 12th August.

McCrum, D., (2015), Dear Slater and Gordon Shareholders, Alphaville, 30 March, https://ftalphaville.ft.com/2015/03/30/2125246/dear-slater-gordon-shareholders/

Perret, J and Askew, K, (2005), ‘Writedowns Tarnish Knight’s Insolvency Armour’, The Age, 15 April

Shapiro, J and Eyers, J, (2015), ‘Slater and Gordon: The Millionaire Ambulance Chasers’, Australian Financial Review, 4th July.

Shoaib, A., (2018), KPMG fined £4.5m over Quindell audit misconduct, 11th June, https://www.accountancyage.com/author/aliashoaib/

Slater and Gordon Holdings Ltd, (2007), Prospectus, https://media.slatergordon.com.au/prospectus.pdf.

Thompson, P, Macdonald, A and Moullakis, J, (2017), ‘Barclay’s offloads Slater and Gordon Debt’, Australian Financial Review, 10 March.

Vaz, J., 2016, How private equity won while other Dick Smith investors got burnt’, The Conversation, January 6.

Exhibits

1. ASX Announcement February 2016

2. ASIC Consolidation Notice

3. EY Audit report 2017

4. Key financial data

Exhibit 1: ASX Announcement

29 February 2016

Market Update

Slater and Gordon Ltd (SGH) notes ASIC's media release of today which is attached to this announcement and available at: http://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-050mr-asic-notes­ slater-and-gordons-decision-to-reduce-asset-values/

ENDS

Slater and Gordon Limited. ABN 93 097 297 400

ASIC NOTES SLATER AND GORDON'S DECISION TO REDUCE ASSET VALUES

ASIC today noted the decision by Slater and Gordon Limited (S+G) to reduce asset values in its financial rep01i for the half year ended 31 December 2015.

ASIC also noted S+G's earlier decision to reclassify a portion of its work in progress (WIP) and disbursement assets as non-current in its financial rep01i for the year ended 30 June 2015.

ASIC had made inquiries of S+G in relation to its financial report for the year ended 30 June 2014 and had subsequently raised questions in relation to the financial report for the year ended 30 June 2015.

ASIC's inquiries mainly concerned the recoverable amount of goodwill attributable to the company's Australian and UK businesses, the recognition of fee revenue and related WIP, provisioning against debtors and disbursement assets, and the basis for classifying WIP and disbursement assets as current assets.

In its financial report for the half-year ended 31 December 2015, S+G has:

• Impaired goodwill from the May 2015 acquisition of the Slater Gordon Solutions business in the UK;

• Impaired goodwill arising from various acquisitions of legal services businesses in the UK and Australia;

• Reduced the value of WIP on the adoption of accounting standard AASB 15 Revenue ji·om Contracts -with Customers; and

• Increased its provisions against debtor and disbursement assets.

Further details on these matters are provided in the company's ASX announcement and financial report.

ASIC's inquiries on revenue recognition and WIP focussed on the appropriateness of accounting policies adopted and the testing ofWIP estimates and assumptions against historical data. Given S+G's transition to AASB 15, ASIC has not approved or disapproved ofS+G's use of the percentage of completion basis of accounting for fee revenue under accounting standard AASB 118 Revenue in its previous financial reports.

ASIC has now discontinued its inquiries in relation to S+G's financial reports for the years ended 30 June 2014 and 30 June 2015.

ASIC proactively reviews 340 financial reports of listed entities and other public interest entities each year. As a part of these routine reviews, S+G's financial reports for the half year ended 31 December 2015 and subsequent reporting periods may be selected for review in the future.

ASIC's financial reporting surveillance program continues to focus on impairment ofnon­ financial assets, values attributed to financial assets, and the appropriate recognition of revenue.

Exhibit 2: Notification of Consolidation/Split

Entity name

SLATER & GORDON LIMITED

Applicable security for the reorganisation

SGH ORDINARY FULLY PAID

Announcement Type

New Announcement

Date of this announcement

Monday December 4, 2017

Reorganisation type

Security consolidation

Effective Date

Friday December 8, 2017

Record Date

Monday December 11, 2017

Issue Date

Monday December 18, 2017

Additional Information

The number shown on issue after reorganisation accommodates fractional rounding up to the next whole number.

Refer to below for full details of the announcement

Part 1 - Entity and announcement details

1. 1. *Name of +Entity

SLATER & GORDON LIMITED

1. 1. *Registered Number Type

ACN

1. 1. *ASX issuer code

SGH

1. 1. *The announcement is

New announcement

Registration Number

097297400

1. 1. *Date of this announcement

Monday December 4, 2017

1. 1. *Securities affected by the reorganisation

SGH ORDINARY FULLY PAID

Part 2 - Approvals

1. 1. *Are any of the below approvals required for the reorganisation before business day O of the timetable?

• Security holder approval

• Court approval

• Lodgement of court order with +ASIC

• ACCC approval

• FIRS approval

• Another approval/condition external to the entity required to be given/met before business day 0 of the timetable for the reorganisation.

Yes

1. 1. Approvals

Approval/Condition

+Security holder approval

Comments

Date for determination Is the date estimated

Wednesday or actual?

**Approval received/condition met?

[Select...]

Part 3 - Reorganisation timetable and details

1. 1. *+Record date

Monday December 11, 2017

1. 1. Date of +security holder meeting

Wednesday December 6, 2017

1. 1. Last day for trading in the pre-re-organised +securities

Thursday December 7, 2017

1. 1. *Effective date. Trading in the re-organised securities commences on a +deferred settlement basis. If the +entity's securities are suspended from trading during this period there will be no

+deferred settlement trading however ASX still captures this date.

Friday December 8, 2017

1. 1. Record date

Monday December 11, 2017

1. 1. First day for +entity to send notices to +security holders of the change in the number of

+securities they hold. First day for +entity to register +securities on a post-reorganised basis

Tuesday December 12, 2017

2 / 3

1. 1. *+Issue date. +Deferred settlement market ends. Last day for +entity to send notices to

+security holder of the change in the number of +securities they hold. Last day for +entity to register +securities on a post-reorganised basis

Monday December 18, 2017

1. 1. Trading starts on a normal T+2 basis

Tuesday December 19, 2017

1. 1. First settlement of trades conducted on a +deferred settlement basis and on a normal T+2 basis

Thursday December 21, 2017

Part 4 - Reorganisation type and details

4.1 *The reorganisation is

+Security consolidation

4.1a *Consolidation ratio: the +securities will be consolidated on the basis that every

100

(pre-consolidation) +securities will be consolidated into

1

(post-consolidation) +security (lies).

4.2 *Scrip fraction rounding

Fractions rounded up to the next whole number

Part 5 - +Securities on issue before and after reorganisation

5.1 *+Securities on issue before and after the reorganisation

*ASX +Security Code

SGH

Quoted/unquoted

Quoted

*ASX +Security Description

ORDINARY FULLY PAID

Number on issue before reorganisation 347,245,601

Number on issue after Estimate/Actual reorganisation Estimated 3,476,483

1. 1. Further information relating to the reorganisation

1. 1. Additional information for inclusion in the Announcement Summary

The number shown on issue after reorganisation accommodates fractional rounding up to the next whole number.

3 / 3

Exhibit 3:

Report on the Audit of the Financial Report

We have audited the financial report of Slater and Gordon Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2017, the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors' declaration.

In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including:

1. 1. 1. giving a true and fair view of the consolidated financial position of the Group as at 30 June 2017 and of its consolidated financial performance for the year ended on that date; and

1. 1. 1. complying with Australian Accounting Standards and the Corporations Regulations 2001.

We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor's Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor

independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board's APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Without qualifying our opinion, we draw attention to Note 1.1 in the financial report which indicates that the consolidated entity incurred a net loss after tax of $546.8 million, negative net cash flow from operating activities of $39.1 million and, as at 30 June 2017 the Group's total liabilities exceeded its total assets by $248.8 million. The note also details that the Group's Syndicated Facility Agreement is fully drawn, with $450.2 million of the drawings repayable in May 2018 in accordance with the agreement.

Slater and Gordon Limited I Annual Report 2017 I 89

Note 1.1 describes the conditions that raise uncertainty regarding the consolidated entity's ability to continue as a going concern. It details uncertainties relating to cash flows which will not be sufficient to repay a portion of the Group's consolidated entity's borrowing facilities of $450.2 million due in May 2018, or earlier, if that was required. It also details that the Group has reached agreement with its lenders to provide additional liquidity support required for it to remain able to pay debts as and when they fall due through to the proposed date of the recapitalisation of the Group and also details the consolidated entity's reliance on the recapitalisation and the ongoing support of its lenders to continue as a going concern.

Note 1.1 references Note 5.2 and Note 8 that detail the recapitalisation agreement entered into by the Group with its lenders and the settlement of shareholder class actions that both remain subject to conditions precedent and approvals as detailed in Note 5.2 and Note 8.

These conditions along with other matters as set forth in Note 1.1 indicate the existence of material uncertainties that may cast significant doubt about the consolidated entity's ability to continue as a going concern and therefore, whether the consolidated entity may be unable to realise its assets and discharge its liabilities in the normal course of business. The financial report does not include any adjustments relating to the recoverability and classification of recorded asset amounts or to the amounts and classification of liabilities that might be necessary should the consolidated entity not continue as a going concern.

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. In addition to the matter described in the Material Uncertainty Related to Going Concern section, we have determined the matters described below to be the key audit matters to be communicated in our report.

We have fulfilled the responsibilities described in the Auditor's Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report.

Carrying Value of Goodwill and Other Indefinite Life Intangible Assets and Associated Impairment

Why Significant

The Group is required to annually test the carrying value of goodwill and other intangible assets with an indefinite life for impairment.

Disclosures about goodwill and intangible assets are included in Note 4.1 to the financial report.

How our audit addressed the key audit matter

Our procedures included the following:

► Considered whether the methodology used in preparing the value-in-use model and fair value less costs of disposals calculations used by the Group to test for impairment meets the requirements of Australian Accounting Standard AASB 136 Impairment of Assets.

90 I Slater and Gordon Limited I Annual Report 2017

Why Significant

As disclosed in Note 4.1.3 and Note 4.1.4, the ►

Directors' assessment of goodwill and other

identifiable intangible assets for impairment, involves critical accounting estimates and assumptions, specifically concerning future discounted cash flows.

►

These estimates and assumptions are impacted by future performance, market and economic conditions in both Australia and the United Kingdom.

An impairment charge of $361.2 million was

recorded against these assets in the year ended ►

30 June 2017.

►

Given the estimates and assumptions involved in

the impairment test, the recent performance of the Group and the magnitude of impairment charges taken in the past, this was considered to be a key audit matter.

How our audit addressed the key audit matter

Tested whether the impairment models used were mathematically accurate.

Assessed whether the cash flows used in the impairment models accurately reflected budgets approved by the Board at 31 December 2016 and prepared by the Group and submitted to representatives of its lenders and the forecast financial information provided by the Group to its lenders to support the Recapitalisation Agreement at 30 June 2017.

Considered the historical reliability of the Group's cash flow forecasting process.

Considered the impact of a range of assumption sensitivities on the impairment models.

Assessed the external inputs and assumptions within the cash flow forecasting models by comparing them to assumptions and estimates used elsewhere in the preparation of the financial report and benchmarked them against market observable external data.

Considered the adequacy of the financial report disclosures contained in Note 4.1, Note 4.1.3 and Note 4.1.4, in particular those regarding assumptions.

As impairment testing relies upon business valuation principles, we involved our valuation specialists to assist in the work outlined above where we considered such expertise was required.

Work in Progress (WIP) and Associated Revenue Recognition

Why Significant

WIP is significant to the Group, comprising 45% of total assets and movements are included in

How our audit addressed the key audit matter

Our procedures included the following:

revenue recognised for the year. The Group's ►

disclosures regarding WIP and the associated

revenue recognised are included in Note 3.1 and Note 4.3 to the financial report. ►

Considered whether the Groups' accounting policy for complied with Australian Accounting Standards, in particular AASB15 Revenue.

Obtained details of WIP recognised for each revenue stream at balance date and applied statistical sampling techniques to select individual legal matters ("cases") for testing.

Slater and Gordon Limited I Annual Report 2017 I 91

Why Significant

The Directors' determination of the carrying ►

value of WIP and its associated revenue streams

involves significant judgement, data analysis and complexity and accordingly has been considered a key audit matter.

The Group considers each revenue stream in ►

isolation and makes judgements in relation to:

► The identification of a contract ►

► The identification of the performance obligations as part or withinacontract ►

► Determination of the transaction price, particularly for revenue streams accounted under a "no win no fee" basis

► Allocation of the transaction price

► Recognition of revenue when a performance obligation is satisfied ►

To validate the judgements made in relation to WIP, the Group develops a series of data models based on historical information over a two year period. Data included in these models provides a methodological approach to determine the valuation status.

Accordingly, this has been considered a key audit matter.

How our audit addressed the key audit matter Obtained evidence to support the case status that had been allocated to each case file by the responsible professional. Evidence obtained was assessed against the coding guidelines of the Group.

Assessed the data that supports the judgements noted that were included in the data models.

Assessed the movements in the cases profile including changes in status and ageing.

Involved our data quality specialists to assess the accuracy and integrity of both the data (historical information over a two year period) and the workings of the models. This was completed using data analytic procedures to re­ perform, re-calculate and validate key calculations.

Considered the adequacy of the financial report disclosures contained in Note 3.1 and Note 4.3, in particular those regarding assumptions to which the outcome of the data models is most sensitive.

Recoverability of Trade Receivables and Disbursements and Associated Provisioning

Why Significant

Trade receivables and disbursements are significant to the Group, comprising 43% of total assets, net of provisions for impairment.

The recoverability of trade receivables and disbursements is a highly subjective area due to the nature of the legal case profile and the level of judgement applied by the Group in determining provisions. Accordingly, this has been considered a key audit matter.

How our audit addressed the key audit matter

Our procedures included the following:

► We assessed the assumptions used to calculate the trade receivables and disbursements provisions for impairment.

► We performed analyses of ageing of receivables and disbursements, collection history, future collections strategies and assessment of significant overdue individual trade receivables and disbursements.

92. ISlater and Gordon limited I Annual Report 2017

Litigation Matters and Subsequent Events

Why Significant

The Group is and has been subject to a number of Shareholder Class Actions and other legal proceedings. These matters are detailed in Note 7.4, Note 7. 5 and Note 8.1.

These matters are subject to a number of pending approvals and the settlement of the Class Action matters are a condition precedent of the proposed debt restructure as detailed in Note 8.1.

Accordingly, our consideration of these matters and the related disclosures was considered a key audit matter.

How our audit addressed the key audit matter

Our procedures included the following:

► Obtained all proposed settlement and claim documentation in relation to the Class Action and other legal proceedings.

► Met with the Group's internal General Counsel in relation to the status of the legal proceedings.

► Considered the conditions noted in Note 7.4, Note 7.5 and Note 8.1 for factual accuracy.

Considered the adequacy of the financial report disclosures contained in Note 7.4, Note 7.5 and Note 8.1.

The directors are responsible for the other information. The other information comprises the information included in the Company's 2017 Annual Report other than the financial report and our auditor's report thereon. We obtained the Directors' Report that is to be included in the Annual Report, prior to the date of this auditor's report, and we expect to obtain the remaining sections of the Annual Report after the date of this auditor's report.

Our opinion on the financial report does not cover the other information and we do not and will not express any form of assurance conclusion thereon.

In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated.

If, based on the work we have performed on the other information obtained prior to the date of th is auditor's report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error.

Slater and Gordon Limited I Annual Report 2017 I 93

In preparing the financial report, the directors are responsible for assessing the Group's ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report.

As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.

• Conclude on the appropriateness of the directors' use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the Group to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.

94 I Slater and Gordon limited I Annual Report 2017

We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on the Audit of the Remuneration Report

We have audited the Remuneration Report included in pages 18 to 35 of the directors' report for the year ended 30 June 2017.

In our opinion, the Remuneration Report of Slater and Gordon Limited for the year ended 30 June 2017, complies with section 300A of the Corporations Act 2001.

The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.

Ernst & Young

Christopher George Partner

Melbourne

31 August 2017

;

Slater and Gordon Limited I Annual Report 2017 I 95

Exhibit 4:

AND CONTROLLED ENTITIES

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF

SLATER AND GORDON LIMITED

Report on the Financial Report

We have audited the accompanying financial report of Slater and Gordon Limited and controlled entities, which comprises the consolidated statement of financial position as at 30 June 2015, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors' declaration of the consolidated entity comprising the company and the entities it controlled at the year's end or from time to time during the financial year.

The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards.

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company's preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

An independent Victorian Partnership ABN 27 975 255 196

Level 19, 15 William Street, l\tlelbour11e VIC 3000

liability limited by a scheme apprnvecl under Profess1omrl Standards Legislation

Pitcher Partners is an association of independent firms Melbourne I Sydney I Perth I Adelaide I Brisbane I Newcastle An independent member of Baker Tilly International

Annual Report 2015 Slater and Gordon Limited 137

AND CONTROLLED ENTITIES

INDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF

SLATER AND GORDON LIMITED

Independence

In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001.

Opinion

In our opinion:

1. the financial report of Slater and Gordon Limited and controlled entities is in accordance with the

Corporations Act 2001, including:

1. 1. giving a true and fair view of the consolidated entity's financial position as at 30 June 2015 and of its performance for the year ended on that date; and

   2. complying with Australian Accounting Standards and the Corporations Regulations 2001; and

1. the consolidated financial report also complies with International Financial Reporting Standards as disclosed in Note 1.

We have audited the Remuneration Report included in pages 35 to 63 of the directors' report for the year ended 30 June 2015. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.

Opinion

In our opinion, the Remuneration Report of Slater and Gordon Limited and controlled entities for the year ended complies with section 300A of the Corporations Act 2001.

AR FITZPATRICK

Partner

29 September 2015

PITCHER PARTNERS

Melbourne

An independent Victorian Partnership ABN 27 975 255 196

Level 19, 15 William Street, Melbourne VIC 3000

Liability limited by a scheme approved under Professional Standards Legislation

Pitcher Partners is an association of independent firms Melbourne I Sydney I Perth I Adelaide I Brisbane I Newcastle An independent member of Baker Tilly International

138 Slater and Gordon Limited Annual Report 2015

1 A brief period of time where one enjoys success or accolades.

2In 2018 KPMG were subsequently fined GBP4.5 million by the Financial Reporting Council for failures of the audit.

3Such was the case with Dick Smith (DSE). Anchorage acquired DSE from Woolworths Limited for approximately $115 million, and later raised approximately $520 million from the IPO of Dick Smith Electronics Limited (Vaz, 2016).

10