without prejudice

WITHOUT PREJUDICE

Folks,

It was with dismay that I read the Audit Report this morning supplied by Somes and Cooke, CVI's auditors in CVI's Annual Accounts.

Disclosure first : I have been a CFO for listed companies, a Director and finance manager for BHP entities and presently MD and CEO of an ASX listed company.

I am a FCPA and have an accounting degree and have vast experience with audits of listed entities and with auditors. I have never been an auditor.

I was a holder of CVI shares and options and bought and held these because I believed what the CEO of CVI was telling the market. I no longer hold.

Firstly I can only assume not everyone who reads the CVI threads fully understands the auditors’ role and what his/her report actually means. Forgive me if I am telling you to suck eggs.

The auditor is appointed to report to the SHAREHOLDERS, not management, that the books, controls (to a certain degree), and solvency of the company are sound. What we call "true and correct" under Australian Accounting Standards.

An auditor should never be criticised by shareholders for giving what is called a "Qualified Report". Usually if there is a qualification it is quite a small issue, but nevertheless unusual. A qualified report means the auditor has not received enough information, or is worried about the information given to stop them saying the accounts are "true and correct". In crude layman's terms, it is a disclaimer by the auditor saying DYOR on the issues raised by myself, the auditor, that I can't justify!

Highly unusual but it can happen for legitimate reasons.

The vast majority of Audit Reports are never qualified, because if there are issues then management and the company auditors get together and work out what information is needed to satisfy the auditor to issue an unqualified statement...ie: the accounts, in the auditors opinion, and having regard to the information supplied by the company, are true and correct.

This has not happened with CVI. The SHAREHOLDERS of CVI have received, in my opinion and without prejudice, a heavily qualified report on certain transactions and the solvency of CVI. I recommend all shareholders read carefully the audit report and if you have questions contact the auditor, not the company.

The transactions in question are centered on the issues that Raks, Shadders, and many others working behind the scenes have had issue with. For example, where has the money gone and what was received for the money.

Again, in my opinion and without prejudice, CVI has a lot to answer for regarding these transactions. It is totally unacceptable, again in my opinion and without prejudice, that the company's auditors were not satisfied that the investments made could not be audited to the satisfaction of the auditor, causing the auditor to issue a qualified report. Again, in layman's term, this means the auditor could not audit the transaction or carry out the necessary carrying value tests. A carrying value test involves the auditor being satisfied that the investment would lead to future value to satisfy the auditor that the investment should remain on the balance sheet.

It appears, in my opinion and without prejudice, CVI has decided to write off these investments rather than justify the transactions to cause them to be capitalised on the Balance Sheet. To capitalise these "investments" would mean that management would need to convince the auditors that they have future value. The auditors have stated that they were unable to obtain all the information and explanations about these transactions.

Question: why were they written off rather than everything be disclosed to the auditor? There may be a reason for this, however it is certainly not the norm, and certainly the value of the transactions were very large and should have been fully disclosed to the auditors.

If you own leases it is normal to carry forward expenditure until a time that it is capitalised (because the project is economic) or written off (because drilling or whatever means the project is uneconomic).

I have never seen an exploration company, like CVI, be willing to write off all investments rather than capitalise them on the Balance Sheet. Something, in my opinion and without prejudice, is very, very wrong here.

I also note the auditor's opinion on solvency. For exploration companies it is the norm for auditors to ask management what their plans are for the next 12 months, to provide budgets for those plans, and how those budgets will be funded.

It is the norm for exploration companies, in my opinion and without prejudice, to prove to the auditors that the following 12 months plans can be funded. Exploration companies usually live with an amount of money to "get by" with...they don't tend to have excess funds because that is a waste of opportunity cost to shareholders, however they do have, in my opinion and without prejudice, plans and auditable expectations to be able to fund these plans.

This has not happened with CVI, and causes me as much angst as the fact, in my opinion and without prejudice, that the very transactions that saw huge funds paid to "third" parties could not be verified to cause them to be capitalised on the Balance Sheet.

It is much easier, in my opinion and without prejudice, to write these investments off against the profit and loss than to explain to the auditors the unexplainable.

The above should cause great concern to shareholders of the viability of the company, and the arm's length nature of the investments made by CVI.

All of the above was written based on my opinion. I suggest concerned shareholders contact CVI's auditors who prepared their report as your representative.

Cheers guys, Tony.