To Contact Us
to page back through Previous Editions click here Index is in right hand column

November 2009 Edition ----

We start off with a communication on Auditors from the Minister of Commerce Simon "where the US goes we go" Power. There apparently has been a communication from the European Union saying the consensus is that self regulation of auditors does not work and countries it trades with need to select another method of regulation, either regulation by the Government or regulation by an independent body. Australia apparently has chosen and implemented regulation by Government and even despite intentions to have NZ's commerce system fit in closely with that of Australia, Mr Power is choosing an "independent" body, namely what is presently called the Accounting Standards Review Board to administer this regulation.

The New Zealand experience is also that self-regulation is no good but we say that "independent" bodies which are appointed by the minister are worse. Collusion between politicians and the "independent" board members who the politicians have appointed to ignore accounting principles so as to allow certain corrupt practices is rife in this country. We relate, yet again, the two most disgusting of these instances that we know of.

The first concerns the 1990 Bank of New Zealand in which the allocation of revenue from two huge parcels of zero coupon bonds was deliberately mishandled to allow a profit of $100m to be reported where the true profit was near zero. The Government held a large majority of shares in the bank at the time. The Labour political party was in power at the time and an election was looming. Although they lost the election the cover-up might have saved more of the the Labour MPs and ministers from loosing their parliamentary seats. The National political party has presumably gone along with this because the people involved were primarily National people. The Finance Minister was told before the accounts were released that the Bank needed to be bailed out for a second time but the accounts were released without this fact being mentioned. It is clear that Ernst and Young's Senior Technical Officer, Elizabeth Hickey, who was overseeing the audit was assured by politicians of both parties that they would see her right if an unqualified audit was given which it was. Ms Hickey was appointed to the Securities Commission in 1992. Shortly afterward this independently appointed Commission took on the case of one of those parcels of zero coupon bonds, which was known as the "insurance policy". In May 1993 it issued a mammoth report declaring that that the 1990-profit statement of the Bank in their opinion did not present a true and fair view of the year's profit. It claimed that Ms Hickey did not get her reasoning right with respect to one of the parcels of zero coupon bonds and it was an "unfortunate mistake" that she did not pick up upon the over-crediting of interest earned with respect to the other. We reject both contentions utterly. With respect to the "insurance policy" she said the arrangement "might not now be acceptable" when commencing her audit, she rejected $27m of claimed income from the arrangement (offset by profit understatements invented by the audit partner) and then told the Commission (of which she was then a member) that the rejection was just something she had come up with and the Bank's treatment was perfectly acceptable as well. But she did not issue a minority opinion. Ms Hickey spent a record 11 years on the Securities Commission and last year was re-appointed onto it. She has now been made an adjunct Professor of Accounting at the University of Auckland Business School and is on the management board at the Institute of Chartered Accountants. There is no place in the profession for such a person.

Then we come to the Feltex Carpets case. The country clearly has some obsession with winning medals at the Olympic Games. Success there must clearly enhance satisfaction with the Government and make it more likely to be elected. NZ tends to have the largest team per capita at the games and generally does well in terms of medals per capita. But despite having a big team in Sydney in the year 2000 only one gold medal was earned. Australia had an Olympic "embarrassment" at the 1984 games when it failed to get a gold medal despite the Eastern Europe cheats not being present. It then threw plenty of money into an Institute of Sport and has done very well in terms of medals (for what it is worth) ever since. New Zealanders who skited to Australians in 1984 (we won 8) might have been got back at in 2000. Anyway it seems accountant and sharebroker Eion Edgar was appointed chairman of the games association for the build up for the 2004 games and was asked to investigate what he could come up with, radicle or otherwise, to get what would be regarded as a good haul of medals for the country. We assume he consulted certain of his contacts and came back with a proposal whereby if they promised to lay off scrutinising a public float of Feltex Carpets Ltd he should be able to achieve something. He would seem to have got the National Party agreeing to the deal although why they should do so we do not know although they do purport to represent his type of people. Probably as part of the deal he was given an honour the equivalent of a knighthood (recently upgraded to an actual knighthood) and appointed to the ACC board and made chairman of ACC's Investment Committee.He was chairman of Forsyth Barr who co-lead the Feltex offer. Well the Government had effective control of the Securities Commission. Various other bodies that might have taken legal action against the scheme such as the liquidators and the Shareholders Ass were seen to fall into line. A considerable number of shareholders are taking legal action but they are bogged down with peripheral issues for the moment at least. The medals came in with cycling to the fore and cycling is recognised as one of the easiest sports to fix if sufficient funds are available. The achievements in cycling by the NZ medal winners in 2004 were colossal. This and the coverup of misrepresented movements in Austalian carpet market size on page 37 of the Feltex Prospectus and of grossly unrealistic projections of a turnabout in Feltex's market share prove in existence of this olympic medals "project" beyond doubt. Such projects if successful (as they invariably are) have terrible consequenses for accountants who will not go along with them, but that is the accountant's duty.

The purported appraisal of the Feltex IPO after the company's collapse was undertaken for the Securities Commission by Kevin Simpkins, a former South African who presumably succeeded Elizabeth Hickey as Ernst and Young's Senior Technical Officer in the early 90s and who Mr Power we think has appointed as chairman of the ASRB and is presumably who he wants to be chief Audit regulator. Mr Simpkins was presumably in the audit office when the Olympics/Feltex project was launched. He was then appointed by the Government appointed Securities Commission to "handle" the Feltex case and now is being appointed chief audit regulator, we say in an attempt to keep the matter under wraps.

The ARSB of course came into existence as a result of the 1993 Securities Commission report into certain arrangements entered into by the Bank of New Zealand from 1988 which in part we told about above. A long serving early chairman of the ASRB was accounting supremo (as proclaimed by the ICANZ when it made him a life member) John Hagen. Mr Hagen was an accounting expert appointed by the defence in the High Court case Hedley v Kiwi where he failed to distinguish between a "kg of milk" and 19 kg of milk solids supplied at the rate of one kg per year. He was the ICANZs "accounting supremo" and latest life member in 2005 and has gone on to face a couple of charges under section 36A of the Financial Reporting Act arising from being a director of Feltex Carpets limited when its December 2005 half-year financial statements were produced. It would seem to have been important to establish that the "immunity" is only for the Feltex IPO and accounts up until that point of time. What we are saying is just that the ASRB is just an politicians play thing.

As part of his ramble on audit regulation Mr Power says that someone from the Companies Office has done a review of failed finance companies and found that only about 25% of them were audited by the big for accounting and audit firms. Although he does not say it we rather fear that Mr Power wants these big firms to come further to the fore. Not if we can help it, particularly with respect to Ernst and Young. We think they are rather responsible for the ineffectiveness of the ICANZ. The ICANZ are apparently still investigating the case against Gordon Fulton who gave an unqualified audit opinion to those December 2005 Feltex financial accounts. Interestingly he was taken off the Mighty River Power audit. Another current Ernst and Young partner and the New Zealand representative on the International Federation of Accountants board is Warren Allen. His assertion in item g of this document when he knew full well that the Securities Commission had found that the 1990 Bank of New Zealand profit statement, unqualifyingly audited by his firm, did not present a true and fair view. We say this firm is not fit to do any auditing.

Well there is a Kathmandu IPO under way. It has got some similarities to the Feltex one of May 2004. The vendors are a private equity conglomerate who would like to quit the lot. Various commentators have said the Feltex IPO should have been avoided because the vendors exited completely. Like Feltex also, a critical matter is what arrangements are there with the instigator of the enterprise or part of it. We are thinking here of Shaw Industries in the case of Feltex and Jan Cameron in the case of Kathmandu. As we understand it when buying a business it is legal and sensible to have an agreement whereby the vendor is prevented from competing with the business which is changing hands for a set period of time. The equity firm then takes advantage of this amnesty to build some sort of profitability record. But the protection might not be there for the post float owners. Apparently this restraint of trade by Cameron is still to run out. But she has been talking about her plans when it does run out and such talking too is supposed to be illegal under the agreement reached. But we say this no talk agreement is not in the public interest and should not be enforceable. Jan Cameron already has a network of stores under the Nood brand. They stock certain camping items. Nood is probably a little too stark but she no doubt has some other word up her sleeve to give a romantic flavour which can be employed at short notice. She knows the market and knows the suppliers. The Kathmandu brand probably has a little bit of a yesterday tinge to it. A great way to make money is to sell a business off and then have it come back to you at no cost.

The Kathmandu float is apparently aimed at institutional investors, which makes it a little different from the Feltex one, perhaps. Perhaps also the institutions will queue up like they did for the book-build of the crapped out Transrail in 2003. 50% of the value was gone within 6 months just like anyone with their eyes open would have suspected. We suspect some under the table commissions to the fund managers happened then. The Securities Commission got a little bit of the proceeds back. But if you took your funds out of the Institute in the meantime (perhaps in protest) then you did not see any of the recovered funds.

We are going to try and get a copy of the Kathmandu prospectus. To be fair however we have no reason to suspect that there is anything inappropriate in it.

Restricting the issue to institutions for a start might be a tactic to build up the demand. There might be just sufficient shares not taken up by the institutions to offer each private investor a “lucky quite exclusive” opportunity to participate.

Well Joan Withers is on the board of Television New Zealand now. The more we criticise her the more prestigious positions she gets. All in the public sector though. We believe this is an attempt to overpower any uncovering of what went on with the Feltex float. Well it won’t be successful as far as we are concerned. Being an executive or being on the board of a news media organisation allows one to influence what is published we believe, especially on matters about oneself. News about her is presumably coming as certain Feltex subscribers attempt to hold her responsible, at least in part, for their losses. We say that they have a very good case and can only hope that it will be competently presented.

We think Ms Withers was brought in to the Feltex board just prior to the IPO to win over the Mum and Dad investors because indications were that the institutions (other than the ACC of course) were not going to subscribe. Then they had to get her off because the board was going haywire. David Kirk came to the rescue with a "reason" for her to resign and is now on the board or Forsyth Barr for his troubles we think.

Advertising section

------------------------

Suitable Objectives

Register of Members

Members Forum - Topical
* open to all meantime:

Plenty of Opinion

Magazine Plans

Need an Accountant?
or Prepared to Change?

Users Forum
* have your say

Ready to Join?

Knowledge Tests
* being developed

What's Wrong with
the existing 
accounting body?

So called BNZ Audit
an extensive case study

 Visit our Advertising
page from 
Here