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Dec 2003 Edition----to page back through Previous Editions click here

It has been a truly momentous year for those accountants and executives implicated in the 1990 Bank of New Zealand profit overstatement. In general they have climbed higher and higher as they seek to protect one another from fallout but some significant knocks have been incurred.

Let’s start with the latest happenings and then do a review of the year.

First, its official, an Ernst and Young accountant has finally been found guilty of an accounting offense suggesting complicity with misdeeds of a client organisation and indeed has been given a rare slap with a wet bus ticket. Its way past time but at least this firm is the first to receive treatment of such magnitude, which is consistent with their portrayal as the Number One culprits on this web site.

It was Kenneth William Fergus of E&Y who copped it when he failed to take adequate action when the PPCS meat company he was auditing gave a bank guarantee to help finance a secret purchase of shares in another meat company and reported in its accounts for the next 4 years “Contingencies ... Bank guarantees - nil” as well as some related inaccuracies. It seems Mr Fergus knew what was going on but he argues that the bank was holding shares which covered the amount of the loan so there wasn’t any real liability. Seems he forgot what a contingency was or forgot that the value of such shares was volatile and could easily fall below the loan amount, which in fact happened along the way, not that that changed his attitude. These E&Y accountants are wide awake; especially when something controversial and of national significance is going on. Their mates will be quizzing them about what is going on even if the auditor directly responsible is not excited by the happenings. But they don’t want to lose accounts and so want to keep their reputation with company directorates as the lenient auditors, so they pretend to have drifted off to sleep a little and so never really face the music.

But it continues to be the degree to which the Institute of Chartered Accountants of New Zealand supports this behaviour that is disturbing. The Professional Conduct committee put up 8 counts of breaches of professional ethics. The Disciplinary Tribunal managed to whittle that down to 5 which it declared proven to some degree. The findings can be downloaded from > here.

Let us summarise the findings:

Count (1) found him guilty of “accepting” an invalid disclosure but the tribunal found fault with the relevant standard, SAAP 15, which mitigated the guilt. Presumably the Tribunal did not review the standard before it was issued.

The same reservation applied to count(ii) which found him guilty of failing to “encourage” PPCS to follow proper practice. A lot of good encouraging would do. An auditor will invariably need to insist in matters of willful breach. The Tribunal said that they didn’t think encouraging would have achieved anything as if someone might have thought otherwise. They need to get real.

Count (iii) was not found proven which is a real let-down. The Tribunal found that Mr Fergus was under no obligation to qualify his audit report because the matter was not significant. Wrongly claiming that no bank guarantees were given could have huge consequences in terms of what suspected activities of the company were perceived to be possible and hence whether suspicions remained credible and were acted upon. Huge action can follow live suspicions. Business people and the public would not expect an auditor to allow a complete falsehood to go unchallenged. It was not an inaccuracy of degree. It was a totally false statement which needed correction.

Count (iv) which relates to not making adequate enquiries was considered proven. Ironically being guilty of this charge is actually in Mr Fergus’s favour, something that he probably doesn’t deserve. He probably knew everything that was going on alright. It was the official recording of the enquiries that did not happen. Agreeable accountants are likely to keep good tabs on what is going on so that they can take modifying action if events turn too much against them.

Count (v) which relates to inadequate records was rightly considered proven. If one’s defense is going to be unfortunate oversight then one cannot present workpapers showing a keen interest in the matter concerned.

Count (vi) related to the need of the auditor to withdraw from an audit if he considered that the integrity of the directors or the management to be in doubt. This is a good provision but the tribunal did not uphold it.

Count(vii) was upheld in respect to a lack of competence but not in respect to a lack of objectivity or independence. The Tribunal is drawing some very fine lines there.

Count(viii) was more general and related to assisting PPCS to conceal improper transactions. This was not upheld because the Tribunal considered that had the accounts complied with applicable standards a user of the accounts would still not be able to deduce from the accounts that the Securities Amendment Act 1988 had been breached. That might be so but if the user was already highly suspicious that the act had been breached, as probably was the case, the suspicion would be unfairly curtailed if the user had confidence in the Auditor as he or she were entitled to do. The excuse of the Tribunal for not upholding this count was very poor indeed. Also breach of that Act in itself would have created contingent liabilities that should have been declared in the accounts or the Audit Report. Indeed such liabilities in terms of fines and court costs were realised when the company got caught out.

The Tribunal’s second sentence of para 7.5 effectively says the following “ However, we have made no finding that the member’s demonstration of lack of professional competence is of such a degree that it tends to bring the profession into disrepute.” This is complete nonsense. All incompetence has that tendency even if it is unavoidable. The complainant was presumably unimpressed by the incident as would be many others.