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Aug 2003 Edition----for Previous Editions click here

In this edition: We focus a little on the New Zealand Securities Commission, Tranz Rail affairs, and the New Zealand Government’s idea that equity investments will out-yield fixed interest ones in the longer term.

We start with the Securities Commission who in the Dominion Post of 8 August 2003 say they want more powers to do random inspections of company financial records. As this article and others suggest, they don’t do much with the powers which they already have by way of investigation where there are grounds of suspicion. They want to appear to be tough while at the same time protecting the government in the short term by not rocking the market. This allows corrupt practices to take hold resulting in longer term disaster.

Ms Elizabeth Hickey is off the Commission but two new women have been appointed by the female Minister of Commerce making for six women, including the chairperson, on the 10 person Commission. All would seem to be loyal to the minister with the independence required not there.

According to this article in the Dominion Post, Jane Diplock, the Securities Commission chairman, says the desire for these random or systematic inspections has possibly been brought about by the questioning of Telecom’s accounts by Allan Robb of Canterbury University.

It seems the half year accounts to 31-12-2001 spelt out differences in treatment for certain items so as to meet both USA (where the company is also listed)and New Zealand requirements.

The items gave a profit 20% higher than under the US treatment and this naturally brought about media comment and suspicion that the US treatment was better. The Securities Commission responded with an investigation and reported that the matter had been treated properly by Telecom but there was need to address differences in standards. This was reported on 26 Feb 2002.

Then on 15 March 2002 this article appears in the National Business Review written by Allan Robb and his associate Sue Newberry. The article brings up a matter concerning the previous year’s accounts (to 30 June 2001) whereby Telecom dispensed with equity accounting for an associated company. This was because apparently the associate company had made a substantial loss for the year. Yet Telecom declared $245m which it received in dividends from this associate during the year as operating revenue. The use of the dividends gave Telecom an extra $221m of reported profit, being a 52% increase on what the reported profit would otherwise be.

It is submitted that such dividends cannot be genuine operating revenue which contribute to profit. The authors, Robb and Newberry do not offer any scenario on how this could be so. Yet unfortunately they take the view that Telecom might have a genuine reason. They also make the inconsistent comment in their forth to last paragraph “obviously Telecoms auditor agreed” with the Telecom’s implied judgement on the matter.

It is never obvious that an unqualified audit report in respect to a public company is sincere. The issues involved are often confidential and complex and are seldom reviewed by another genuinely independent and influential entity, so that keeping on side with the client can feasibly be worth the risk for the auditor. Hopefully there are a multiplicity of inter-related controls in place so that audit reports can be relied upon but by their very nature they are certainly not obvious. Saying this is not a slur on the profession, it is just a fact of life. In this particular case the authors have raised some serious questions about the validity of these dividends so that the sincerity of the auditor is even less obvious.

The questions raised by Robb and Newberry are very compelling. It is almost certain that there was a 52% overstatement of the 2001 Telecom profit which the Securities chooses to ignore.

Here is what a prominent journalist has to say (on 2 Aug 03) about the Securities Commission’s efforts to combat insider trading.

Among investigations they are supposed to be doing concerns Tranz Rail. Tranz Rails 2001 accunts treated assets which it had “leased back” as as being owned by the financier and merely leased whereas effectively they were owned by Tranz Rail and secured under lease-back by the financier. This makes a big difference to the charge by way of expenses and inflated the reported profit. In addition TR sold the Auckland Rail corridor back to the government at about that time giving the impression of greater profitability. The two major shareholders then sold out by way of what was known as a book-build. The appearance of good profitability would offer the excuse for the sales to take place at high prices. About $3.70 compared to the $1 or less now ruling. The buyers appear to have been a variety of fund managers. How could they possibly be so dumb. An answer is that maybe the funds were so poorly performing that there was nothing to be gained from trying to improve them. There may have been more direct benefits available to the managers by going though with the sale. This possibility exists wherever there are caretaker managers of ailing assets transacting with people who own the funds which they manage. As another example Air New Zealand bought a 50% share in the Australian company Ansett from News Corp at what turned out to be an excessively high price. The New Zealand taxpayer paid for that. It is for the regulator such as the Securities Commission to hold caretaker managers and directors to account.