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January 2003 Edition----Previous Edition here

We greet the New Year with the news that the Institute of Chartered Accountants of New Zealand is still not prepared to recognise malpractice associated with the 1990 annual financial accounts of the Bank of New Zealand (BNZ). Indeed they are still perpetuating a cover-up with the following recent action.

• They appointed Mr Pat Waite as their president for 2003. Mr Waite was on the management team of the Bank of New Zealand at the time that the bank’s 1990 results were misreported. He is listed in the 1990 annual report as being General Manager for New Zealand operations.
• They have launched a Corporate Transparency initiative with the stated aim of attempting to learn from the Enron and other large overseas corporate failures having made no attempt to investigate the BNZ and other domestic failures which their members have been involved in and showing no wish to hear about them.
• The have appointed Mr John Farrell to review this Corporate Transparency exercise and findings. Mr Farrell is recently retired as long serving Chief Executive of the Securities Commission. This commission reported on certain aspect of the 1990 BNZ annual accounts in what would seem to be the commission’s only extensive report. While facts outlined in the report are a major source of information on this site and appear to be reliable the findings of the report are not rational as outlined below.
• They have reappointed Mr Michael Fenton as the chair of their Professional Conduct committee for 2003. Mr Fenton retired as an accountant several years back and has chaired the committee or its equivalent for most of last decade. He was replaced as chair a few years back only to re-emerge in the position for 2002 when the committees were not announced until March and there may have been contentious issues pending. The committee reports little information and appears to make minimal rulings against members as was the case when complaints made in 1993 about the BNZ 1990 accounts preparation and audit were dismissed. There are no lay members on this committee which rules on initial complaints with no right of appeal. Mr Fenton has recently been made a life member of the Institute and at least one other member of the committee has been promoted to “fellow” status. Reward for inaction it is suggested. Mr Fenton was a partner of KPMG Peat Marwick when they advised on the validity of the bogus insurance scheme as used by the BNZ in 1990 and refered to here.

Let us outline the apparent major culprits in the BNZ 1990 fake profits affair.

• The Bank of New Zealand Directors and Management who employed two huge parcels of long term zero coupon bonds from which to allocate excessive income through failure to utilise the Yield to Maturity method to apportion income to the year. This YTM method had by then been well established as the only acceptable method for apportioning such income.
• The auditors Ernst and Young who were aware that the YTM method was not employed with respect to both parcels of bonds but nevertheless issued an unqualified audit report knowing that profits were overstated by close to $100m over what the YTM method would have said. They partially disallowed the excessive profits from one bond parcel in their working papers but then offset this with invalid items of profit understatement in their Unders and Overs schedule.
• The Securities Commission who, while asserting that YTM should have been employed and going outside their brief to report on the second parcel of bonds then:
  • took the arrogant view that their opinion was of greater quality than that which could be expected of other accountants,
  • decided that Ernst and Young’s purported misunderstanding that the second parcel of bonds carried a variable interest rate, was an unfortunate mistake when their was no way of knowing that
  • failed to enter the full amount of $16m being 1989 interest declared in 1990 in their version of the unders and overs schedule so that their version of the profit overstatement was $10m less than it should have been
  • stated that they found no evidence of a conspiracy or fraud despite a great many parties accepting or promoting the “arrangements” and so being at variance with the Commission’s opinion on the matter and a great many errors on the part of the well educated auditors
  • and failure to declare that Ms E M Hickey, a senior member of the audit team was in fact a member of the Securities Commission when their report was written in 1993. Ms Hickey remains a member of the Commission with an unprecidented length of tenure.
• Coopers and Lybrand who in 1991 as accountants undertook an assignment giving advice to the bank on how it could improve its operations and credibility and suggested that a change to YTM in the 1991 accounts involving a $26m reduction in reported profit might not be the thing to do because it might raise public concern as to the motive behind such a change.
• KPMG Peat Marwick who advised the Euopean Pacific group that a document claiming to convert zero coupon bonds into an insurance policy covering loans of the bank which had become bad or doubtful would mean that such debts would not need to be written down.
• The Commerce department of Victoria University of Wellington. Professor Trow from this institution argued hard to the Securities Commission on behalf of the BNZ when the enquiry was held in 1992/93. He argued that turning a monetary investment into an insurance policy covering bad debts by producing a document having the appearance of an insurance policy was generally accepted accounting practice and hence valid. Mr Dunmore from Victoria has recently gone on record claiming that audit fees are low because of other consulting fees which auditors obtain from companies which they audit and because of this the practice of auditors accepting such work should continue. A former chairman of the ICANZ and partner in Coopers and Lybrand has recently been appointed as a lecturer at Victoria.
• The International Federation of Accountants has New Zealanders ex Victoria University and Ernst and Young in key positions. It would appear that they are doing this under pressure from international accounting firms to help keep the BNZ 1990 coverup in tact.
• While the fourth big accounting firm, Deloitte Touche Tohmatsu, appear not to be involved in the BNZ matter it is suggested that their behaviour is similar, and their chairman and that of the Accounting Standards Review Board, Mr John Hagan has more recently given misleading information in his eagerness to pander to big business. He is quoted in the high court judgement in Hedley V Kiwi (para 226) as telling the Court as follows:. "He [Mr Hagen] said that EY's analysis showed that, without the differential, the Tui shareholders were projected to be approximately 141 c per kilogram of milk ahead of their stand-alone position and even after the differential, approximately 90c ahead." EY refers to Ernst and Young and in fact their analysis showed that the Tui shareholders would be a maximum of 16cents ahead after the diferential. The 90cents is in fact the sum of the projected advantage in cents per kg of milksolids (present value) for each of 19 years. While this is what their analysis said Ernst and Young in their report to Tui shareholders also gave the impression that the shareholders would receive 90cents per kg for an indefinite (say 19 year) period should a company merger go ahead. Mr Hagen would have known that 90 per kg extra for an indefinite period was to good to be true. The matter is detailed elsewhere on this site.