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July 2003 Edition----Previous Edition here

In this edition:

a: The Corporate Transparency committee of the Institute of Chartered Accountants of NZ has reported

b: The auditor who decided to allow the Bank of New Zealand to post a $100m profit in 1990 when the profit should have been no greater than $35m and probably zero has been awarded a top job with the International Accounting Standards Committee.

c: The proposed government bailout of Tranz Rail yet again means no receiver/liquidator has been appointed to check out possible miss-appropriations of shareholders funds and recover any such if possible.

d: Craig Norgate loses the CEO job at Fonterra Corporation

We consider each of these items in turn

a: The “Corporate Transparency” working group has Reported

The document is entitled “Improving Corporate Reporting: a Shared Responsibility” and can be downloaded from here.

Its 5 months late and ironically they consider that companies should now be given 4 months instead of 5 to report their financial results.

Lets start with the first sentence of paragraph 4 of chapter 2. It reads: “That there will be a major reporting failure in New Zealand at some point of time is inevitable”. They are prepared to admit that it will happen in the future but will not entertain any suggestion that it has happened in the past or is happening because that could get them or their mates into trouble. If its never happened in the past and the Institute is on the ball prospects would be good for it not happening in the future one would think.

The report does not cite any examples of corporate reporting failure in New Zealand major or otherwise. It says in paragraph 140 (chapter 5) “The working group did not find and was not presented with any evidence of widespread reporting failure in New Zealand. It was told about the errant Bank of New Zealand reporting of the late 80s and early 90s and of that by Fortex in the mid 90s but this did not meet their definition of widespread apparently. Enron was a big reporting failure but that was in a proportionately bigger economy. They correctly observe that failures are more likely in a booming sharemarket and New Zealand hasn’t had one of them for some time. But the reason that the New Zealand market hasn’t boomed is because of dreadful reporting failures in the late 80s and early 90s.

In paragraph 14 they make their only quote from submissions received and endorse the assertion that their “first duty is to do the patient no harm”. This is an illogical excuse for inaction. Most medical patients have to suffer a little extra discomfort in order that a treatment can be put in place, and many worthwhile treatments carry side effects and some risk of adverse outcome.

The approach of the report has generally been to recommend that all the existing theoretical controls over corporate reporting failure be tightened up a notch. Generally the controls don’t work so that does not mean much. Recommendation 16, for instance, provides for organisations such as the Securities Commission, the NZ Stock Exchange and the Register of Companies to appoint laypersons to the to the Institutes disciplinary committees. But these quasi public bodies tend to comprise ex Institute executives anyway and “compatible” laypersons will be found by way of consultation. How about the small shareholders organisation?

>b: Elizabeth Hickey appointed Education Director of the International Accounting Standards Committee.

On 19 May Hickey’s appointment as Director of Education for the IASC foundation was announced as per this propaganda. The IASC and the International Accounting Standards Board which it appoints are private organisations which somehow manage to dictate accounting standards, Sadly they too appear to be in the accountant laundering business.

The Minister of Commerce, who appointed Hickey as chair of the Accounting Standards Review Board on 17 February , issued this apparent tribute. No mention is evident on the NZ Institute of Chartered Accountants web site which might be a promising sign.

c: Tranz Rail bailout offer by Government.

The Tranz rail case parallels the 1990 Bank of New Zealand affair in several respects including the fact that the Fay Richwhite camp has been a significant shareholder. That was until February 2002 when David Richwhite along with Wisconsin Central, an American railroad company sold out. They both received a price of about $3.70. The buyers were several New Zealand financial institutions. The price then fell over 2002 and for the first half of 2003 the price has hovered around 90 cents. These Institutions should have known to be careful given the reputation of Fay Richwhite. But then again the fund managers did not own the funds that they used to make the purchases and all might be working out well from their point of view.

Since those trades Tranz Rail has announced several adjustments to its accounting practices. In particular that the treatment of sale and lease back agreements applying to rolling stock and the newest cook strait ferry had been treated as operational leases and not financial leases in the 1991 accounts. They claim the matter was complex and on receipt of new complex advice they have changed their accounting policy in respect of the issue.

Accounting principles concerning sale and lease back are long established and clear cut. The aim of sale and lease back is generally to give the investor better security. The contention is that it will be faster and easier to get possession of one’s own (eg the investor’s) property following the breach of a lease agreement than it would be to get possession of someone else’s property (eg the borrower’s) following the breach of a secured loan agreement. But for accounting purposes, who the official owner is, is not really relevant. The borrower (or leasee) has in both cases an obligation to make all payments provided under the lease or loan and has an obligation to maintain the property. When all payments are made the borrower gets unencumbered title to the residual asset. Hence if the agreement is honoured by both parties the effect is the same regardless of which type of agreement it is.

Tranz Rail in the 1991 year appear to have treated the total payments made on the leased back items as the sole charge. No depreciation on the assets was provided for, possibly because they argued that they did not own them. These “lease” payments at the early stages of the agreements would be much less than the interest component of the “lease” payments plus a proper depreciation charge for the assets; hence the cost of using the assets would have been under-provided for. It is hard to see how any confusion could arise and claims of such are likely to be masking in support of claims of an “unfortunate mistake” which will have boosted the reported profit, declared dividends, and the share price”. The matter should not have been able to get past the auditors, KPMG, either.

The Securities Commission is supposed to be investigating claims of Insider Trading with respect to this matter. That could be an issue if one party knew of the inappropriate accounting treatment and the other (the buyers) did not. This would likely be the case if the buyers were small investors with limited capacity to analyse the accounts and ask about the nature of the lease agreements. When the buyers are high profile institutions this is a little hard to believe. It would seem to be more of a case of allowing the vendors to dip into the funds of the institutions with the gatekeepers being somehow appropriately rewarded.