Securities Commission and Their 1993 Bank of New Zealand Report

The Securities Commission is a Government(govt) Agency with govt appointed commissioners. The practice seems to be for it to have 6 or 9 members with 1/3 being legally qualified people, 1/3 with accounting qualifications and 1/3 prominent company directors. To do a report they seem to form a committee of 3, 1 from each of these sectors.

In 1993 the members were: Barristers & Solicitors P D McKenzie(chairman) Miss J M Potter and M R H Webb. Chartered Accountants R A Anderson A N Frankham and Ms E M Hickey. Company Directors RE Baker S J Cushing and J M Robson.

The states that the quorum of members dealing with this matter comprised McKenzie, Anderson and Baker. The report was issued by the Commission however and presumably all members were entitled to have a say. Ms Hickey was a central subject of the report but this was not disclosed. Also Mr Cushing (now Sir Selwin) was a director of Brierley Investments who was a part owner of European Pacific Ltd, also a central subject of the report.

The report did not disclose these conflicts of interest so sadly not even a future High Court judge (Miss Potter) has insisted that they do so.

The Securities Commission is important because it appears to be able to obtain and report business information that would not otherwise be public. Factual information stated in the report can be taken as valid, although one must watch out for opinions that masquerade as fact.

The objective of this and probably other reports seems to be damage control. It is not damage to the country or the innocent business or professional person that is concerning them however, it is damage to a rather corrupt upper level of business and professional people.

The basic tactic is to take a scandal and sanitise it, by criticizing it quite strongly, but leaving out some matters of substance, then to assume the role of an authority and say that nobody deliberately did anything wrong or deserves to be disciplined.

The message to those at the top is "you can carry on as you are, we have quelled the protest for you."

The report was quite strong in rejecting form over substance arguments and declaring that profit was overstated by $54m for the 1990 year. However they appeared blind to the fact that $16m of calculated income on bonds for the previous year and not declared that year, should not be included in the 1990 profit. The idea that if you did not catch up on it last year you can throw it into this year and forget about it is common in accounting without any justification. The Commission concentrated on the fact that the $16m was an overcalculation, ignoring that it should not have been there no matter how it was calculated.

The Commission also chose not to ignore that $13m was treated as an extraordinary when they had examined the situation and clearly it was not. Conversely large writedowns in the value of advances to Australians probably should have been declared as an extra-ordinary item as was done in the 1989 and 1991 years. The bank no doubt wished to give the impression that extraordinary write-offs were behind it.(a small unjustified extraordinary loss goes largely unnoticed but lifts the operating profit, a large loss justified as extraordinary would lift the operating profit much more but would be deplored in its own right).

Reference to large Australian writedowns was made in the CEO's report attached to the accounts. This should have given rise to the declaration of post balance date events being made in the accounts but the Commission chose not to mention this even although it refers to major Australian troubles being addressed by the Bank board at the time that the accounts were being signed.

But the biggest shortcoming of the report was the failure of the Securities Commission to even consider whether deficiencies which it found were deliberate. They stated that they found no evidence of improper conduct by any of the parties whose work it reviewed. It maintained an attitude of "we can't expect others to hold to our high standards" and never considered the possibility that even a multiplicity of errors may have been deliberate. Falsifications made in a way that they later can be purported to be mistakes are so easy to do and unless there are inspectors who will highly scrutinise them they are a sure thing for getting away with by people with strong personalities or those who have associates so endowed

The accountants involved in preparing and auditing these accounts have very enquiring minds and would be eager to understand the large contracts for zero coupon bonds and perpetual notes to know just what is going on. They discuss it among themselves. They do not get it wrong unless the pressure is put on them to deliberately so do. They want to hold their jobs.

para 15.158 ends with the commission's assertion in relation to an alleged omission of the auditors "The omission of such an adjustment was an unfortunate error." It is impossible to obtain evidence to support such a finding and hence it is completely improper to state this finding. There remains no way of monitoring the human thought process. Overlooking the adjustment was fully consistent with the strong wish of some directors to "smooth the profits". There is no reference to any questioning of the auditors as to why their knowledge of such a large transaction was so inadequate especially since they had advised the Bank board that this was one of two matters which they were having trouble with.

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The Audit certificate for the 1990 Bank of New Zealand annual accounts

NZ Society of Accountants reaction to this issue