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February 2005 Edition ---- to page back through Previous Editions click here

The time has come for us to claim the mantle of New Zealand's pre-eminent (yes we stole that word), publicly accessible accounting web site. The ICANZ site is at an all time low. It always displays the current date but it is unlikely that this means there has been updating for the day. At the time of writing there is currently no Events news, no Institute news, no Membership news, no People news, no Press releases, no Current issues. There are a few Standards items still on display as the standard setters to the world (self proclaimed as a result of "punching above their weight" - no mention of height in relation to the belt though) progressively surrender to the standards of the private International Accounting Standards Board, organisation.

There may be plenty of gusto in the "members only" section of the ICANZ site, but effective accounting requires engagement with the public.

This is an appropriate time to reflect that for several years the ICANZ had a "Towards 2005" committee. Was the Committee successful with the Institute making it here? Evidence is yet to emerge it seems. "Towards 2005" seemed to have been a euphemistic mechanism for the finishing off of the Institute's ACA College. This college would seem to have had several of the attributes of a concentration camp. When compulsory continuing education attendance, at considerable member cost, was introduced about 1994 it applied only to the new CA college. Members who were unlikely to require a Public Practice certificate could opt for the alternate ACA college and were strongly encouraged to do so by the President of the time. The colleges were to each have their own committee to represent them and to rank equally in many respects. But the ACA college never had a committee appointed and soon became the target of finger pointing with its members accused of having unjustified privileges. Eventually this Towards 2005 committee, in which Peter Garty of 1990 BNZ infamy made an appearance, choked the ACA off so that it gets no new members. Straight laced people on the periphery of the profession or struggling because of their independent stance would have been siphoned off, changing the political orientation of the organisation for the worse.

So much for negativity, what are we offering this month? Well its the awards season in certain of mass communications industries and we think that we too should parody the technique. It is time for New Zealand's all time Greatest, Officially Sanctioned, Fake Accounting Reports awards. Who will win NZ's GOSFARs?. Keep in touch and much will be revealed although a final announcement might be delayed a month or two to build the suspence. The talent is superb, the competition fierce. Perhaps some reader participation can be included. Contact us with any nominations, then perhaps next month it can be voting.

Then it will be time for another escorted tour to contrasting parts of the publication "Report of an Enquirey into Certain Arrangements Entered into by the Bank of New Zealand in March 1988" of the NZ Securities Commission. Private guided tours can add a lot to one's appreciation of the Department of Conservation estate and we suggest that the same applies to this fascinating Securities Commission report which is now on line. Its an Evergreen. There are hundreds of worthwhile tracks through it just like a National Park. We are not charging an escort fee so should not need a licence.

The other thing we hope to do is to instigate is a Fair Trials and Hearings political party. There seems to be a feeling in the hierarchy that the frank truth is not always in the public interest. The aim is to stamp this out.

However we have also been negligent in not reaching out more to those considering being an accounting student or considering options having decided on accounting. Hi there youngsters! We note that accounting students seem to have done very well in the NCEA scholarship assessments compared with those taking many science subjects. We hope that subjective data manipulation has nothing to do with it because absence of such is fundamental to the subject's value. Well the profession is a rather a closed shop. Outwardly it is all about sound knowledge and ethics and inwardly it is all about client management and retention and assessing "how to get away with it". We seek to destroy that philosophy but its a long haul.

As well as your student loan to service when you start work there is also your compulsory Continuing Education fees and time out to attend them, if you are going to take the mainstream approach. Some might say that your employer will pay for your CE; if he(/she/it) does he might also service your loan as well and all will be rosy, but that does bring up an important accounting issue, concerning the existence or otherwise of the free lunch.

You could ask the Learning Institution which you are considering what it teaches on that matter, but more importantly you should ask what, and to what extent, it teaches about the 1990 Bank of New Zealand annual accounts saga. Does this rank as a turning point in the state of the profession? And if so in what direction. Another question could be the approach to Principle verses Rules based standards. The emphasis would seem to have been on principles all along except following the Trow pronouncement of 23 May 1993 that the profession was in a bad state because it did not have a comprehensive set of rules. Professor Trow taught at Victoria University. This University seems to have links with the International Federation of Accountants, which is something else to consider. Is that a healthy thing? Muti-national firms seem to have involvement in both.

Some questions should also be asked of the Canterbury University accounting school if you are considering study there. Key lecturers of that school exposed serious questions concerning Telecom's 2001 annual accounts about March 2002 in this article. Well and good so far, but the article contained a couple of unjustified peripheral statements that served to mitigate the disclosure.

Concerning the decision of Telecom to include this suspicious income in their accounts, these lecturers state "obviously the auditor agrees with that decision". There is no specific reason given for that obviousness and one is left to assume that it is the unqualified Audit Report that they think makes agreement obvious. It is rather obvious that the auditor has seen fit to go along with the declared income in question but that is quite a different thing. Auditor's operate in a very private situation and can be subject to great pressures. It is seldom if ever obvious that an Auditor has done his/her job. That is the nature of the job as it currently exists. The more the integrity of their reports are declared to be obvious the greater is the temptation for them to turn a blind eye.

These lecturers then go on to say that given the inaccessibility of complete information concerning the matters they question "users of Telecom's financial reports must trust Telecom and its auditors on the accounting treatment". It is submitted that there is no such requirement whatsoever and users of the accounts should cease so using them if after due consideration they have lost confidence in them because of revelations that the lecturers have made or revelations that they have otherwise discovered. They can also protest about the state of affairs in various ways and perhaps get something done.

It is submitted these lecturers may have been given the job of exposing the anomaly with such "padding" to prevent attention to any more blunt exposure which might have obliged an official or independent enquiry. Thunder must be allowed to peal unmitigated.

The credibility of the institution where you intend to study could be very relevant in the future. Excellent technical ability may be of little relevance if there is little confidence in your preparedness to apply your knowledge and skills as and when appropriate.

All the best, accounting students. Remember high ethical standards will be needed for your successful career, unlike this age where it is the other way around.

Now for this months walk through some pieces of the 1993 Securities Commission special report. Fire up Adobe and load the file. If necessary obtain it at http://www.sec-com.govt.nz/publications/documents/report-of-enquiry-into-certain-arrangements-entered%20into-by%20bnz-march-1988.pdf

Press (control + N) to go to page 312 of the file. This is a copy of the famous fake insurance policy. The name of the insurance company (Dutch) sure is a whopper but other than that it sort of reads like an insurance policy but there is agreement that no party is offering to indemnify losses. It only aims to have the proceeds of zero coupon bonds of the Bank credited as a "claim" in any year of the bank's choosing (during the tenure of the bonds) while the cost of the bonds can be treated as a "premium" expense in any year that the Bank chooses. Hence it was claimed to be a valid procedure to manipulate its reported profit between years, probably with in the hope of avoiding the need to report losses.

We now trace what records there are or the attitude of auditor Peter Garty to this "insurance" otherwise known as "The Arrangements". If we go to file page 168 we get page 159 of the report. Scroll down to section 15.53 which concerns the 1990 year. RWS, solicitors representing Messrs Macaulay and Garty at the 1993 enquirey say that these two thought that the treatment of the arrangements in 1990 was OK. Note the reference to the "matching principle". The "matching principle" seems to refer to everything that is good in accounting and there are no alternatives to it.

Now go to file page 67 where at sections 4.8/9 these two auditors tell about when they were first told of the Arrangements in 1988. Insurance is designed to cover adverse events somewhat beyond the control of the insured. The prudent extending of credit is normally a core business of a bank and its profitability depends upon how well it is done. One cannot expect an insurer to take responsibility for such delicate business decisions. Mr Macauley acknowledges smelling a rat and would surely have passed on his misgivings to Mr Garty.

Now at file page 141, scroll down to the bottom to section 14.5 where Mr Garty advises their agreement with the arrangements in writing but insists that the premium be expensed on a straight line basis over the life of the premium. He does not say why he sees this as necessary. One suspects it is so it will look more like a common everyday insurance policy and so attract less attention, and it is not because of any legal provisions. This was in 1988.

At file page 188, section 15.110 we see that although Mr Garty says he thought the Arrangements were OK in 1990 his high profile assistant, Ms Hickey, did not. She challenged Mr Garty's straight line premium charges, also siting the matching principle. No doubt the thinking was that if all available proceeds had been claimed one would not expect to have to continue to pay premiums. Then again normal insurance premiums do not usually vary up and down according to the amount of claims that have been made. That tends to negate the purpose of insurance.

Next we go down to file page 212 and scroll down to section 16.24. The year is 1991. Mr Garty is still the Audit Partner. They still cling to the assertion that it is an Insurance arrangement, but concede it is more of an investment.

Finally we go to file page 259 and get a short quote from Mr Garty in 1993 which might sum up the policy, including the word "meaningless". But he had allowed it to be put to very serious uses including deception as to the profitability of the Bank.

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