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February 2006 Edition ---- to page back through Previous Editions click here

Surprise, surprise, we are almost on time with this month's edition. Well, last months was not as comprehensive as it might have been so time for a catchup.

There appears to be little movement at the NZICA site. It might be appropriate to dub Mr Muriwai "Flash Gary" considering the brief appearance of his speech in December. Another point he made as we now recall was that the country's accounting could not be that bad considering the present high level of foreign investment being attracted. Well the investment is mainly going into real property where the complexity of accounting is probably not so great. Indeed it can be argued that the investors would rather risk leaky building syndrome (another product of professional fudging) than trust the accounting very far.

There was no fanfare but it seems that as the new year ticked over a change of office bearers took place on the NZICA site. The new president is Keith Wedlock, a public practitioner from Palmerston North. We found a short article on his appointment in a publication called Newsfocus Manawatu. He seems to stack up reasonably well considering but we think it important to try and demonstrate that he cannot escape scrutiny by hiding from the net. New presidents were fronting up to take their medicine but the situation seems to have changed recently.

Newsfocus Manawatu quotes Mr Wedlock as saying the Institute has disciplinary procedures in place "if need be". We would like to tell him that need does be. Accounting is all about loot and who is entitle to get or retain it and to what extent. Education does not weed out corruption, indeed it probably makes some people feel more invincible.

Manawatu is of course Tui Milk Products country, or was until a most substandard accounting report likely caused the shareholders to vote for the company to be taken over in 1996. We don't know whether Mr Wedlock has been involved in the dairy industry but as probably the biggest industry in the region he is unlikely to have been too far away from it. We suspect he would have access to this E&Y report when it was posted out and would have been curious enough to check it out including its logic, reasoning, and expression. " 90cents per kg milksolids for the seasons 1996 to 2015" is not near clear enough. We suspect many of our readers would think it quite clear and one gets 90 cents for each kg of milksolids supplied during that time, which was not the case. We have recently referred to other logic and arithmetic inaccuracies in that report. Local accountants such as Mr Wedlock should have slapped an injunction on the second vote (which followed the first vote in close succession) until the report was corrected and fairly presented. An author of the report remains in public practice in the region, sporting an FCA designation.

Just through the gorge from Palmerston North was Richmond country with meat processing plants of that Napier based company. While Tui faced a juggernaut from the west, Richmond faced a juggernaut from the south in the form of the PPCS meat co-operative, again with poor support from the accounting profession. PPCS had Richmond shares bought and held in trust for it. Richmond tended to suspect as much but were comforted into thinking otherwise by the words "bank guarantees - nil" in the PPCS accounts because it would be unlikely that a trustee would finance such a purchase without a guarantee. But a bank guarantee had been given and for the very purpose of indemnifying the bank trustee from holding losses on the Richmond shares. However the Disciplinary Tribunal of the Institute found that the auditor had no obligation to qualify the audit report in respect to this because the guarantee was somehow insignificant. There seemed to be no fortitude exhibited by local accountants to stand up to this ruling.

Let us now return to the old hardy annual of the International Accounting Standands and where NZ stands with respect to it. It is very hard to get to grips with this. NZ followed Australia in announcing the adoption of IABB standards and one got the impression that they were leading the way. However background material which accompanies IASB statements contains the following:

" A Deloitte & Touche study indicates that 94 countries either require or permit the use of IFRSs (International Financial Reporting Standards) for publicly traded companies beginning in 2005. Some other jurisdictions, including Australia, New Zealand, the Philippines and Singapore, base their national practices on international standards."

This would tend to indicate that NZ is rather out on a limb in requiring some differences from these international standards here and there.

We have also found this fascinating current FAQ page on the IASB site at http://www.iasb.org/about/faq.asp?showpagecontent=no&xml=18_23_24_171220. Although it dates back Aug 2004, it refers to the country of Australia and New Zealand in which a member of the board of IASB resides A leaf would seem to be taken out of the book of Trinidad and Tobago with respect to naming. The other countries which have a resident board member with "formal liaison responsibilities" are Canada, France, Germany, Japan, United Kingdom and United States. These are virtually the recognised Western style rich club. No small countries seem to hanging on to the coat tails of these big countries. Why does NZ have to make itself so different from the rest? This hype of being big on accounting standards seems to be to make up for a failure to enforce them. It seems likely that most of these big countries are also not part of the 94 referred to by Deloittes. The IASB is a bit of a "do as we say not as we do" club.

Interestingly the IASB does not seem to have appointed a replacement Director of Education which further suggests that the position was created to give Ms Hickey a high ranking job. Ms Hickey, now the director of Technical Activities with the IASB, of course made her name in 1993 by telling the Securities Commission (of which she was a member) that the treatment of certain arrangements entered into by the Bank of New Zealand in 1988 in the Bank's 1990 annual accounts were "perfectly acceptable at the time", having herself at the time recorded in the audit notes as an audit partner that the treatment was unacceptable on a matching basis, and the Commission, subsequent to Ms Hickey's submissions, declaring in a major report that there was no such acceptability, without any dissenting report from Ms Hickey. The IASB and its technical director make for one big comic opera with not so comic consequences.

The above verifiable assertions concerning Ms Hickey are to be found in the 1993 Securities Commission report that can be downloaded from here, at paragraphs 15.107 15.110 and 15.62. The pages concerned are 178, 179 and 163 respectively being pages 187, 188 and 172 of the Adobe reader.

We would like to now comment on the ruling against the Securities Commission concerning the application of a Statute of Limitation provision in its proceedings in respect of insider trading of Tranz Rail shares. Did it know about the provision we wonder, and if not is it going to request that the statute be repealed? There was reason to suspect insider trading in those shares at an early stage, indeed even before the trade took place. Railways tend to now be Cinderella businesses the world over, relying on Government support to keep them viable. The 2001 Tranz Rail annual accounts were a sham to much anyone who looked at them, particularly with respect to financial leases being treated as operational leases and track renewals being capitalised without the rest of the track being depreciated. KPMG did the auditing. The sceptics society made fun of all this but the ICANZ appeared to not care a toss. It runs a mile the other way when Fay Richwhite appear to be involved. Its long standing lord high executioner, Jim Hoare, was a Fay Richwhite employee in its hay day. Then in late 2001 newspapers started publishing suggestions that the Tranz Rail price was suppressed because a major shareholder or two wanted out but once that was resolved the share price was (somehow) set to take off. Nobody seemed to be taking responsibility for this nonsense which was attributed to "sources". At the time it was also well recognised that Trans Rail was being run down and sold off as much as was possible consistent with retaining basic services. Guard rails collapsed through rust when touched etc. The company announce a 6month profit of $43.3m on 8 Feb 2002, made up mainly of sale proceeds of the Auckland rail corridor and half of it Trans Scenic subsidiary. Arguably that was just a sale of assets. The next day these sales of the major Tranz Rail shareholdings took place under the guise of some new trading procedure called a book build. As far as the share register was concerned the buyers were two nominee companies but actually it was a wide range of the country's investment fund managers who developed some sort of pied piper urge and rushed off to squander their beneficiary's funds on the overpriced Tranz Rail shares. These managers obviously saw the above anomalies as providing adequate cover (ie excuses) for them to go through with the purchases. We suspect some hidden motive for their behaviour, either carrot or stick. They are too clever to have been genuinely fooled. This insider trading action serves to protect them.

These fund managers acted this way despite their knowledge of one of the vendors. In 1993 directors of the Bank of New Zealand who had been appointed by Fay Richwhite's Capital Markets Ltd, including Michael Fay, argued that the Bank's so-called Insurance Policy should have been acceptable as a device for smoothing profit. What they meant was the smoothing of reported profit. Under the scheme a "claim" could be made one year as in 1990 and paid back in later year when the reported profit would be correspondingly reduced. It did not seem to trouble them that the company might not survive to be around in the later year, or the fact that potential investors did not know how well the company (bank) was really going. Fay Richwhite were of course also defendants in the Winebox enquirey. The fund managers who bought the Tranz Rail share in Feb 2002 threw proper caution to the wind allowing significant drainage of the funds entrusted to them. Most of them eventually sold the Tranz Rail shares to Toll for about half the price they paid.

Meawhile Ms Diplock gets another 5 years at the helm of the Securities Commission and settles into a mansion which seems to be her reward for letting most everything slip through her fingers. We read the Commissions report on the Access Brokerage failure and the interesting thing was that there was almost no reference to accountants or accounting standards when that was very much what it was all about. They seem to think that sharebroker's trust accounts do not deserve the same attention solicitor's trust account. We were told that the Stock Exchange engaged Grant Thornton to check out the the trust accounts of the other brokers following the collapse. We thought that Grant must have been some sort of handyman hanging around the place but Grant Thornton is in fact a firm of accountants, now a taboo word to the commission it would seem.

One of the fund managers who bought Tranz Rail shares in February 2002 was AMP Henderson. One of their investment managers at the time was Paul Dwyer. Mr Dwyer is now chief investment officer with the New Zealand Superannuation Fund, the new fund to help cushin the projected national supperannuation blowout with funds of $8billion and growing. We are concerned about this background of his as well as that of several other of the small staff of the Fund. The latest recruit is Tore Haywood, who comes from being AMP's chief investment officer as did Mr Dwyer. Of concern is Mr Haywards 5 years as fixed investment stratagist for Fay Richwite and Co. Perhaps he there learned to wrap up a little reward in a fixed investment price calculation as was done to pay the Cook Islands government $50,000 for services rendered. And he could have had many other things instilled into him as well. We have had a look at the background of other members of the Fund. Mr Brooks, the fund's chief financial officer who presumably handles the liquid stuff was with the Development Finance Corporation from 1983 to 1990. There is nothing much wrong with that except that the corporation went insolvent in that time and creditors lost money. The Corporation had been the Government's business development arm and perhaps it could not well convert to a standalone finance company. But while with the Corporation Mr Brooks would have had close association with Mr Education, Warren Allen who was General Manager, Finance and Administration, and was with Ernst and Whinney before and Ernst and Young after his stint with the Corporation. He came back to E&Y just after the 1990 BNZ annual accounts were released. He went on to lead the NZ Society of Accountant's compulsory education adoption to restore the Society's lost reputation.. This education was no barrier to successful crooks. All that was needed was the money for the fees and the time to attend the courses. Mr Allen has of course featured on this site previously and we refer again to his letter to the ICANZ in which he implied that the Securities Commmision had found nothing inappropriate with the 1990 BNZ accounts and their audit.

Ms Adams the Fund's Financial Accountant, worked for Ernst and Young from 1988 until probably 1991, in which time this firm was probably thickest with Fay Richwhite.

We can see adequate association for the NZ Superannuation fund to be drained in double quick time, although no one in particular need be involved. The staff are probably all very fine people but knowledge of their weaknesses could be in the wrong hands. It will all be billed as being most unfortunate of course.

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