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February 2008 Edition ---- to page back through Previous Editions click here

Well perhaps the first news is that the State Services Commissioner, Mark Prebble is on his way out. He no doubt was on a lot of pressure from a Government which wants everything done its way but should have been able to resist much better than he has. A bit like NZ's recent opening batsmen perhaps but his performance has a far greater effect on us all. He is taking an unnecessarily long walk back to the clubhouse or to wherever he is going as well.

He is not an accountant as far as we know but he comes under our scrutiny for his unjustifiable defense of an accountant. On reflection we believe we have understated this case against him in the past. The facts are that Peter Garty, Group financial controller for New Zealand's biggest listed company Telecom(NZ), was given a document concerning Telecom which his friend had improperly taken from the Department of Prime Minister and Cabinet where the friend worked as a clerk. Mr Garty decided to take the document to his work to see what the specialists there thought of it, which he duly did in the morning when one would expect that he would be sober. Mr Prebble had the matter investigated from the State Services point of view and then took the liberty to say that Mr Garty had done no wrong. We say that that statement should have been an axing offence for the commissioner. But the whole story seems to have been a jack-up for the Government not having to tell the markets about its decisions affecting Telecom in a correct way. There tends to be no correct way to give such news as far as the commercial sector is concerned. Thus with no-one to axe him Mr Prebble lived on to oversee, perhaps unknowingly, more partiality scandals, at the Environment ministry and elsewhere.

Mr Garty of course has this site's top billing for wayward accounting for his performance on zero coupon bonds and finding new items of profit while audit partner to the Bank of New Zealand from 1990 to 1992. This is perhaps eclipsed only by his close associate in 1990, Elizabeth Hickey, who used her misdeeds to propel herself to be the accounting standards expert of the country and now the world. Newspapers were determined not to mention Mr Garty's auditing exploits when reporting on his leaking of the Government document on Telecom in 2006.

Also on the move is high profile accountant Marko Bogoievski. The former Chief Financial Officer of Telecom is off to the public infrastructure company Infratil, or at least to the management company which controls it. Mr Bogoievski was in office at Telecom earlier this decade when Telecom's profitable associate company Southern Cross Cables was adjudged (by Telecom) to be insolvent. An associate company to a given public company (say Telecom ) is one that Telecom owns to the extent of 50% or thereabouts. For financial reporting purposes the relevant portion of the profit (or loss) of associated companies is added to the profit of Telecom in its Group accounts. But dividends received by the holding company are taken out of the group accounts because of course it is important that income from associated companies should only be counted once. The accounting regulations provided for an exception to this procedure, which was when the associate company was insolvent. The theory is that shareholders do not have to make good the losses of a company which is going into liquidation so it is not appropriate to take on board losses which the group will not have bear. But this provision in the regulations would seem to have been worded a little roughly. The provision should only apply if the Group, eg Telecom, really thinks that the associate company is going under. And dividends from the associate company should only count as income to the group if they arise from profits which have not already been reported by the group. But this point too was not made clear in the regulations it seems.

It appears that Telecom noted that its income for the year was shaping to be a couple of hundred million less than what was expected. Its solution was to get Southern Cross Cables to pay them out that sort of amount in dividends, lending them the cash to do so to the extent necessary and rendering Southern Cross insolvent. They assumed the dividends could be treated as income. They sort of acknowledged that this was an irregularity the next year when profits had returned to normal, perhaps with the help of more favourable government regulation which perhaps had been promised all along. In the meantime the gap had been bridged without a drastic fall in the share price.

We say that abuse of accounting principles in this manner is not acceptable and people who go along with such practices are not fit to be accountants.

Infratil tends to own infrastructural assets which were once the preserve of the public sector, such as a majority share of Wellington's airport. Public space there has recently been used up by a huge liquour barn for children to wander through. Anything for some profit. Infratil was one of the few companies to directly buy into the bookbuild of Transrail in early 2003. Fanatic as they might be about anything to do with infrastructure we say that it was obvious to them that Transrail's accounts were a sham and the shares were way overpriced. Why would they do it? We don't really know but have our suspicions about kickbacks to management or similar..

Well we have also discovered that Mr Peter Garty's employment at Telecom has also come to an end. It seems that for as long as Telecom was receiving monopolistic privileges from the government its majority owners were happy for the Government to use it as a shelter for old friends and a showcase of a top female executive, but with the opening up of the local loop those days have passed. From what we can ascertain Mr Garty now looks after the books of St Lawrence. This appears to be an investment company with some Australian connections. It sponsors a Radio Sport show compared by ex New Zealand batsman John Morrison. Mr Garty seems to have had an association with St Lawrence while at Telecom. Interestingly, assisting Mr Garty there appears to be none other than former long serving Accident Compensation Corporation chief accountant Phil Burt. These men were both with Ernst and Young in the late 1980s we think. The small firm would now seem to sure have an accounting powerhouse which will lead it in some direction. We had some grumbles about ACC not having the audited sections of its annual accounts all together in its annual report which has been fixed now that Mr Burt has left. We have of course a lot of grumbles about some of the corporation's investment purchases but we think that Mr Burt probably had little or nothing to do with that. There seems to have been a big shake up of ACC senior staff but we think Mr Bagnall is still there. The new Chief Executive seems to have taken herself off the Investment Committee. Investments might be separate from the rest of operations but they sure are a mountain of temptation and hence not particularly suitable for delegation.

Well of course Mr Prebble is not the only public officer of required independent stance who have allowed themselves to pander to Government wishes. We have previously mentioned the Reserve Bank Governor who from about 2003 has, we believe, tread to softly and let property prices get out of control. There are ways other than this of maintaining full employment. He got unjustified support from the news media who were always going on about the NZ dollar being too high relative to the US dollar. This was particularly true of the Dominion Post whose Saturday page C2 viewpoint hammered the point. The contributors seemed to be oblivious to the take-off of dairy product prices. If the swing to dairying had started somewhat earlier in response to the high dollar the country would have been better off. The Dominion Post went further with statements such as NZ's "exports per capita almost half that of Australia and two and a half time the United States" being printed on a general business page. In fact these exports per capita were 25% greater than that of Australia an 75% than that of the United States but the newspaper and the Press Council were determined that the correct situation should not be published. Fortunately Kerry McDonald whose data was purported to have been misquoted has faded from the limelight. He too was going on about "bad policies" causing the high exchange rate. The gold mining company he chairs should be doing well now though.

The false argument going around now and stemming largely from the National Party concerns why NZ's standard of living has fallen behind that of Australia and several European and other states. It is convenient for the opposition to blame it on recent government policies. We say the answer goes back to the "think big" era of the late 70s and the pathetic public investment decisions which were made at that time. The decisions seemed to be made on the idea that oil price rises experienced then would continue at the same rate until the end of the century. Adding to this was the over-eagerness of the Labour administration of mid eighties to quit government ownership or, particularly management, of businesses. This resulted in scandals such as Bank of New Zealand lending of a billion dollars which was written off with few if any recovery attempts with the government footing the bill and later the purchase of a half share in the dud Ansett company by an Air New Zealand board which the government also paid for. We suspect that some of the billion would find its way to that Air NZ board.

Such squandering is not just a problem at the time. It is a problem for ever and ever. It is not appropriate for the media to write some big articles of lament about such matters and then forget about them. They are the reason why we are poor. So whenever it is asked why we have become poor it is because we have lost our nest egg through the mis-management as outlined above. To be fair we were rather vulnerable to such mismanagement because the traditional high value of our food and wool exports was falling. Often a large injection of capital expenditure will fix a problem but it has got to be well thought out and subjected to public scruiteny.

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