To Contact Us              Index is in right hand column

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

A list of GOSFAR (greatest officially sanctioned fake accounting reports) Award nominations is now close at hand but a little comment on current issues would be appropriate in the meantime. It is noted that Telecom NZ has just got the Roger Award for the worst trans-nation company operating in NZ so the season is still on. Telecom is likely to feature in the GOSFARs also, having something of a record on this site. The Roger awards are partly run by the Campaign Against Foreign Control in Aotearoa. But Telecom NZ is a primarily NZ listed company and foreign control would seen to be limited. It seems to be NZ Government controlled by way of the Government controlling its monopoly privileges and other environmental factors and so be in a position to dictate, to regulate the sharemarket, of which Telecom comprises about 25%, and to showcase a high paid woman CEO etc.

Also in the news with a record on this site of GOSFAR proportions is Kiwi Co-operative Dairies Ltd. Four former staff of this company (now merged into Fonterra Corporation) are on trial for arranging the export of milk powder by the company in an unlawful manner. This alleged offence would seem to have occurred soon after the company's 1996 controversial takeover of Tui Milk Products. Mr Norgate is not among the accused and apparently will be giving evidence. We infer nothing, just alert those interested of the proceedings.

But the most disturbing item of recent news relating to accounting would seem to a cross border sale and leaseback of the South Island AC electricity grid, undertaken by the hereto owners of the grid, the state owned enterprise, Transpower.

The matter has been brought to public attention by Robb and Newberry of Canterbury University. They already feature on this site. Prima face they do good work but the suspicion is that they bring up an issue, possibly at someone's request so that the bubble is safely burst and so it will not erupt as a scandal at an inopportune time.

Traditionally scandal around sale and lease-backs has been the practice of treating a financial lease, which is really just a loan secured against an asset, and a traditional or operational lease whereby one pays the owner of an asset for the right to possess and use it. By treating a financial lease as an operational lease the cost of (effectively) owning an asset can be inappropriately stated in the accounts of the user so increasing or perhaps decreasing profit as desired. It can also take assets off the users balance sheet even although the user takes the holding gains and losses.

But this old trick as "accidentally" used by Transrail in 2001 would seem not to have been used by Transpower in 2004. Their annual accounts clearly set out the difference between the two types of leases and the inference is that they apply it.

The Transpower accounts declare a contingent liability of a cross border lease of the SI AC grid. It tends to play down the importance. Apparently the arrangement could still be "unwound" but the tax department considered it to be final and so $10m of tax on profits of the deal had been expensed in the accounts but the profit has yet to be declared. Presumably if the profits do not eventuate the tax would be refunded so this treatment of the tax does not seem to be correct for what it is worth.

But the main criticism of the accounting and auditing is that the information on this lease is far to vague considering the potential consequences. This would seem not be a borrowing procedure for the ongoing needs of the business. Since the issue has been exposed it has been explained as a bit of harmless mumbo jumbo whereby another party to the "transaction" is able to genuinely reduce itheir liability for US taxation. Hence this party is happy to pass on some of the gains. One would think that US tax authorities would only recognise transactions of substance.

A more plausible explanation is that this electricity grid is a most critical asset and hence can provide security for a most blue chip loan. The other party probably has a relatively good security rating but by using these assets as security can borrow that much cheaper. The difference might seem like money for jam to some since the chance of a default on the loan might be very low. But given that there is no such thing as a free lunch the profits to be gained are probably payment for a risk.

The trouble with SOEs and other entities where governance is divorced from ownership is that it is just too too easy for some funds to go direct from a transacting party to management and directors. Just a casual tip that a few shares in some small company somewhere else in the world could be a worthwhile investment is all that is required. Of course we are not suggesting that something like that has happened here but the sooner these enterprises go back to the public service the better.

Advertising section

------------------------

Suitable Objectives

Register of Members

Members Forum - Topical
 - open to all meantime:
 Plenty of Opinion

Magazine Plans

Need an Accountant?
 or Prepared to Change?

Users Forum
 - have your say

Ready to Join?

Knowledge Tests
 - being developed

What's Wrong with
 the existing 
 accounting body?

So called BNZ Audit
an extensive case study

 Visit our Advertising
 page from 
Here