Promotion of Accounting Reform as the most effective Pathway to a Fairer Safer and more Prosperous Society. Comment and Support from all quarters is Sought to straighten out NZ's problem

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We can be slow to the mark and it has just come to our notice that Warren Allen of Ernst and Young NZ is a member of the 21 strong board of the New York based International Federation of Accountants. Previous to that Mr Allen was for several years chairman of the Education Committee of this federation. You would think such a chairman would be on the Board but apparently not so. Mr Allen was also the Education Specialist of the New Zealand Society or Institute in the mid 90s prior to becoming national president for a year. He brought in compulsory education requirements for members. The education is provided by large firms such as the one Mr Allan belongs to. The members have to pay up to attend and the costs in terms of fees and time are considerable. It was not the regime that members had reason to anticipate when they decided to study to become an accountant. Quite a few dropped out of membership including, we understand, Mr Tony Gavigan who fronts the action of subscribers to the Feltex IPO against the vendors, company directors, and lead brokers of the issue. We think Mr Allen did not want mavericks in the Institute.

The education "reform" which Mr Allen lead was largely brought about, we are lead to believe, by overseas accounting bodies, particularly the UK, withdrawing their reciprocity with the Society or Institute, whichever was then operating. We believe that this lack of confidence in the NZ profession arose from the Securities Commission's 1993 report on certain arrangements undertaken by the Bank of New Zealand in 1988. That report deliberately gave the wrong impression that the Ernst and Young auditors Elizabeth Hickey and Peter Garty were out of their depth when dealing with (particularly) the 1990 BNZ annual accounts. We say this was deceit on behalf of the Commission (which included Ms Hickey) and these auditors had a most clear understanding about what was going on all along and what the correct accounting reaction to it (as outlined in the Commission report) was. The trouble was that these auditors chose to go along with likely coercive activities of Bank directors and politicians to cover up the accounts deficiencies in their work papers with a series of "unfortunate" mistakes and misjudgments, and issue an unqualified audit report. There was absolutely no educational deficiencies involved. Better education would have fixed nothing. The only way to fix the problem is a long spell in the slammer for those who have feigned incompetence, and a life time limit on the seniority of roles they can undertake. We say it is not too late to take such action.

So accountants who had invested a lot of time in qualifying for the profession were forced to drop out so Mr Allen's sometime colleagues could be as sure as possible of getting away with it.

The Institute is currently claiming and celebrating 100 years of existence. We say that its existence started in the mid 1990's with the establishment of the "Institute". Normally just a name change and rules revision for modernization purposes should not be perceived as a break in continuity but this was a complete change of entity. The idea was that the new entity should have no jurisdiction over accountants behaviour in the past and the old entity, the Society, should cease to exist. This gives the executive etc the clean slate that they "deserve" apparently. No doubt there will be another entity change if executive members yield to temptation at some future time, possibly after another sharemarket or property crash.

Our information of Mr Allen's high appointment includes a statement from him that it is now recognised that the accounting profession is unable to effectively police itself. We think this is the first time we have heard such a comment from a senior accountant. We don't think Mr Allen has done enough in an attempt to have the profession self policed. He is personally benefiting from not attempting to do anything about his errant colleagues. We do not think that is good enough. We have previously exposed what we believe is an attempt to cover up misdeeds of colleagues. He told the Professional Conduct Committee that he did not know of anything inappropriate about the 1990 BNZ accounts and that was also the finding of the Securities Commission. Well the Commission was very clear cut in saying that the 1990 BNZ accounts did not present a true and fair view and the auditors among others were at fault.

But as with Securities Commission's referral of his colleague who audited Feltex reports following the Feltex profit downgrade in 2005 nothing happens when the matter gets to the Society/Institute. It is up to Institute members to show what they are made of and sort the matter out.

As well as these two incidences involving the Securities Commission we have the 1996 report to shareholders of Tui Milk Products Ltd by Ernst and Young. This report purported to employ Net Present Value analysis but the NPV was ambiguously explained and could be interpreted to be annual payment. The aim was to assist shareholders which way to vote on whether a merger proposal should proceed. The trouble with such analysis is choosing the appropriate interest rate. They choose 11% which apparently was the going overdraft rate at the time. But that rate was to compensate for and help bring down inflation, which might have been 4%. A net rate of say 7% would have got a better result but years 3 and 4 were counted twice as well the confusion over whether it was an annual amount. So it was all just mumbo jumbo in support of those paying the bill.

Then more recently we have the case of "Bank guarantees - nil" appearing in the accounts of the PPCS co-operative meat company for several years. The E&Y auditor should have known that this was not so as shares in another meat company had been bought and held in trust in preparation for a takeover offer. At one stage the guarantee was not sufficient for the bank so other corrective action had to be taken. All was fascinating information that the auditor was privy to. But it was for him to ensure that no reporting requirements were broken in the process of the company trying to keep this share purchase secret. The Institute committee found that it was acceptable for the auditor not to report that the "Bank guarantees - nil" statement was wrong. What are auditors for? one might wonder.

We think that Mr Allen's Ernst and Young connection makes him unfit to represent NZ at the IFAC. Indeed we believe that he is abusing his position by implying to Institute members that policing high profile members is to much to expect of them and hence they should not try.

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