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we recommend reading the lot but if one is in a hurry one can jump to" review of report concerning Housing NZ decision, or happenings at the NZICA, , or more on Mr Garty, , or exports and the NZ Press Council.

It would seem appropriate for us to review the Auditor General's report of an Inquiry into certain allegations about Housing New Zealand Corporation.

The report is rather similar in style to the 1993 report of the Securities Commission on an enquiry into Certain arrangements entered into by the Bank of New Zealand in 1988, in that it clearly elucidates certain accounting matters, but does not discuss whether anomalies found might have been deliberate, and assumes otherwise. The amount of scandal uncovered would seem to be far less than in that earlier report however.

Our first observation, not really related to the report, concerns confusion over just who the auditor of Housing New Zealand Corporation is. It is the Auditor General or at least that is the official position. The National Party spokesperson on such matters seemed, somewhat understandably, confused when he suggested that who he called the Corporation's regular auditors, Ernst and Young, (yes they are involved again) should not carry out this assignment and that instead it should be carried out by the Auditor General who he saw as being independent. Other commentators, more correctly, saw the issue as the entity doing the inquiry being shifted up a level.

The confusion probably stems from the Audit Reports of the annual accounts of this and similar state corporations. The audit report is signed on behalf of the Auditor General as auditor by some presumably authorised person, which is OK. The signing person is invariably a partner of a major accounting firm (in this case E & Y) who (the partner not the firm) the Auditor General has appointed to carry out the audit on his behalf, hopefully with the right to monitor and intervene as the AG sees fit. The problem is that the Audit Report is couched with the word "we" rather than "I" implying that there is some sort of partnership between Auditor General and the subordinate contractor. This is unsatisfactory as there must be seen to be clear lines of responsibility in such matters. They might say that two people are taking responsibility for the audit which is better than one, but not so. Being two people opens the way for wriggling and finger pointing if something is found to be wrong and onlookers and affected people do not know how to apportion blame.

The other worry is that the Auditor General might have effectively been told that he is the auditor of these corporations but he must subcontract to a partner of a big firm if he wants to keep his job. He has to have a wide range of discretion on how to go about things if he really is the auditor.

Interestingly the "foreward" to this special report concerning Housing NZ uses "I" referring to the Auditor General which is signed by him, Mr K B Brady, in person but the rest of the report uses "we" without, it seems, any explanation as to who "we" is or are. Perhaps it is fair to just assume that it the consensus of his staff involved.

Of more concern is that in paragraph 1.2 of the report we are told that Ernst and Young is the Auditor-General's appointed agent in auditing the corporation. The latest Audit Report for the Corporation would indicate that this agent is in fact S R L O'Connor of E & Y. Well the contracts used to be with the firm and old habits of expression die hard, but elsewhere in the report the need for clear lines of responsibility are referred to. Getting these things right can, we think, make the people actually responsible sharpen their act.

This paragraph goes on to say that as part of the contract this agent is required to inform the AG of any significant Audit Related issues. With respect to the issues which the report is concerned with the agent did this on 27 March 2006. The report indicates that the auditor's agent had been informally kept informed of the rumblings at issue from a much earlier time. We expect that the agent did some independent investigation to find out what it was about soon after gaining awareness of it. At what point the issue became significant is for the agent's judgement and we are not saying the agent got it wrong. But it is a worry that the Auditor General was informed a few days after the issue got into the public arena. In general public knowledge of it should not change the significance of an issue, we think.

Now we leave para 1.2 and perhaps discuss the report in more general terms. Well it is about a person who is called "the contractor" who was engaged to do work for Housing NZ and voiced concerns about some of the corporation's accounting practices, both internally, and eventually also externally some time after his engagement came to an unscheduled end. Much of the fuss is about whether there were inappropriate attempts to gag him but we will steer clear of that. Our interest is in what is disclosed concerning the Corporation's accounting operations.

The contractor seemed to have been appointed to do accounting work. The report does not seem to say whether he had accounting qualifications or professional affiliations but one would assume so. He was engaged through a leasing firm as seems to be quite common. When problems started to emerge the leasing company is reported to have told the contractor to "do as he was told". We think it far more proper if he had been told to be sure to fulfil his professional duty albeit that this requires doing as one is told in many instances. Businesses tend to engage accountants to say to the world that professional people do their accounting work but they really want the assumed professionals to do what they are told regardless. "Do has you are told" leasing companies should be exposed so that corporations who used them can be viewed with suspicion.

The summary of the report reads reasonably in that it said it could be expected that an inquiry into some accounting aspects of such a corporation could be expected to uncover some anomalies and so it happened. The inference was that the anomalies found were about what would be expected so the allegations were not really significant. Perhaps this is so.

But eight recommendations to the Corporation result from the anomalies detected. If the investigation had covered all the Corporation's functions and recommendations were produced at the same rate one fears that the Chief Executive would have been suffocated by them. Some of the recommendations were about increasing the number of accountants employed. This is quite an expensive option. If it is basic accounting skills that is the problem this remedy will probably work. But if the system is being skewed towards giving results which better suit dominant parities, and the new accountants are indoctrinated to "do as they are told", then this expensive option might not achieve anything.

A lot of the discussion in the report relates to the Greenstone Gardens project of the Corporation's Auckland modernisation program. In paragraph 5.74 we are told that an amount of $722,000 had not been applied to this project for management reporting purposes because as far as the National Property Improvement team was concerned the breakdown of this amount and whether it all applied to Greenstone Gardens was unknown. In paragraphs 5.75 to 5.94 we are that the Auditor General considered that the full $722,000 related to the Greenstone project and hence expenditure on the project was understated by 11%. A decision had been made to account for the Greenstone project separately which is not normally the case with such individual projects. The NPI team noted that the $722,000 expenditure was included in overall modernisation expenditure and seemed to take comfort from that. The Greenstone project had incurred cost over-runs and the budget had been increased 3 times. It was pointed out in the report (para 5.92) that there were probably very excusable reasons for such over-runs. With a building boom on it was harder to get labour for this less glamorous project. We wonder if stating this was an attempt to make under-reporting the cost more excusable. It is completely wrong to manipulate figures of fact so that variances reflect a sense of fairness to people involved (or any other reason) and the AG needs to make that abundantly clear.

We doubt if paragraph 5.98 of the report is appropriately worded. It says that apart from its comments on the Greenstone project it did not find any evidence of deliberate manipulation of information reported to management. It is somewhat like saying that apart from documented incidents at Hiroshima and Nagasaki there is no evidence of atomic bombs having been dropped on Japan. It is probably very accurate and is very good news if one wants to see it that way.

Anyway we note that the lady chief executive of Housing New Zealand is leaving her post having been called back home to fill a similar position in South Australia. We hope that Ms Diplock of the Securities Commission might also get the call home in the near future. The Commission's legal wrangle with Mr Richwhite is starting to drag on like the Winebox enquiry. Perhaps someone else can stop this farce factor.

The New Zealand Institute of Chartered Accountants seems to be going through a reform phase, which would seem to be good news. They have slashed the liberal studies requirement for an entry degree course by about a third. Graduates might now have an insufficient liberal outlook so as not to be able to see a monetary investment as being an insurance policy in accounting terms. And they are bringing back the ACA college for those who find they cannot afford the continuing education requirement. We wonder whether this college will have its own committee to look after its interests which was provided for last time around but not delivered upon. Other barriers to entry or membership were also mooted for reduction but it is unclear whether they have been adopted.

We wish to maintain our focus on Peter Garty especially given that this reform process is going on at the Institute. He should get an admonishment for receiving and passing on secret Cabinet work papers although that probably requires a complaint to be laid. Perhaps one of our readers could do the deed. We are a little busy at the moment. But also the Institute could now perhaps be coerced into revisiting the 1990 Bank of New Zealand annual accounts and their audit. Not that its predecessor paid much of a visit the first time around. It was a gingerly knock at the door then run for one's life. Their reform process will not be complete until they do face up to those 1990 accounts.

We would like to once again attempt a summary of the auditing aspects of the 1993 Securities Commission report, to encourage further reference to the report with perhaps positive action resulting.

On 31 March 1988 the Bank of New Zealand purchased two large parcels of zero coupon bonds. At that time the Yield to Maturity method was accepted as the only acceptable method of apportioning the interest earned or paid on such bonds amongst accounting. The yield on the bonds was about 15% pa so the method of apportionment of such interest could have a significant effect on profits.

With respect to one of these large parcels the Bank purported to incorporate extensive legal arrangements to turn it into an insurance policy indemnifying it from defaults on its advances. The "arrangements" as they came to be called involved purported contracts with an associated company called European Pacific and a Dutch insurance company but the net effect was that neither these nor any other external party undertook to bear any Bank losses.

Effectively the arrangements were to intended to act as a means of "spreading" the reported annual profits of the Bank over the 5 year term by allowing the Bank to apply the cost of the bonds as "insurance premium" to the extent that the Bank chose in any year, with the total having to be applied within the 5 years. Similarly the total gross proceeds of the bonds could be used as "insurance proceeds" offsetting loan losses and costs in any year to the extent that the bank chose. Of course should it effectively borrow off future year's profits there was no guarantee that the bank would be in existence, or have the profits, to do the repaying in the future years. We submit that there was no excuse for Mr Garty seeing such a scheme as being valid.

In instigating the arrangements the Bank no doubt was looking towards minimising the effect of the October 1987 sharemarket crash and possibly the 1988 annual accounts were the first hurdle it had in mind. In the event it found that it did not need to write off loans advanced to an extent which reduced the 1988 profit much below the normal level. But during the 1989 year the bad loans could not be denied any longer and the Government bailed out the Bank to the extent of about $900m. As part of the restoration process the loans evaluation processes of the Bank were tightened up with responsibilities given to the international firm Booz Allen Hamilton surrounding this function. But also Fay Richwhite part owners of European Pacific, bought into the bank through the company Capital Markets Ltd which they controlled, and two directors of this company became directors of the Bank. The general expectation would be that the damage from the sharemarket crash had been repaired and that Bank would approach normal profitability in the 1990 year but this did not happen because of a delayed downturn in the Australian property market where the Bank had significant interests. Understandably there were concerns about what would happen if the Bank failed again. The "arrangements" were employed to boost the 1990 reported profit by $55m and a wrong application of interest on the other parcel of zero coupon bonds increased the reported profit by another $20m. But again the appearance of profitability was short lived because a further Government bailout was required and given in the 1991 year and a further loss was recorded.

Mr Garty was told of the arrangements on 30 March 1988 as an auditor of the Bank along with his senior colleague at the time. The colleague said he was most surprised at what he was told. Later they both told the Securities Commission that they recognised the arrangements as being an insurance policy as there was no rule that said otherwise. Later in 1988 Mr Garty told the bank that the arrangements were acceptable except that the "premiums" needed to be charged against profits of each year by way of five equal instalments. He did not give any reason for this and one can only assume that this was to make the arrangements appear to be more like a typical insurance policy. At the end of the 1990 year however when the Bank made a significant "claim" under the arrangements, Mr Garty's fellow partner and advisor, Elizabeth Hickey, did not even accept the adoption of equal "premium" installments and entered a profit overstatement of $27m on the Schedule of Audit differences in their work papers. She argued that total premiums charged need to be proportional to total "claims" made. Several items of profit understatement purported to offset this overstatement on the schedule the major ones of which were seen as invalid by the Securities Commission in 1993. . There were no other items of profit overstatement on it. In 1991 Mr Garty advised the bank that from then on he was treating the arrangements as a bank deposit from then because although they were an insurance policy they were more akin to an investment.

With respect to the second investment parcel of zero coupon bonds (often referred to as perpetual notes because of their close association with such notes) interest was not credited in the 1989 year because the bank purported to have forgot to do so. Then two years interest of $16m each, calculated on a straight line basis were included in the 1990 year profits when there should have only been one year's interest, calculated on a Yield to Maturity basis, totalling about $10m. Miss Hickey is purported to have mistakenly thought that a variable interest rate was involved and did not recognise this profit overstatement on this feeble false excuse. But in the 1991 Mr Garty somehow realised that YTM should have been employed, but then purported to think that the bond concerned was a loan rather than an investment and hence offset the total profit overstatement to due to these bonds date against that due to for the arrangements to give himself the impression that the overall total profit overstatement to date was minimal.

We wish to return again to Ruling No 1051 of the NZ Press Council. The complaint was upheld but the commentary that goes with it means that the upholding is irrelevant and the effect of the communication is many times the opposite of what the upholding should imply. Any advice or other assistance to have it removed from the Council's web site would be appreciated. It is an utter disgrace to those who put their name to it, which appears to be the whole Council membership.

The ruling concerns an assertion on the business page of the Dominion Post that New Zealand's "exports per capita are almost half that of Australia and 2 1/2 times less than the United States. The NZ Press Council is determined that readers of their ruling should gain the false impression that New Zealand's exports per capita are much less than Australia and the United States; whereas the true situation is that New Zealand's exports expressed on this basis are considerably greater than that of those two countries. Exports per capita is a logical concept in economic comparisons and this sabotage of public knowledge should not be in anyway tolerated.

We attach a copy of the ruling, edited only in respect to the complainant's name, as well as that of the complainant's email dated 15 November 2005 in which he attempted to draw the attention of the Dominion Post to what he believes to be a huge inaccuracy in an article published that day.

It is differences between the first paragraph of the email and its portrayal in the determination that has seriously defamed him. Firstly the determination twice says that he said in this email that some singular figure was wrong. As can be seen he made no statement approximating such expression and merely inferred that two ratios were wrong by reference to World Trade Organisation data which the newspaper was free to verify. I is likely that readers of the determination will think all that was said was a statement that some unspecified figure was wrong and hence this was a bad reflection on the complainant being quite uncouth and justifying the communication being ignored by the newspaper.

Secondly, relatedly but more importantly, the determination in no way says or suggests what the correct comparison of per capita exports is, or what the complainant believed it to be. The supplied email gives high prominence to what the correct situation is as did the complaint to the Press Council. This failure to present the correct data is in spite of the fact that the existence of an inaccuracy can only be determined by comparing the stated situation with the accepted correct one. Also the Council's second specific principle is that inaccuracies should be corrected. A correction surely involves stating the true situation not just the fact that the published statement was wrong. The complainant thus had every reason to believe that the true situation in relation to exports per capita would be part of the determination narrative.

Failure to state the correct situation and hence the magnitude of the inaccuracy in conjunction with other information given, will have caused readers to think that the inaccuracy was trivial, and that the complainant was not really justified in raising it, and other assertions which he is quoted as making also cannot be justified over such a trivial matter.

We list and briefly comment on these references:

1 "It is time you started publishing letters on such issues". As you can see my email went on to discuss other aspects of Mr McDonald's subject matter. The quoted ending applies more to the second part of the email which is not relevant to my complaint to the Press Council. It suggests that the complainant overly keen to capitalise on a small error.

2 "No one other than [the complainant], including Mr McDonald, had suggested it was wrong". Readers will conclude that the matter was too trivial for Mr McDonald or staff who had prepared his speech, or economists in general to notice it was wrong or to think it was worth correcting. If the magnitude of inaccuracy were known this assertion would have been much more of a bad reflection on Mr McDonald and other experts than on the complainant.

3 "an attempt by the Dominion Post to get on board in decrying this country's level of exporting". This comment is more plausible the greater the inaccuracy. Again the readers impression is likely to be that the complainant is using a small technical inaccuracy as a platform to sling mud.

4 "initially they had no reason to believe that Mr McDonald had been misquoted". Readers would think that the published and alleged correct data were very similar. Readers will think that if the Dominion Post could not see anything wrong with the published statement complained of then they should not either; again reinforcing the idea that the inaccuracy was trivial.

5 " error was intentional rather than a genuine mistake ..... business section was controlled by some business clique". Again these are extravagant claims if the error is small, unfairly reflecting badly on the complainant. If the Council takes exception to some of the assertions made it can say so but it is not entitled to punish the complainant by misrepresenting him.

6 "newspaper had a duty to check the facts presented by Mr McDonald, even if accurately reported". The rebuttal of this contention is fair enough in the ordinary course of events but not when the statement seems over the top, when the narrative should be prefaced with 'he made the incredible assertion that .." or similar. Again readers will think that the inaccuracy is minor.

7 The final bit of the determination suggests that the Press Council have seized the opportunity of a small inaccuracy to uphold a complaint and put in a plug for its services and relevance. It will be perceived that if there is judged to be an inaccuracy it is not fair to then downgrade it by saying that it is trivial but this has been done "between the lines".

The fact that the ratios complained about were derived from a invalid source is not itself evidence that the ratios as stated were inaccurate, merely grounds for suspicion. Two sets of ratios can just happen to be identical or quite similar and readers would think that in this instance they probably were. The complainant's letter of 18 December was for the purpose of convincing the Council that the matter was worth investigating and the new information was not in itself evidence of an inaccuracy.

The Dominion Post published this determination on page A14 on April 5 with the heading "export figures complaint upheld" replacing the bold type heading of the determination supplied. It thus did not indicate that the full statement was prepared by the Press Council. The back page positioning adds to the triviality notion.

The following is the text of my email to the Dominion Post of 15 November 2005.

Mr Kerry McDonald (pC3, 15 Nov) is reported as saying that NZ's exports per capita are about half that of Australia and 2.5 times less than the US. I assume he means the NZ figure is equivalent to the US one divided by 2.5. This surprised me so I looked up the World Trade Organisation's figures for 2004 at NZ exported $US20.4b of merchandise and 7.8b of services. Dividing the total of 28.2b by 4m people gives $US6,900 of exports per person. Corresponding figures for the US are 819b, 318b, 1137b, 294m giving $US3,900 per person. Australia comes in at $US5,500. Big countries are naturally more self-sufficient so NZ's exports might still be to low, but quoted comparisons need to be more accurate than that. Like many economic commentators Mr McDonald ignores the Think Big debacle and compares NZ and Australia GDP per capita inferring that ongoing economic policies are to blame. Apart from colonial heritage they are quite different countries so there is no reason why there should be GDP parity. It is time for you to start publishing letters on such issues. [name and address]

The following is the text of the Press Council determination. The final paragraph does not appear on the version on the Council's web site. We submit that it suggests to readers that the Council was taking advantage of a quite trivial matter to make a rare finding against the newspaper and so put in a plug for its relevance.

Printable Version

Case Number: 1051 [the Complainant] AGAINST THE DOMINION POST

Council Meeting MARCH 2006

[The Complainant] complained that a paragraph in a report published in The Dominion Post on November 15, 2005, was incorrect and that although he pointed out the error no correction has been published. He complains that in publishing an inaccurate report and failing to amend it the newspaper is in breach of two of the Council's principles. The complaint is upheld.


In a report of a speech to a minerals conference in Auckland by Mr Kerry McDonald, chairman of OceanaGold and BNZ, The Dominion Post reported that New Zealand's exports per capita were "just under half that of Australia and 2 1/2 times less than the United States."

On the same day [the Complainant] e-mailed The Dominion Post saying that this figure was wrong. He concluded "It is time for you to start publishing letters on such issues."

The letter was not published.

On November 24 [the Complainant] received a note acknowledging receipt of his letter and replied immediately by e-mail, indicating he was not satisfied and suggesting the figure required "correction by one means or another."

On November 30 the editor of the newspaper, Tim Pankhurst, wrote to [the Complainant] saying they had no reason to believe the figure was incorrect. No one other than [the Complainant], including Mr McDonald, had suggested it was wrong.

At this stage it appears both [the Complainant] and The Dominion Post were attributing the figure to Mr McDonald.

The complaint

On December 8 [the Complainant] complained to the Press Council and followed this with a letter on December 18 which pointed out that having seen Mr McDonald's text, as published on the internet, it was clear the figure was derived by the newspaper incorrectly, their having overlooked the qualification that the relevant table referred to increases in exports per capita over the period 1960 to 1999, rather than an absolute per capita figure.

[The Complainant] attributed this to "an attempt by The Dominion Post to get on board in decrying the country's level of exporting." The newspaper's response

In a letter to the Press Council two days later Mr Pankhurst acknowledged that [the Complainant] was right, saying "the error was ours." He explained that initially they had no reason to believe Mr McDonald had been misquoted and had had no request from him to correct the mistake.

A letter from Mr Golden, on another subject, was published in The Dominion Post a couple of days before his letter of November 24 and they generally had a general policy not to let their letters columns be hogged by any individuals.

Mr Pankhurst said he was now happy to publish [the Complainant's] letter.

Offer rejected

On December 29 the Press Council wrote to [the Complainant] putting forward the option of having his original letter published in The Dominion Post. However [the Complainant] decided to pursue his complaint and suggested The Dominion Post's error was intentional rather than a genuine mistake. He said the newspaper's business section was "controlled by some business clique". This was denied by the newspaper.


The Press Council upholds the complaint. The speech was inaccurately reported. Having ascertained the error it was incumbent on The Dominion Post to correct it. [The Complainant's] beliefs as to the motive for the error are irrelevant. His original contention that the newspaper had a duty to check the facts presented by Mr McDonald, even if accurately reported, is not sustainable. No news organisation can submit all statements made in speeches to analysis in the course of a news report. Their obligation is to report the text as accurately as possible. It is for comment sections, letter writers or other contributors to challenge the content of such material if they feel it is warranted.

Press Council members considering this complaint were Barry Paterson (Chairman), Lynn Scott, Aroha Puata, Penny Harding, Ruth Buddicom, Denis McLean, Terry Snow, Alan Samson, Keith Lees, Clive Lind, and John Gardner.

People with a complaint against a newspaper should first complain in writing to the editor of the publication and then , if not satisfied with the response, complain to the Press Council. Complaints should be addressed to the Secretary, P O Box 10 8789 The Terrace, Wellington, Phone 473 5220. Information on the Press Council is available at

(end of report)

Protests have been made to both the Dominion Post and the Press Council. Both refused to discuss the matter or amend their reports.

The following was the reply of the Dominion Post:

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