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July-August 2004 Edition----to page back through Previous Editions click here

News items during the month of June again highlight the wayward accounting profession. Top of the list is the new chairman and deputy for Wrightson Limited. The chairman, Keith Smith has been a president of the Institute of Chartered Accountants of New Zealand in recent times. There shouldn’t be anything wrong with that except that the record of those who have held the office since about 1989, when Jeff Chapman did a stint, leads one to wonder. And of course Mr Smith’s association with his deputy at Wrightsons who appears to hold the voting power.

The new deputy chairman of Wrightson Limited, Craig Norgate, was voted Young Accountant of the Year, about 1994 by the Institute/Society. This apparently was in recognition of his negotiation and management skills as CEO of Kiwi Co-operative Dairies when it absorbed fellow dairy company Moanui. Mr Norgate and a team of supporting directors went on through the nineties to absorb or dominate a merger with most other dairy companies for him to become CEO of Fonterra Corporation, New Zealands biggest corporation. But his fixed term contract in that position was not renewed and the new CEO came from outside the dairy industry. Mr Norgate has since used his funds, contacts, and skills to take control of Wrightson, a major farm servicing company.

The consensus seemed to be that legislative export monopolies as was the NZ Dairy Board were no longer acceptable on the international scene and it was government policy (without saying so) that a natural export monopoly in the form of one large company be “formed” to replace the Dairy Board’s legal hold. Mr Norgate was seen as the price that had to be paid for the formation taking place.

If one is clever enough to get oneself in such a position then “fair enough” one might say. But the tactics used by Mr Norgate in maintaining his dominant position are much open to question. In the final merger process that saw the formation of Fonterra it was probably a matter of being less intent on achieving a virtual monopoly than the other parties and holding out for the plum job.

But this site is primarily about accounting and the point is that in 1996 Mr Norgate was involved with Ernst and Young and others in E&Y producing a report to mislead the shareholders of Tui Milk Products Limited as to the benefits that they would receive from their company “merging” with but effectively being absorbed by Kiwi Co-operative Dairies of which Mr Norgate was CEO. The report gave the impression that the Tui shareholders would receive 89 cents extra because of the merger for each kg of milk solids which they supplied to their dairy company for the next 19 years. In fact the calculations show that the 89cents was to be the total benefit (up front equivalent) if the shareholder were to supply a kg of milk solids in each of these 19 years Even a high court judge was fooled into the nineteen fold overstatement of what the 89cents represented. But even these calculations were wrong and the 89cents was overstated by some 30%.

It is fair to say that dairy farmers have a habit of talking about their milk solids as a number of kgs without saying “produced per annum”. This is assumed. Thus to them “milk solids” can refer to the solid matter contained in milk or alternatively their annual or seasonal production of these solids. One would assume that that professional people such as accountants would adopt the former, traditional dictionary, meaning of the term “milk solids” for the sake of clarity but not so Ernst and Young in this report. They referred to a net advantage to Tui shareholders of “89 cents per kg milksolids for the seasons 1996 to 2015”.

Officially they meant a gain the equivalent of 89cents paid in 1996 for each kg of annual milksolids supply, with the actual gain being spread over 19 years of milk payments. But effectivly what they said was that 89cents extra would be obtained for each kg supplied during the 19 years.

Those shareholders who enquired about the meaning of the 89cents were no doubt told the true story. All the shareholders naturally want to think that they were not silly enough to think that they would get an extra 89cents for every kg produced season after season. But a 30% increase in earnings such as that would have been is not unheard of as the gains from industry rationalization. They knew that huge losses from the merger were unlikely and many would have been prepared to sacrifice some income to keep their local company. Many who had not been told the true story and could not be bothered inquiring would decide to vote for the merger on the grounds that they were not going to turn down 89cents on all kgs supplied henceforth because of failure to believe it. If it sounds too good to be true it usually is, but if the cost qualifying for the promise is low perhaps one should be in just in case. Hence the corrupt information would have achieved the result that the perpetrators wanted.

But it doesn’t stop there. Tui was incurring a considerable losses on its local milk sales in the hope that they would return to profitability. It had the option of selling or closing down this sector. The 89 cent advantage assumed that the losses would continue.

If the Institute of Chartered Accountants had taken firm action against Mr Norgate he would probably not have held such high positions in Fonterra or Wrightson.

The sharemarket is heating up and slick operators are coming to the fore. Among them is former accountant Allan Hawkins who has been allowed to have control of a listed company despite serving several years gaol for his part in the Equiticorp collapse of the 1980s.

On 26 July the Dominion Post newspaper produced on page C5 an article of propaganda entitled “Accountants go into bat for new code”. It consisted of an interview with Joanna Perry of the Financial Reporting Standards Board of the Institute of Chartered Accountants of NZ. Ms Perry appears to hold similar qualifications to the long term holder of this position, Liz Hickey, and is also clocking up time as a member of the Securities Commission, as did Ms Hickey for 11 years. Ms Perry claim that NZ was “punching above its weight” as the smallest country by far amongst eight International Accounting Standards Board “partner standard-setters”. No mention of the need to keep up NZ’s profile so that its high profile accountants avoid prosecution to the embarrassment of the International firms that they work for. It is important that this “leading the world” stance be squashed. The same misguided stance applies to female participation on these NZ Boards and Commissions.