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Christmas 2010 Edition ----

Bad tidings of great consternation is what we have to report this festive season. Click here to access our pantomime.

The five former Feltex directors who were each acquitted of two criminal charges in relation to the six monthly accounts to 31 December 2005 have been awarded costs of about $900,000. This is a surprise according to the news media but we say it is perfectly consistent with the judgement that talks about "all honest men" and "not a s------ of evidence against them".

The MED or Companies Office did not appeal the awful judgement but is appealing the award of costs, the costs being just what one would expect given the judgment.

We have gone on before about the improperness of the judgement and we will do so again and again.

Firstly the directors had no right to rely on a review of these accounts undertaken by Ernst and Young because this firm was the company's auditors (with respect to the annual accounts to 30 June 2006) and reviewers (with respect to the six monthly accounts). Auditors and reviewers have to be independent of the company's sources of expertise. The idea is that the company has one source of expertise and the auditors/reviewers have another, completely independent, source of expertise. The auditors/reviews report to the shareholders on any significant differences between the two sets of expertise as it applies to the accounts. If there is a defect in one source of expertise or the other it will come to the surface. But if the company chooses to rely on the auditor's/reviewers expertise then there is only one set of expertise in the mix and any defects in it will not come to light. Even Ernst and Young go along with this as evidenced by paragraph 110 of the Securities Commission's report of 11 October 2007 where it says "Ernst and Young takes the view that an accounting firm (whether conducting an audit or a review engagement) does not provide advice to the directors of a company". This is repeated at paragraph 188. They suggested that the company engage them to do a review because it would help reassure shareholders and others of the validity of the accounts, not because it would save any need for the directors to get alternative expertise. That would be their official attitude anyway.

Secondly the idea that under the previous accounting regime debt held by the bank need not be classified so as to reflect the strict legal situation is codswallop. Where did she the judge find an accounting authority saying that? We suspect that there have been a lot of occasions where businesses have "strengthened" their balance sheets by saying that an "at call" bank overdraft was more secure than the legal situation and have got away with it but they are illegal acts of accounting abuse. The practice is not generally accepted even although it might be widespread. Its like going more than 10% over the speed limit. Few say that it is OK (because if it was OK there would be anarchy) but a great many of us have done it, some of us getting caught. Where is the value in the directors saying "we should be able to last another year without getting our overdraft called up"? It makes for meaningless classification. Even Ernst and Young as quoted at paragraph 172 of the Securities Commission document "asserts there was not a significant change in the requirements for classification of debt from previous NZ GAAP to NZ IFRS".

Thirdly most of the bank loans had been for a one year term. This means it had been justifiable to classify them as non current. But in the re-negotiations of September 2005 the term became one month's notice. The directors thus had good reason to suspect that this would change the classification regardless of any changes in the standards.

Fourthly there is nothing reputable about the accounting firm Ernst and Young. Sure their technical knowledge is second to none and their grasp of the subject can't be faulted. But this counts for near nothing when they don't have integrity. For them it is all about what they can get away with. We will present our quite extensive file of deficiencies in Ernst and Young here very soon.

Well it is a little sad to see the resignation of Pansy Wong from parliament. The road to heaven was very narrow and tricky when it came to near free overseas travel. When one applied for it there should have been an official who did a strip search for any possible business intentions, which would have frightened away all temptation. There was not a hint of an inspector in sight at the time. Then somehow there was a release of MPs expenditure claims in Britain which unearthed a groundswell of protest. The NZ public did not really join in that protest but the press wanted to be part of it. They are not prepared to expose the Feltex scandal but needed to do something which had a bit of bite. And whang bang one is caught.

It transpires that Dame Jennifer Shipley, who also has the generous overseas travel entitlement, is a sometimes business associate of Ms Wong's husband. Dame Jennifer was in China doing business at the same time as the Wongs were on their eventual ill-fated trip. We wonder whether the newspaper has checked whether the Dame had claimed for her travel. Indeed did it check on the Wongs because some business they conducted overseas had come to there attention?, or was it because the business they had knowledge of appeared just a little mirky because of Ms Wong's official involvement? If the newspaper become aware of business conducted oversea by anyone entitled to the travel subsidy when business is not involved will it check it out or will it only do so if the business it knows about seems to have a mirky flavour, or will it only do so if the business people don't have a knighthood and are of certain ethnic origins?. These are the questions we would ask. Dame Jennifer's business we suggest is now a little mirky because of her association with Mr Wong.

Probably the Dame is too well healed and instilled with the protestant ethic to fall to such a temptation but all should be checked out fairly.

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