The Institute of Chartered Accountants of New Zealand have made recently (Nov 1999 ) awarded Life Membership to one Peter Hays.

Mr Hays is not deserving of normal membership of any self respecting accounting organisation and this "honour" indicates that the Institute has not reformed.

Mr Hays made the following submissions to the Enquiry of the Securities Commission into Certain Arrangements entered into by the Bank of New Zealand in March 1988, published in May 1993:

At page 158 of the Commission's report he is quoted thus:

1.9 To summarise, in my view the treatment of the arrangement as an insurance policy by the prior board of the BNZ in that bank's 31 March 1988 financial statements was likely to be reasonable and within the limits of generally accepted accounting practice in New Zealand at that time.

In these circumstances there would have been a considerable range of tolerance within which the BNZ was able to offset future bad debt losses it occurred and hence were claimable under the policy, with recoveries available to it in accordance with the policy.

Then, at page 173, when asked whether an overstatement of profit of $54 million for the 1990 income year was material he said:

If I might qualify my remarks in that I've not examined the financial reports of the Bank of New Zealand for the years. I've not had the time and I've merely a summary of the key figures extracted from those accounts so subject to that you know I do observe that the profits of 1987 of a certain amount went up in 1988 and then plunged to a massive loss in 89. Then in 1990 it restored to profit but not to the levels of the 87 and 88 years. My assessment in those circumstances would be that $54 million for 1990 was not material.

and later

To me the user of the reported accounts in 1990 would make much the same decision on those accounts whether the profit was $50 million lower than the figure reported or $50 million higher. It showed whichever number one had eventually there I think would show the same result There had been a recovery from 1990 but it was still a long way short of what had been achieved in 87 and 88 and that's why I believe that the amount referred to in the report for an adjustment for 1990 is not material when you look at the affairs of the Bank of New Zealand.

and later again

The way I would see it is that the user of the accounts and I think we'd generally be talking here in terms of the shareholders as the users would have seen after a disastrous year in 1989 that the bank had recovered a great deal. It was not now reporting a result as bad as 1989. It was reporting a profit but a profit which was not large in relation to what had been achieved in the years immediately before 1990 and that's why I would see that the user of the accounts would look at that reported result in relation to the actual results of 87 and 88 and if materiality was to be a factor then that would have also be assessed in relation to the results of 87 and 88.

The following information and argument is offered in support of the opinion expressed of Mr Hays and the Institute.

1 The "arrangements" referred to had the sole purpose of allowing (mainly or solely by bluff) the reported profits of the bank to be "smoothed" by;

(a) not declaring interest on a $110 million zero coupon deposit which formed the substance of the arrangements;

(b) treating the $110 million as the total insurance premium which was to be "charged" against income in an arbitrary manner over the 5 years involved ( in the event this charge was quite constant), and

(c) applying the $200 million proceeds of the deposit as claims against bad debts and associated costs, in any of the years as seen fit, the total such claims to be $200 million even although most all the cash proceeds were not available until the final year.

2 No external insurer took any responsibility for indemnifying losses under the arrangements.

3 No evidence has been supplied or specific allegations made of any "arrangements" similar to this having ever been entered into in New Zealand before although Mr Hays and others claim them to be "likely to be reasonable and within the limits of generally accepted accounting practice in New Zealand at that time".

How could they be "generally accepted " if such arrangements had never been tried before?

What similar schemes were "generally accepted" ?. No examples were offered. The only basis for similarity with any other scheme is likely to be that they were similarly fraudulent and/or outrageous and entered into by a similar class of people. There is surely a distinction between being accepted as OK and having been "got away with".

4 Traditionally there has never been any insurance available against bad debts and advances. This is because the level of bad debts in any situation depends so heavily upon judgements made in extending the credit in the first place. Mr Hays and most every accountant knew that in 1988 and thereafter. Any talk about a bank insuring its advances would immediately raise the utmost interest and scepticism as to how the agreement worked. Inquiry into this BNZ scheme would reveal that it was not an insurance scheme even if there was documentation that called it such. The idea that something becomes something else just because there is an official looking document saying so is preposterous. The fact the the document cost over $1m to prepare (that much was paid out anyway) is irrelevant. Yet Mr Hays talks about "the policy" as if that is what it was.

This is not the case of a traditional accounting practice of dubious value being constantly employed by the bank and nobody had got around to putting a stop to it. The arrangement was instigated solely for the purpose of trying to evade the bank's obligation to report an accurate profit for each financial year and nobody is denying that.

5 With respect to whether a profit overstatement of $54m in the 1990 year was material the following the recent reported profits (before taxation)

Mr Hays's argument that because recent profitability had been highly volatile the latest reported profit would be less relevant is illogical. Potential traders in the BNZ stock would be trying to determine whether it was on its way back to normal profitability or still in a lot of trouble (as subsequently proved to be the case). A razor's edge for deciding which may well have been in the $50m to $100m range. Mr Hays rationale is not acceptable for an accountant.

He deserves a life sentence rather than any life membership.

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