Worldcom prompts NZ accountants to audit their standards

By NZPA

Friday 5th July 2002

Accountants believe New Zealand has a superior accounting framework for protecting investors from the type of financial scandals exposed in the United States. But that doesn't mean it would be immune or couldn't be improved.

Across the Tasman, the Australian government has foreshadowed law changes to toughen up its accounting standards.

Here the Institute of Chartered Accountants plans to release a discussion paper within the next month which puts forward a number of options including independent audit committees for companies.

Institute president Ralph Marshall told NZPA his organisation had also been discussing the need for better checks and balances with the Government.

The "green paper" he plans to release covers corporate governance, the appointment of auditors, and whether the services an accounting firm provides to a company should be disclosed in that company's annual report.

Mr Marshall is currently overseas where he is meeting with representatives of accounting bodies in Britain, the US, Canada and the International Federation of Accountants.

"With each of these bodies we will be discussing their responses to the governance, reporting, standards and audit issues that have been raised and looking for lessons that we can apply in New Zealand," he told NZPA from New York.

Mr Marshall said that while it was highly unlikely that a WorldCom-type situation could occur in New Zealand, no country was immune from fraud.

"New Zealand has had its share of corporate crisis in the past, particularly in the 1980s, and we have learnt from those," he said.

"There's quite a clear difference between the way companies operate in New Zealand. We don't have the CEO and chairman being one and the same thing ... Enron, Global Crossing, WorldCom have all had the chairman and CEO being one and the same."

US companies also did not "have a lot of non-executive directors on boards and of course, share options make it fairly attractive for people to try and manipulate the market, along with the fact that they have to report quarterly."

A clear standard on share options in New Zealand was "one of the things being worked through at the moment".

But Canterbury University senior accounting lecturer Alan Robb believes it is quite possible some New Zealand companies are likely to be "doing a WorldCom" -- hiding expenses by calling them assets.

"I think it's extremely likely that similar questionable action is being practised in New Zealand at the moment," he said at the weekend.

"There are some things that are appearing on balance sheets that should not be treated as an asset, that should have been treated as expenses, in my view."

To instil greater confidence in the Australian market, Treasurer Peter Costello signalled last week that corporate accounting laws defining world's best practice would be introduced into parliament next year.

"We haven't got a blameless record in Australia, have we, in terms of corporate regulation?" Mr Costello told the Age newspaper.

"We've had One.Tel, we've had HIH ... Now we've got to make sure in Australia that we attend to these things."

However, the new head of New Zealand's Stock Exchange, Mark Weldon, thinks that while there may be room for improvement, New Zealand is not badly served by its current accounting standards.

"I hope it's not famous last words, but I would think that the structure of our economy and the size of the companies ... would suggest that these things are more likely to happen in the US than they are here."

Mr Weldon's confidence are based on three planks: New Zealand's size, its relatively uncomplicated company structures, and its principle rather than rule-based accounting system.

The sheer size of the WorldCom, Enron and Xeroxs of the world were at one stage "worth more in terms of market capitalisation than the entire GDP of New Zealand".

"So when you try and reduce a company of that size to a very small balance sheet and profit and loss statement there is a lot of latitude for wiggle-room."

Mr Weldon, recently returned from several years in the US, says another thing in New Zealand's favour is its emphasis on returning dividends, giving shareholders a clearer idea of its progress.

"In the States everything is driven by stock price appreciation ... If companies are actually repatriating cash on a regular basis, you at least know they are generating cash, rather than a pure earnings report like in the US where you see the report and you value them."

An overweaning emphasis on quarterly results in the States was also less evident here, making it less tempting to fudge the books.

"The analysts over there are all powerful and CEOs and management are petrified of not meeting quarterly earnings expectations ... Companies (here) tend to take something more than a quarter by quarter approach. I think there are quite a lot of distortionary elements built into the US system that aren't structural here."

Then there's the fact that New Zealand, Britain and other countries are based on accounting principles rather than the US' heavily rule-based accounting system.

"The accounting codes in the US are very technical and rule-driven, so you can be in technical compliance at the same time as you are ethically non-conformant," Mr Weldon says.

"The most obvious example is the situation where you only have to report material transactions, and material in some instances is defined as only any transaction greater than $US5 million.

"So what it means is that you will get a lot of companies over there engaging it what they call `under the radar acquisitions' -- they'll run around for example, banks, will run around buying blocks of branches of other banks at $US4.5 million a time."

When an analyst sees the report, Mr Weldon says, none of the se transactions are mentioned in the disclosures but they boost the company's earnings and get rated upwards.

International financier George Soros agrees, saying the US' rash of accounting irregularities reflected America's rule-based approach to accounting practice and an undue emphasis on success in American culture.

"Rules alone are not enough," Mr Soros told BBC TV.

"You need principles."

Some of the ideas the Australian government is tossing around include independent audit committees for publicly listed companies and a 12-member public board to monitor firms.

New Zealand accountants are also interested in seeing independent audit committees used more widely. As far as the costs are concerned, Mr Weldon says that depends on the efficiency of the company.

" If it's disorganised and chaotic the auditors need to spend more time and it costs more money. "

Whether Australia's tough talk on accounting would result in onerous costs for New Zealand companies listed there, remains to be seen.

Telecom, New Zealand's largest listed company, said it would watch developments in Australia closely.

"As Telecom is listed in the US and Australia as well as New Zealand, we give much regard to both US and Australian accounting standards," said spokesman Martin Freeth.

In February, following the Global Crossing collapse, Telecom's accounting was taken to task for recognising all revenue from the sale of spare cable capacity in its half year result even though income accrues over a number of years. The Securities Commission investigated but found no wrongdoing.

Telecom said there were conceptual differences between the New Zealand and New York stock exchanges which required different accounting approaches in some areas.

But Mr Freeth said in principal, Telecom supported any "reasonable moves" to beef up public confidence in corporate reporting in New Zealand.

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