Accountant kept Watson links separate from Elders' audit Intercompany debt, so what?

By Deborah Hill Cone

Friday 22nd February 2002

Accountancy firm Brown Woolley Graham (BWG) has moved to defend its audit department's independence, explaining why it is not too close to Eric Watson's empire to audit the accounts of Elders, the finance company he half-owns.

BWG partner Rick Johnston is Mr Watson's longtime accountant and a trustee for a raft of his companies, while the firm is upfront about carrying out consultancy work for other companies in the group, as it discloses in the finance company's most recent accounts.

But Margaret Fisher, chief executive of BWG, said as Mr Johnston had no personal or beneficial shareholdings, there was no conflict of interest.

"He is merely a trustee so therefore he has no benefit or contact out of that at all," Ms Fisher said.

And the 10-partner firm's audit department was rigorously independent, with audits carried out on a separate floor from Mr Johnston.

BWG, in the process of changing its name to Grant Thornton, is only one of least six major accounting firms that carry out work for companies in Mr Watson's Cullen Group - along with PWC, E&Y and Deloitte.

"Where there are conflicts you will find there will be other accounting firms [doing the work]," she said. "This firm is extremely conservative and we wouldn't be risking anything."

Cullen Investments managing director Phil Newland pointed out Cullen's spend on BWG was only 14% of its total spend on accounting firms.

The issue of audit independence has been in the headlines worldwide since the Enron collapse, with accountancy firms moving to clear perceptions of conflict of interest.

One of the key issues the auditors of Elders had to deal with was related-party lending within the finance company, which is owned by Mr Watson and Mark Hotchin through Hanover Group.

Some of those links include companies of which Mr Johnston is a trustee.

Investigations by The National Business Review show:

Mr Johnston is a joint shareholder with Mr Watson in property company Plaza Developments, the vehicle used in the construction of Auckland's Sebel Hotel. Companies Office records show the company still owes money to Elders Finance, with a partially satisfied January 2001 debenture, with a priority amount of $7 million still to be paid off in full. The company also owes money to AMP Bank and Westpac. The most recent Elders Finance prospectus shows Plaza had owed $6.3 million to Elders at June 30, 2000, but had no current loans outstanding a year later;

Mr Johnston is a director and joint shareholder with Mr Watson in Malibu Investments. The balance of that company is owned by Cliff Matson and there is a mortgage and a debenture over the company owing to ASB Bank;

Mr Johnston is the sole director of a company wholly owned by Mr Watson called Safari Productions, which was set up in 1997 to fund a film called "Kiwi Safari." That company has charges over it to the California-based Imperial Bank, Atlab New Zealand and Foundation Films;

Mr Johnston is joint shareholder with Mr Watson in Foreshore Investments, which has a 15% stake in Sonal Holdings, owner of Matarangi Beach Estates, which has three charges owing to Elders. Matarangi Beach Estates conversely has a charge over DHC Holdings, a company that owns 500,000 of the nine million shares in Elders Finance; and

Mr Johnston is a director and joint shareholder with Mr Watson in a company called Queens Road. The other director is William Gibson, a former accountant with BWG who left to work for Cullen Investments five years ago.

In its June audit report for Elders, BWG disclosed it carried out other assignments for the group "in the area of special consultancy projects."

Ms Fisher said that was standard wording and the firm enforced a rigorous separation between the services it provided to Cullen and the services to Elders Finance. While it provided a broad range of accounting and taxation consulting services to Cullen, it provided auditing services only to Elders.

She said the firm's audit staff had reviewed certain internal control procedures at the request of management. They had also had discussions with management on the presentation of the final accounts - those were the "special consultancy projects" referred to.

The Institute of Chartered Accountants (Icanz) has a nine-page guideline on integrity, objectivity and independence as well as a section of its code of ethics dealing with independence and objectivity.

It says a firm should not accept a reporting engagement for an entity if anyone in the firm is a director, officer or their equivalent of that entity or any other entity that "has control or exerts significant influence over it."

BWG's Ms Fisher said Icanz had in the past few weeks carried out a regular practice review and given BWG "a big tick."

"All of these things have been examined - we wouldn't have got [a clean practice review] if they were not satisfied," she said.

Icanz divisional director of policy April Mackenzie said a practice review did not go into a detailed study of a firm's client relationships.

"The truth of the matter is when you've got complex relationships it isn't straightforward as to what is correct or incorrect," Ms Mackenzie said.

Icanz had avoided making clear black and white rules in this area because the institute believed these were matters of judgment.

"That's because integrity and objectivity are the qualities of absolutely overriding importance for all members, and that's not something that you can put down in black and white," Ms Mackenzie said.

"The picture you have given me here, one couldn't tell one way or the other whether there is a clear conflict, a potential conflict or absolutely no conflict at all. It depends on the nature of all of the engagements, of all of the relationships. That's why we don't write black and white rules."

Ms Mackenzie said the institute had not received a complaint about the relationship between Elders and BWG.

Elders Finance, believed to be the country's biggest privately owned finance company, said in December it would issue $550 million of secured deposits, almost twice the size of the $270 million it issued in 2000.

BWG audited Elders Finance's most recent accounts, for the year to the end of June 2001, which show shareholders' funds of $25 million, an unqualified opinion.

At June last year the amount owed by related parties was 19.97% of total receivables - and while that figure does include lending to wholly owned subsidiaries such as Nationwide Finance, it does not include all the lending by Elders to other Watson companies unless they are considered "material."

The Matarangi lending, for example, was not disclosed, because it was not deemed to be material.

Elders' shareholder Mr Hotchin said the Matarangi Beach Estates charge over DHC Holdings dated from the time when he owned both companies (Matarangi Beach Estates is now owned by interests of property developer Greg Wilkinson). Mr Hotchin said when Matarangi Beach Estates was sold the charge was assigned to a family trust, the Kelly Ashley Trust, but the registration was overlooked and he would be addressing it.

Mr Hotchin owns his 50% shareholding in Elders through the Kelly Ashley Trust, so its trustees, John Radley and Harry Lloyd Hotchin, show up as the actual shareholders of Elders part-owner District Holdings.

In line with its rapid growth Elders' provision for doubtful debts went up from $289,000 to $2.3 million in the year to June 2001, as Elders' borrowings increased from $91 million to $154 million.

Investors who put cash into Elders on an attractive interest rate of 6-7.25% have an interest in knowing how much of the finance company's lending is going to companies linked to Mr Watson's empire in some way.

In another Elders lending transaction that leads to Mr Watson, the finance company has a charge over NZL Properties, which is owned by Hauraki Ltd, which in turn is 100% owned by Mr Watson. It relates to a $135,000 loan.

NZL Properties, like many Watson companies, gives the BWG details as its address.

The Elders charge in that case is dated September last year, so even if considered a related-party transaction it would not have shown up in the most recent accounts of the finance company.

Mr Watson recently resigned as a director from some of his companies. Records show he resigned from Logan Corporation, a subsidiary of Cullen Investments that owns shares in listed retailer Pacific Retail Group, on August 24 last year. He also resigned as a director of Hanover Group on October 25 last year. Most of his investments are owned through Cullen Investments.

BWG is to have an official function next week to change its name to Grant Thornton, aligning it with the sixth-largest accounting firm in the world - a firm that specialises in small and family-owned businesses. The name change does not alter BWG's ownership structure - it has bought the rights to the international name in much the same way as franchisees buy the rights to use other multinational names such as McDonald's.

Grant Thornton's Auckland office will continue to be run independently of the already operating standalone Grant Thornton firms in Wellington and Christchurch.

The firm previously known as Grant Thornton in Auckland, before BWG bought the rights, has changed its name to Carlton DFK.

Why do accountancy specialists pay particular attention to intercompany debt or related-party transactions?

Canterbury University accountancy lecturer Alan Robb said complex financial frameworks, involving multiple companies, partnerships and off-balance sheet deals were a common marker of financial health - or lack of it.

"The reason is simply that shareholders and lenders are rarely able to see the true extent of indebtedness, and often creative accounting - within generally accepted accounting practice - presents a misleading picture of financial performance," Mr Robb said.

And a 1997 Australian study of famous company collapses by accounting professors Graeme Dean and Frank Clark found byzantine corporate structures were "a mechanism of financial obfuscation."

The FOEs - the 'Friends of Eric'

Like most tycoons with a widespread network of investments, Eric Watson is surrounded by an ever-changing group of associates.

Some are permanent fixtures, who have been his lieutenants since the early Blue Star days. Some join up for a time and then move on.

Some also share his after-work interests and hang out with him on the golf course, at the corporate box and around the racetrack or find themselves in the pages of women's magazines.

Others are prodigious behind-the-scenes workers who keep a low profile but make the deals happen and keep the money flowing.

THE JOCK
Matthew Ridge
This sportsman is a mate of Mr Watson's as well as a business partner. The pair are often seen out at Auckland watering holes (Spy bar, Garage) and golf courses. Mr Ridge is also director of the bar formerly known as Finz (and presumably which will continue to be known as Finz, at least in business terms, if they want to use up those tax losses). Sources said Mr Ridge's latest business initiative was to set up a chain of carwash outlets. Companies Office records show an out-of-date address for Ridge, in chic Auckland suburb St Mary's Bay - the address of a house he sold for $2.1 million last year. He is said to be living in an apartment in the Metropolis building.
THE COMPANY MAN
Phil Newland
The 33-year-old group managing director for Cullen Investments is the son of colourful Auckland property developer Olly Newland, author of the book Lost Property, re-released last year. Mr Newland (junior) came back from the US last August, where he had gained a postgraduate finance degree from New York University, to take on this job. A lawyer who spent some time at blue chip firm Russell McVeagh before heading to the US, Mr Newland also worked for property developer Andrew Krukziener "on a short term contract." He has now been installed as a director of practically all Mr Watson's companies and is said to have brought a new level of corporate discipline to Cullen Investments.
THE PARTNER
Mark Hotchin
Most often described as a "property developer," Mr Hotchin actually has diverse investments, including 50% of Elders Finance (owned through trustees) and a stake in Pacific Retail Group. Mr Hotchin was the businessman who sold Corporate Cabs to Murray Bolton. And it seems he makes a habit of being generous with cars. Friends recall how he gave Mr Watson a vintage car for his 40th birthday a couple of years ago - wrapped up with a big bow. Mr Hotchin lives in a $2.2 million 1950s brick-walled house in Parnell.
THE MARKETER
Mick Watson
The NZ Warriors boss - no relation to the other Mr Watson, by the way - doesn't show up on many directors lists but is still a key player in the Watson portfolio. A former manager for Kellogg's cereals in Australia, he secured naming rights sponsorships for Kellogg's for some Australian league matches and the country's premier schoolboy competition. Since taking over as general manager of the Warriors in October 2000 Mr Watson has managed to lure back the crowds and has also taken the team to venues other than Auckland. He drives a black Porsche and has just bought an impressive house in Auckland's chic St Mary's Bay.
THE PROTÉGÉ
William Gibson
Joining the Watson empire has been a blast for this early-30s accountant, who went from a day job at Brown Woolley Graham to a well-paid spot as an accountant at Cullen Investments. He is sometimes jokingly known as the CEO, or chief entertainment officer, organising some of the tycoon's corporate functions. He oversees a portfolio of Mr Watson's assets, including his Westbury Stud. Mr Gibson is a director of several Watson-linked companies, and lives in a $600,000 apartment in Herne Bay.
THE PROPERTY DEVELOPER
Greg Wilkinson
This entrepreneur is in the process of extricating himself from the Watson empire, as he negotiates to do his own thing. He is to buy back Wilkinson Investments, the company that is developing the luxury Matarangi resort on the Coromandel Peninsula. Another deal for Eric Watson's interests to buy Mr Wilkinson's Axis Property Group did not go ahead. A respected figure in property circles, Mr Wilkinson was a key driver behind the drawnout but successful Sebel Hotel development on Auckland's waterfront. His split with Mr Watson is amicable - he says the negotiations have been "fair." Mr Wilkinson is married to Mandy Craddock, daughter of legal highflier Richard Craddock QC.
THE CONTENDER
Evan Christian
Once in on lots of Mr Watson's deals, Mr Christian now gives a short reply to a question about what dealings he has with Watson: "I have not been involved with Eric on any new deals for some time now. He still is a shareholder in Advantage Group, of which I am chairman." The former golden boy of tech stocks keeps a lower profile since the tech-wreck. He is said to have "discovered" TV star Eva the Bulgarian, his former girlfriend, in Eastern Europe.
THE BACKROOM BOYS
Maurice Kidd and Mohindar Randhawa

Maurice Kidd
These are the two men who inhabit the offices closest to Mr Watson in his ANZ Tower premises. Mr Kidd, often described as Mr Watson's right-hand man, is a key figure in practically all the Watson companies and fronts for him at annual meetings, such as Eldercare's sometimes stormy AGMs. Mr Kidd's background was with Alan Gibbs' and Trevor Farmer's Tappenden Holdings, although he has been working with Mr Watson for many years now. Mr Randhawa is the numbers man who is considered the Mozart of a balance sheet but keeps his personality out of the headlines - he lives in non-flashy Mt Eden.

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