Archive | Accounting

Port company performances “can’t be compared” because of valuation differences

Auditor-general Greg Schollum has told the country’s 12 port companies their performances can’t be compared, largely because of their different approaches to property valuation.

But he also said, in a letter to the companies last week, his office hadn’t identified any issues with the governance of investment properties.

The auditor-general’s complaint is unlikely to result in a hurry to change accounting practices because he hasn’t identified any malpractice or intent to deceive, just differences.

Mr Schollum wrote to chairs & chief executives of the port companies, saying their different approaches “mask the underlying performance of many entities in the sector and make them difficult to compare. We are concerned that this affects the ability of shareholders, Parliament & the public to assess the performance of the individual port companies & the sector as a whole…

“For the year ended 30 June 2017, the port sector generated an average return on equity of 8.9% [unadjusted for one-off events]. However, there is significant variation in what individual companies generated. In 2016-17, the returns generated by individual companies varied between 2.3% & 26.1%. This variability in reported returns is not new and is noted in other publications, such as Deloitte’s annual New Zealand ports & freight yearbook.

“Some of the variability in the reported returns is because port companies do not value their property, plant & equipment consistently. 9 of the 12 port companies measure some asset classes at fair value. However, these 9 port companies do not consistently measure the same asset classes at fair value. These differences have a significant effect on the return on equity reported…

“Port companies continue to invest heavily in their businesses and spent about $290 million in capital expenditure in 2016-17. Because of the different valuation approaches, it is difficult to form a view about whether this capital expenditure was a good use of shareholders’ funds.”

Mr Schollum said investment properties amounted to 13% of the port sector’s total assets, typically assets such as tenanted commercial buildings, worth $670 million a year ago.

“5 port companies have built up investment property portfolios that are greater than $20 million. Some, such as Port Otago Ltd & CentrePort Ltd, have clearly separated their investment property activities from operational port activities by holding & managing the investment properties through separate specialised subsidiaries & associated entities.”

Attribution: Auditor-general’s release.

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2 accountants lose certificates for Capital + Merchant and Blue Chip audit failures

Published 22 April 2012

The NZ Institute of Accountants’ disciplinary tribunal censured 2 Auckland members, Peter McNoe & Robert Innes-Jones, on 16 April for breaching the institute’s code of ethics in their audit work.

Both men had their certificate of public practice suspended for 2 years, can’t undertake audits of securities issuers for 5 years and were ordered to pay costs & expenses ($284,965 for Mr McNoe and $319,965 for Mr Innes-Jones). The tribunal findings are still in the appeal period.

Mr McNoe resigned in June 2011 as a director of accountancy firm BDO Auckland Ltd. Mr Innes-Jones resigned as a director of BDO Auckland and BDO NZ Ltd in April 2008.

Mr McNoe pleaded guilty to 5 charges and another was withdrawn. He signed an audit opinion on the financial statements of Capital + Merchant Finance Ltd for the March 2007 year which asserted that they complied with generally accepted accounting practice when they ought to have disclosed a series of points:

the put option held by Capital + Merchant Investments Ltd pursuant to a deed of covenant & subordination between Fortress Credit Corp (Australia) (II) Pty Ltd, Capital + Merchant Investments and Capital + Merchant Finance, and/orCapital + Merchant Group Ltd’s guarantee of the Fortress facility to Capital + Merchant Investments, and/orthe participatory interest in mortgage advances retained by Capital + Merchant Finance being subordinated to the Capital + Merchant Investments participatory interest, and/orthe existence or nature of the restriction on the advance to Numeria Leasing Ltd, and/orinformation from which it was possible to identify & evaluate exceptional risks of operating as a result of the transactions with Capital + Merchant Investments & Diversified Mortgage Trust, and/orthe impact of the transactions with Capital + Merchant Investments & Diversified Mortgage Trust on the financial report had it been prepared using NZ IFRS; and/orMr McNoe failed to consider & assess loan transaction documents which subordinated Capital + Merchant advances behind those of Capital + Merchant Investments & Diversified Mortgage Trust.

On the second charge, he failed to comply with auditing standards which require audits to be planned & performed with an attitude of professional scepticism, so did not adequately assess the $8.6 million carrying value of goodwill in the group financial statements, and the associated carrying value of the investment in Numeria Leasing of $8.3 million in the parent financial statements, arising from a related-party transaction the day before balance date, whereby Capital + Merchant bought Numeria Leasing – an entity with negative tangible assets – from a related party.

On the third & fourth charges, he failed to obtain or document sufficient appropriate audit evidence to support his conclusions that the loans from related parties were recoverable, and/or $180.2 million of mortgages & loans were recoverable.

The fifth charge related to the Beneficial Finance Ltd for the March 2008 year, and Mr McNoe’s failure to obtain sufficient appropriate audit evidence to support his conclusion that the industry-standard percentages applied in calculating the provision for bad & doubtful debts were appropriate & justified, and/or that bad-debt recoveries should be offset against the provision calculated in accordance with industry standards.

Mr Innes-Jones pleaded guilty to 3 charges and 3 other charges were withdrawn. He signed an audit opinion which asserted that Blue Chip Financial Solutions Ltd’s financial statements for the December 2006 year complied with generally accepted accounting practice, when they failed to correctly recognise a liability arising from Blue Chip’s exposure to rental guarantees provided to investors.

On the same audit, he didn’t qualify his opinion that there was a limitation on the scope of his examination because he’d failed to obtain sufficient appropriate audit evidence to support his conclusion that the $42.5 million of aggregated deposits paid on investment property were recoverable.

Mr Innes-Jones also breached standards in the Beneficial audit, failing to obtain sufficient appropriate audit evidence to support his conclusions that $2.89 million should be deducted from the provision for doubtful debts calculated in accordance with industry standards; and or the classification of past due loans was accurately reported by the client’s accounting systems, and/or the disclosures in note 17 of the financial statement of impaired &/or past due assets were materially correct.

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Attribution: Tribunal decision, story written by Bob Dey for the Bob Dey Property Report.

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ASIC ticks off auditor who missed Allco’s shift of $A1.9 billion into non-current

Published 8 December 2010

ASIC (the Australian Securities & Investments Commission) has given a light-handed reprimand to the KPMG auditor who signed off the financial report for Allco Financial Group Ltd & its controlled entities for the June 2007 financial year – and missed an $A1.9 billion misclassification.

The $A1.9 billion was entered as non-current liabilities when it should have been current – due within 12 months.

Allco’s banking syndicate appointed receivers of the group in November 2008 and most of the group was placed in liquidation in May 2009. Strategic Finance Ltd in New Zealand was a subsidiary of Allco HIT (Allco Hybrid Investment Trust) by the time of those events.

The KPMG Sydney partner & auditor, Christopher Whittingham, has given ASIC an enforceable undertaking following an investigation into his conduct in relation to the Allco audit. He’s agreed not to practise as a registered auditor for 9 months, to undertake an additional 10 hours of continuing professional education on audit-related matters, to have the first 3 audits he conducts after suspension reviewed by an ASIC-approved KPMG registered company auditor, and to pay $A10,000 towards ASIC’s costs.

ASIC is concerned that Mr Whittingham failed to carry out or adequately & properly perform his duties as an auditor. ASIC identified a number of concerns regarding Mr Whittingham’s conduct as lead auditor and was concerned that Mr Whittingham failed to ensure that the audit was conducted in accordance with Australian auditing standards.

In the 2007 audit, $A1.9 billion of interest-bearing loans was misclassified as a non-current liability. Allco issued its accounts in February 2008, then issued restated accounts after the Sydney Morning Herald questioned the discrepancy between the interim report and the previous annual report. The discrepancy related partly to Allco’s mortgage business, Mobius, which lost $A31 million in the December 2007 half after giving assurances that it had addressed its problems.

ASIC didn’t say why it took so long coming to a conclusion when the error was spotted immediately, rectified by Allco reissuing its accounts.

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Attribution: ASIC release, story written by Bob Dey for the Bob Dey Property Report.

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Auditor suspended for Jaffe accounts

Auditor gave unqualified report on $A170m of non-earning intellectual property

An Australian auditor has been suspended for three years for issuing an unqualified audit report for Auckland businessman Eric Isadore Jaffe’s company in 1995, even though the company’s claimed $A170 million of intellectual property had produced no revenue in 20 years.

Suspension of Arthur John Forrest’s registration as a company auditor is the longest suspension handed out by the Companies Auditors & Liquidators Disciplinary Board.

It followed an Australian Securities & Investments Commission (ASIC) application in relation to Mr Forrest’s audit of Industrial Banking Corporation Ltd (IBC) accounts.

The disciplinary board also required Mr Forrest to undertake continuing professional education in the duties and responsibilities of auditors for no less than 10 hours during each of the three years of his suspension.

The board said this was “in addition to the requirements of the Institute of Chartered Accountants,” but did not say what those requirements were. I understand the institute has not taken any action yet against Mr Forrest.

Mr Forrest is a partner in the Sydney firm of Griffiths Forrest & Greer and had been IBC’s auditor since 1983. He issued an unqualified audit report for the 30 June 1995 accounts when the company was showing $A170 million in its accounts relating to intellectual property and an $A50 million debt owed by a director-related Hong Kong company, which represented an aggregate of 99% of IBC’s total assets, ASIC’s New South Wales director of regulation, Jennifer O’Donnell, said today.

IBC’s principal activities were said to be “financial services and intellectual property.” It issued debentures totalling $3 million to Mr Jaffe in 1993 and $20 million in redeemable preference shares in 1994, as consideration for the transfer to the company of intellectual property.
Ms O’Donnell said some of these securities were sold by Mr Jaffe to private New Zealand investors in 1995.

She said the disciplinary board found Mr Forrest should have qualified his report in relation to the carrying value of the intellectual property in circumstances where none of it had produced any revenue over the previous 20 years, the ability to collect the $A50 million debt, the treatment of $A34.75 million of amortisation expenses written back to the profit & loss account, and numerous other breaches of accounting and auditing standards.

The affairs of IBC and Mr Jaffe, now aged 78, are outlined some detail in a story I wrote in March. You’ll find it by entering Jaffe in the Search slot in the left-hand column. That story mentions action taken by the Securities Commission and the Reserve Bank.

The Registrar of Companies filed charges against Mr Jaffe but withdrew them at the start of what was to be a five-day trial in March 1999. New Zealand First leader Winston Peters established through parliamentary questions that those charges were withdrawn because the Serious Fraud Office was undertaking its own similar inquiry.

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