Transparency paper lacks insight

By Alan J Robb

Friday 18th October 2002

The Institute of Chartered Accountants' discussion paper on corporate transparency is defective in many ways. There is an underlying denial of any significant problems and a reluctance to address known conflicts of interest.

It makes the unbelievable claim that New Zealand in recent years has been spared a major corporate collapse or reporting scandal. Has the institute forgotten such occurrences as the collapse of Fortex in 1994 owing about $150 million, the Renshaw Edwards collapse in 1992 where the auditing of a solicitors' trust account failed to detect theft and fraud and the Graham affair where over $12 million of funds were misappropriated by a chartered accountant?

The document is further flawed by a reluctance to accept that auditing can be incompatible with the provision of consultancy services to the same client. This is at variance with other views around the world.

Icanz claims there is no problem with auditors also providing taxation services to the same client. This is also the view of the International Federation of Accountants (Ifac) but has been rejected across the Tasman by Ian Mackintosh, chief accountant of the Australian Securities & Investments Commission. It was, he said, not correct and ignored some real threats to independence.

The paper proposes limiting the amount of audit and non-audit work an accounting firm can provide to the one client. This is not a meaningful restriction. In Enron's case the ratio was almost 50:50 but this did not result in good quality auditing.

Nor will limiting the fees the firm can earn from any one client, as is suggested, to 15% of gross revenue. Andersen had a string of clients whose fee income could have been within such limits but whose financial results have now been restated retrospectively for several years.

The paper claims New Zealand faces fewer risks because we have "principles-based" standards and not "rules-based" ones. It ignores the reality that the game of getting around standards is played in either case. It also ignores the many significant loopholes in our "principles-based" standards.

Alan Robb is a senior lecturer in accountancy at the University of Canterbury

This article is a summary of Mr Robb's submissions on Corporate Transparency: Making markets work better. A full copy is available at the Icanz website, www.icanz.co.nz.

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