BIL puts new angle on old tricks

By Peter V O'Brien

Friday 31st January 2003

An intriguing tale of alleged skullduggery in BIL International appeared in a three-paragraph statement to the New Zealand Stock Exchange on January 17.

Submitted by BIL secretary Jane Teah, it is worth quoting in full: "The board of directors of BIL International Limited (BIL) noted the article in the [Singapore] Straits Times today under the header 'Ex-CFO sues firm which sues him back,' particularly the paragraph which states that Andrew Shepherd 'failed to produce an accurate profit and loss account in 2001 and deliberately inflated BIL's profits to meet his forecast.'

"BIL would like to clarify that this relates to the interim results for the six months ended December 31, 2001, and that BIL had made appropriate adjustments in its consolidated reported profit and loss accounts for the year ended June 30, 2002 (FY02).

"BIL's consolidated profit and loss accounts for FY02 had been audited by independent external auditors, without qualifications, and dispatched to and considered by the shareholders at its last annual general meeting.

"The outcome of the legal suit is not expected to have any material adverse impact on BIL's consolidated net tangible assets or earnings per share for the year ending June 30, 2003."

Singaporean courts can be left to sort out the validity or invalidity of the legal suit with its apparent claims and counter-claims. We are not leaping into that murk, expect for the two points related to the particular case and general comment on wider issues associated with company financial reporting.

BIL issued its interim report for the six months ended December 31, 2001, on March 19, 2002. It is presumed Mr Shepherd had final responsibility for preparation of the accounts that, presumably, receive board approval before release.

The report said the accounts were prepared in accordance with international accounting standards, a matter that will probably be argued in court.

A selection headed "Management reorganisation," referred first to then chief executive Greg Terry's decision to step down on March 31, 2002. Mr Terry would remain on the board as a non-executive director.

The statement continued: "Andrew Shepherd, chief financial officer, will also leave the company with effect from March 31, 2002." Nothing else was said about Mr Shepherd's departure.

The allegations and counter-allegations in the BIL case will be resolved in time but they prompt consideration of wider issues related to company accounts and corporate governance.

There is nothing new in alleged, or actual, falsification of accounts. While few, they have gone on for years, a notable instance being an Australian financial organisation where the bookkeepers presented cooked monthly accounts to the board each month in the 1960s to hide the activities of incompetent management.

Such desperation leads to stupidity because competent external auditors eventually detect the coverups unless, as in the US Enron case last year, they compromise conflicts of interest.

The introduction of internal auditors, board audit committees and spot checks from external auditors over the years tightened financial controls but those apparent safeguards are useless against determined people.

This column has used a comparison with the general law in the past. All legal jurisdictions have laws making it an offence to steal, assault others and murder. People still steal assault and murder.

Laws impose penalties and sometimes deter potential offences through fear of the consequences. The effect on actual offenders (and on the victims) is always after the event.

So it is in the corporate world, irrespective of how hard legislators and regulatory bodies work to improve accounting and disclosure standards and improve general corporate behaviour.

There is also the grey area of the extent to which directors can reasonably and prudently rely on management and the latter's recommendations.

Directors are supposed to be individually and collectively responsible for corporate decisions but the executives usually lose their heads when things go wrong, even if they get golden handshakes on the executioner's block.

Politics has a similar system in New Zealand, unlike in the UK where ministers walk when public servants foul up. Few walk in this country, although departmental officers may get the boot.

Ministerial attitudes were crystallised in the famous, or infamous, statement of the late Sir John Marshall. He referred to a notorious criminal's escape and subsequent offence after being escorted from prison to play indoor bowls in Auckland. Then justice minister, Mr Marshall told Parliament: "I trusted my officers and my officers let me down". He did not walk.

Directors seem increasingly to be taking the same approach to their responsibilities.

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