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Watchdog's expedition seeks elusive prey

By Shoeshine

Friday 8th August 2003

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In the US the hunt continues for anyone who can vaguely be blamed for losses suffered in the spate of accounting scandals and corporate collapses which made Enron and WorldCom household names.

Lawyers, regulators, investors, and politicians have jostled to get in on the act. Auditors and investment banks have copped huge fines. Company executives have been jailed. The careers and reputations of once-mighty analysts lie in ruins.

The shock waves have rippled outward. In the UK, rules designed to tighten up corporate governance have been hastily adopted.

In Australia, where the US shenanigans rubbed nerves already sore from the HIH collapse, the Australian Securities and Investments Commission (ASIC) and the Australian Stock Exchange have heightened their surveillance and introduced screeds of new rules.

ASIC this week launched a sweep with that will scrutinise the financial statements of 440 listed companies in an effort to flush out any instances of book-cooking, manipulation, or just plain ignoring accounting standards.

The latest offensive follows a massive exercise last year that examined the financials of all 1500 listed issuers.

The aim was primarily to ensure there were no timebombs ticking away in corporate Australia. The commission looked specifically for illicit capitalisation of expenses, WorldCom's besetting sin, the concealed off-balance sheet subsidiaries that brought Enron down, or the revenue inflation practised by Xerox, Tyco, Global Crossing and a host of others.

The exercise unearthed only 31 transgressions, none of them serious, but that hasn't deterred ASIC.

This time around the watchdog has gone out of its way to emphasise that it is on the lookout for auditors who turn a blind eye as much as for sinning companies themselves.

Here in Godzone business has gone on pretty much as usual.

The government, reluctant for once to jump in to remedy an illness that hasn't been diagnosed, has been silent on the corporate governance question while the Stock Exchange, after extensive consultation, has unveiled a minimalist code that even regulation-weary companies can live with.

Attempts to find our very own corporate reporting scandal have come to nothing. Last year certain parties with a beef with Tranz Rail tried to get traction with a story the company had been capitalising "routine" maintenance expenditure as WorldCom did to inflate its revenues and profits.

But the effort fizzled out when Tranz Rail's institutional shareholders declared themselves perfectly comfortable with the accounting treatment.

Another slap, at Telecom over revenue booked from the sale of international cable capacity, was deflected when the commission gave the carrier a clean bill of health.

The Shareholders' Association has also been having a crack, without success so far.

In May it wrote to the Institute of Chartered Accountants questioning accounting practices at medical supplies distributor Ebos and steel distributor Steel & Tube. The institute said it saw no problems "in principle" with the practices the association queried.

Tranz Rail was in the gun again in May when investors complained its accounts hadn't disclosed as a current liability an obligation to pay down bank debt. The company conceded there had been "an oversight."

Plastics packaging group Vertex has been in the news for the past year. Its prospectus and subsequent disclosures came in for Stock Exchange and Securities Commission scrutiny, without result.

The most intriguing case to date has been Tower, which was last year required by its new auditor to start amortising goodwill, and to backdate the charges all the way back to demutualisation.

The change resulted in a $135 million writedown but the interest from regulators has been zero.

The failure of efforts to find any instance of accounting hanky-panky has not been enough to convince the hawks that greater regulatory scrutiny of our listed companies isn't needed.

The Securities Commission, under former ASIC commissioner Jane Diplock, has successfully sought a mandate from the government to examine listed company financial reports and to pursue breaches of accounting standards, as ASIC does.

That doesn't necessarily mean she has her sights on ASIC-style annual sweeps of the listed sector. The possibility Big Sister may be watching tempers temptation whether she is or not.

Shoeshine will be amazed if the commission unearths anything more sinister than negligence or ignorance of correct accounting treatment.

The listed sector which, like private or public unlisted enterprises, struggles under a massive burden of compliance, can well do without having to go through the audit process twice ­ or three times, if the Inland Revenue Department wants to look at the books.

Auditors, who have been throwing their weight around more liberally than they did pre-Enron, will have even more reason pursue a strict line, particularly as the Shareholders' Association is waving a legal club around.

And for companies reluctant to take up the Stock Exchange's invitation to list, commission scrutiny will be one more reason to stay private.

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