Proof that creative accounting is alive and well in New Zealand

[Beagle]

I'm glad Roger brought this up. It's despicable practice misinforming investors about the financial health and integrity of the companies we invest in.

I respectfully disagree with you winner, although you may be being tongue-in-cheek, as ACMR has nothing to do with accounting integrity, it's top-line stuff for SaaS companies, typically who are not making any profit. But you know that better than most.

We're talking here about bottom line and the in-betweens, the financial health of companies. What is the income, what are the expenses, are they profitable, is their a debt burden, can they service it .. etc.

The problem is very obvious imho, that the good thing about 'standards' is that there are so many to choose from! So choices are made, typically that paint the companys' financial performance in the best light. Is it corrupt, well that's not for me to say.

The FMA could sort it pretty quickly by legislating GAAP reporting. Force every listed company to report to a common accounting methodology. That wouldn't restrict them from providing 'alternative' accounting to 'give colour' to the numbers (an alarmingly frequent market analyst term).

All these 'variants' of accounting practices are what is at the core of the problem. It plays into the adage of 'stats, damned lies and stats'.

Any clever accountant can make the books look good through creative money laundering across the GL's. Unless the company is truely fecked of course. Then the accountants and auditors turn on their clients and royally shaft them. But that's after the investors have been well and truely rooted.

The solution is standardising the methodology, with no wiggle room.

Excellent post, couldn't agree more. The intrinsic conflict of interest where the client pays for the trustee's and auditors services which whether large accounting firms and trustee's like to admit in public or not, (NOT that they ever will) fundamentally acts as a corrosive conflict of interest and undermines the objectivity of the provision of truly professional and unbiased professional services. Partners of accounting and Trustee firms are not influenced by the pressure to achieve fee targets...surely not some might say. I say welcome to the real world ladies and gentleman and all the poor souls who found out the hard way that auditors and trustees had their professionalism compromised by the dozens of finance companies that went under during and after the GFC have found out the bitter truth to their financial peril. Disc: This hound no longer provides auditing services because at his heart he feels too many compromises are involved, (very serious dislike of audit work, especially having to bid competitively for it and doing it to a fixed budget almost regardless of concerns, the commercial risks involved and the cost of professional indemnity insurance to cover same).
Life is too short to torment yourself with that sort of thing. As time has clearly shown those big firms stress tested those finance company loan receivables thorougly didn't they to ensure their veracity was without question and vouch for the integrity of the financial statements and all the Trustee companies did a fantastic job of protecting people's interests. By some reports a whopping six billion dollars in total went down the tubes. Arguably the greatest destruction of investor wealth since the great depression of the 1930's. Definitely time for a Tui.

[winner69]

I'm not against companies doing some non-GAAP reporting in addition to GAAP reporting - as long as the headline number used in announcements etc is the GAAP number. The non-GAAP part (clearly defined) can be discussed later in the commentary.

Non-GAAP reporting has it uses - like RYM/SUM underlying profit (yes?) and WHS 'normalised profit' which excludes property sales (yes?) and AIR 'operating profit' (yes?)

Too often company communications have GAAP and non-GAAP numbers in the same paragraph which just confuses matters. They need to be discussed separately.

What bugs me is lack of consistency how some companies report. Fletcher a great example. Firstly the Real NPAT is rarely discussed. They used an 'operating profit before abnormals' - but change there approach every now and again. A few years they proudly announced they would treat abnormals as normal (because they were always restructuring etc so was a normal activity) - resulted in a healthy increase in reported profits the next year on the recast historic numbers - but then had to revert back to having abnormals as the numbers didn't look to good.

I say the GAAP numbers are what needs to be reported in the main announcement (as per Appendix 1) but let companies discuss their performance anyway they lie in separate announcements - it gives them pleasure in doing so, analysts/brokers love normalised numbers ........and Roger condo his SUM multiples on underlying profits.

[Beagle]

Makes good common sense to me Winner.

[Pipi]

Many years ago in a previous life I used to be an Assistant Financial Accountant at a large NZ company. End of financial year was mind blowing. We would spends weeks if not months fiddling the books to make them look good. The most used practice was taking large expenses and journally them into the next financial year, so it made the profits look good. The end annual reports in no way represented the true financial position of the company. It used to surprise me that they could get away with it.

[Beagle]

Many years ago in a previous life I used to be an Assistant Financial Accountant at a large NZ company. End of financial year was mind blowing. We would spends weeks if not months fiddling the books to make them look good. The most used practice was taking large expenses and journally them into the next financial year, so it made the profits look good. The end annual reports in no way represented the true financial position of the company. It used to surprise me that they could get away with it.

Yes...a very long time ago I was company accountant for a major importer and one of the favorite games the CEO liked to play, (that I personally detested), was valuation of slow moving, obsolete and otherwise compromised stock. We haven't sold any decent volume of those handycam camera's for six months and we know that a competitor product is better and cheaper but we'll shift them no problem and no write down to expected realisable value is necessary, let's stick with net landed cost that's all good...yeah right. His coercion had nothing to do with his annual bonus, of course not.

[dobby41]

Many years ago in a previous life I used to be an Assistant Financial Accountant at a large NZ company. End of financial year was mind blowing. We would spends weeks if not months fiddling the books to make them look good. The most used practice was taking large expenses and journally them into the next financial year, so it made the profits look good. The end annual reports in no way represented the true financial position of the company. It used to surprise me that they could get away with it.

What I've never understood with that senario is what happens to next years books?
By moving expenses to next years haven't you just set yourself up for a bigger problem year-end next year?

[winner69]

What I've never understood with that senario is what happens to next years books?
By moving expenses to next years haven't you just set yourself up for a bigger problem year-end next year?

You hope that next year will be 'better' else you do it all over again and do the other tricks of the trade.

[winner69]

Proper analysis of the Cash Flow Statement is the key as harder to embellish this.

If you only look at one thing in the Accounts look at the reconciliation between reported net profit and operating cash flow. Usually hidden away in the Notes.

[Pipi]

What I've never understood with that senario is what happens to next years books?
By moving expenses to next years haven't you just set yourself up for a bigger problem year-end next year?

You add it into next years books, then you find large expenses for that year and journal them into the following year. As long as the business is running it will never catch up with you.

[dobby41]

You add it into next years books, then you find large expenses for that year and journal them into the following year. As long as the business is running it will never catch up with you.

So the first year to get a gain - after that you are neutral but a year behind really.