AN AWFULLY TRICKY TRIUMVIRATE

Machinations of Fonterra, PricewaterhouseCoopers & New Zealand’s Financial Markets Authority

Fonterra is New Zealand’s behemoth dairy cooperative.

PricewaterhouseCoopers (PwC) describes its New Zealand business as “a community of solvers combining human ingenuity, experience and technology innovation to deliver sustained outcomes and build trust. It all adds up to The New Equation”. That’s Pure PwC Piffle. In fact, PwC operates in New Zealand as a financial auditor and consultancy firm.

The Financial Markets Authority (FMA) is New Zealand’s governmental agency charged with supervising New Zealand financial markets and participants in those markets. Under FMA’s own legislation, “FMA’s main objective is to promote and facilitate the development of fair, efficient, and transparent financial markets”.

From 2015 to 2017 Fonterra deliberately cooked its financial books. Fonterra knew its Chinese ingredients - Fonterra’s Beingmate and China Farms investments – had gone rotten, but dishing up its financial statement meals as if they were gourmet creations. The inevitable food poisoning hit over 2018 and 2019, with $4 billion dollars wiped off the value of Fonterra shares.

Dairy farmers supplying Fonterra have no choice but to buy Fonterra shares. The food poisoning was therefore especially toxic for farmers who had to buy over-priced Fonterra shares over the period of book-cooking. Fonterra’s failure to admit that its Chinese ingredients were rotten meant that Fonterra’s share price, at which dairy farmers had to buy in, was bloated with foul hot air. Fonterra dairy farmers overpaid, with the own money and debt, to buy Fonterra shares, and lost that value when in 2018 and 2019 Fonterra spewed up its Chinese investments and the Fonterra share price shat itself.

But a certain someone benefited heartily from the sneakily inflated Fonterra share price. That someone was a Dutchman named Theo Spierings. Spierings was Fonterra’s chief executive officer from 2011 to 2018. Former Fonterra chairman Sir Henry van der Heyden hand-picked Spierings for the Fonterra CEO role. In his 7 years as Fonterra CEO, Spierings was paid $43 million. He received $8 million in his last 2 years, including a $4.7m “incentive” (bonus) payment in his last year. And – listen up – Spierings remuneration was significantly based on Fonterra’s share price; the higher than share price, the more Spierings got paid.

Former Regional Economic Development Minister Shane Jones called the amount paid to Spierings "offensive" considering the role Spierings played in "bringing our national co-operative to its knees". Jones added "The fact that the directors signed a contract, enabling him to wander off with such a gross amount of money which he never earned, and we in New Zealand are left with this fiscal carnage. It's just beyond belief". Jones called the Fonterra board "dysfunctional and incapable of reigning in corporate excess” and ended with the flourish "I can tell you today that the Dutchman, the former CEO, is celebrating a famous Dutch saying, 'It's as if an angel is peeing on your tongue'. But he's richly relieved himself on the tongue of Fonterra and the rest of us in New Zealand, not just farmers, are left with the cost."

By the time Fonterra’s Chinese Chickens had come home to roost and had their necks wrung, Spierings had bid farewell to Fonterra. Spierings’ main Fonterra managerial co-chef in poisoning ordinary New Zealand dairy farmers was Fonterra chief financial officer 2013-2017 Lukas Paravicini, who now appears to be the chief financial officer of nicotine company Imperial Brands.

Spierings and his cronies enjoyed devoted external help in concocting their rancid cuisine. The help came from a surprising corner, Fonterra’s auditor PwC. Financial auditors are the people who are expected, and their statutory duty is, to be the financial reporting equivalents of food inspectors. PwC didn’t see it that way. That’s why two senior auditors from PwC who engaged in PwC’s audit of Fonterra over the book-cooking period have been hauled before the Chartered Accountants Disciplinary Tribunal and face charges of breaching the New Zealand Institute of Chartered Accountants’ Code of Ethics. The Tribunal’s decision is pending.

Fonterra and PwC are as thick as thieves and as intertwined as a couple of copulating snakes.

While PwC was conspiring with Fonterra to cook the books, Brent Goldsack was a managing partner of PwC. When Mr Sack-Of-Gold left PwC in September 2017 he immediately joined the Fonterra Board, where he remains.

A company’s Board Audit Committee is responsible for the quality of the company’s financial reporting. The current Chair of Fonterra’s Audit Committee, a position he’s held since 2017 when he joined the Fonterra Board, is Bruce Hassall, who joined Fonterra from - you guessed it! - PwC, where he’d been PwC CEO since 2009.

After 15 years as Fonterra’s auditor, PwC’s appointment ended after it completed its “audit” of Fonterra for the year ended 31 July 2019. For that year, Fonterra paid PwC $6m; $5m for its audit & $1m for consultancy services (classic conflict of interests, right there). Over its 15 years as auditor, PwC pocketed $94m out of Fonterra.

If you want to see more of what PwC is capable of, and just how unprofessional they can get, Google what PwC has got up to in Australia in relation to taxation of multinational corporations.

At this stage you will justifiably be asking yourself what FMA did about the Fonterra/PwC shenanigans. After all, FMA’s express functions include to “conduct inquiries and investigations into any matter relating to…the activities of financial markets participants or of any other persons engaged in conduct relating to those markets”. The answer to that question was…precisely nothing. That’s until former Fonterra director Colin Armer complained to FMA.

Armer was elected to the Fonterra Board in 2006 and quit in 2012. He was still Fonterra’s biggest shareholder when in 2019 he complained to the FMA about all the above and, in particular, the inaction of the Fonterra Shareholders Council and Fund chair John Shewan. Shewan is…drum roll…wait for it…the former chair of PwC.

In response to Armer’s complaint, FMA purported to investigate [FMA’s own words] “the timing of Fonterra’s big write-downs on its Beingmate and China Farmers assets” and found “no evidence to support action against the dairy company”. In other words, FMA was specifically alerted to the misconduct by a former Fonterra director and still decided to take…no action.

Curious about all of this, on 25 May 2023 Yours Truly made a request to FMA, under New Zealand’s Official Information Act (OIA), for [my words] “each internal FMA report on the basis on which FMA decided to take no action in relation to Colin Armer’s complaints to FMA about financial reporting by Fonterra Co-operative Group Limited”.

On 3 August 2023, well after the legal deadline for complying, FMA refused to produce any of the requested documents, stating as follows:

“We consider there is good reason to withhold much of the information in the documents because they contain information which is subject to an obligation of confidence and release would be likely to prejudice the supply of similar information from market participants in future (s 9(2)(ba)(i) of the OIA). It is important to the effectiveness of FMA’s regulatory role that the FMA can engage candidly with market participants. Fonterra was co-operative with the FMA and we engaged with them effectively on this matter. Public release of significant internal information considered and discussed in an enquiry is likely to have a negative impact on future candid and effective engagement with market participants.

Further we consider there is good reason to withhold significant information in the documents because release would likely prejudice maintenance of the law (s 6(c) of the OIA). We consider it would prejudice the natural justice rights of Fonterra Co-operative Group Limited as well as Fonterra’s auditors PwC where FMA subsequently concluded further regulatory action (including public comment) was not appropriate.”

FMA’s grounds for refusing my request are spurious. The notion that producing its internal documents would prejudice the supply of similar information in future is absurd because the FMA has exhaustive powers under its own legislation to compel market participants to produce documents. Furthermore, FMA’s assertion that “Fonterra was co-operative with the FMA” is clearly irrelevant. When you’re transparently guilty of frightful corporate conduct, sometimes it’s best to co-operate. Was Fonterra in fact cooperative? Who knows? The reference to “subject to an obligation of confidence” is intriguing. Could it be that FMA actively promised Fonterra that it would keep secret the information that Fonterra provided to FMA?

Also, importantly, the ground (for refusing to provide information) that making requested information available would prejudice the future supply of similar information expressly does not apply if “in the circumstances of the particular case, the withholding of that information is outweighed by other considerations which render it desirable, in the public interest, to make that information available”. Surely, where a farmer-owned cooperative of the magnitude of Fonterra has botched its financial statements to the detriment of vast numbers of dairy farmers, there’s legitimate public interest in knowing how FMA, our financial markets regulator, addressed that botulism (see what I did there).

FMA’s second ground for refusing that releasing the information would prejudice the maintenance of the law is excruciatingly laughable. Given FMA’s statutory role to maintain the integrity of New Zealand’s financial markets, refusing to disclose information about how it came to decide to take no action when an iconic national organisation has produced grossly misleading financial statements brings the law, and FMA, into disrepute. FMA goes on to claim that its decision to take no regulatory action against Fonterra (or PwC) itself means that releasing information would “prejudice the natural justice rights of Fonterra”. That claim is preposterously illogical. What the FMA is saying is that the FMA’s inaction (dereliction of duty) is in itself a ground to refuse to produce evidence of that inaction.

What we know for certain about FMA’s refusal of my OIA request is that it wants to hide how it dealt with Armer’s complaint and why it decided to take no action against FMA. The FMA’s CEO is Samantha Barrass. If FMA is emBARRASSed, it damn well should be.

The OIA allows me to complain to New Zealand’s Government Ombudsman about FMA’s refusal to release FMA’s internal reports, and I have made my complaint. But we can’t afford to hold our breaths. For a very good reason, public confidence in the integrity of New Zealand’s institutions is at an all-time low; and it’s because most of our public servants, Ombudsmen included, have forgotten who they’re supposed to serve – which is us, the public.

(Scott St John, a Fonterra Board member since 2016, was on the FMA Establishment Board. The Song Remains The Same…)