BEANIE WATCHDOG BITES!

Courage comes from an unlikely corner

Your plodding scribe McSubstack has previously covered the nefarious shenanigans and evasions of an Unholy Trinity comprised of Fonterra, PricewaterhouseCoopers (PwC) and New Zealand’s Financial Markets Authority (FMA).

Reminder people: Fonterra deliberately cooked its financial books.  PwC acted as Fonterra’s partner-in-crime and “facilitator” (awful word), by acting in complicit dereliction of its duties as auditor. Then our FMA “regulator”, faced with a complaint, called on its own version of Star Wars’ The Force – delivering, à la Obi-Wan Kenobi “These aren’t the Accounts you’re looking for”.

Mercifully, somebody didn’t looked the other way. That somebody is the Disciplinary Tribunal of the New Zealand Institute of Chartered Accountants.

When Fonterra shareholder and former director Colin Armer complained to the FMA about Fonterra’s dodgy bookkeeping, the FMA, displaying a truly remarkable degree of courage, did precisely nothing except kick Armer’s complaint to the New Zealand Institute of Chartered Accountants.

But by deflecting to the Accountants’ Society, the FMA ignited a small flame that would consume what skerrick of credibility the FMA had left in this disconcerting matter, and vindicate Armer.

After investigating PwC’s audits of Fonterra’s financial statements for 2015-19, the Institute referred the complaint to its Professional Conduct Committee.

That Committee took the complaint to the Disciplinary Tribunal of the Accountants’ Institute, alleging that the two individual PwC auditors most heavily involved in Fonterra audits had personally, to put it lightly, let themselves down. And, unlike the FMA, the Tribunal has stepped up (well…sort of).

The Tribunal’s decision came out on 21 August 2023. Unlike the FMA - which has refused to reveal its internal contortions in not taking action against Fonterra and PwC - the Tribunal’s decision is publicly available. Dr Google can find it for you.

The PwC auditors who faced disciplinary action are Jonathan Skilton and Leopino Foliaki. They both admitted the charges against them, which all involved breaches of the Accountants’ Code of Ethics. In short…

Skilton was found guilty of the following breaches of the Code of Ethics:

• He failed to properly document the threats to the appearance of independence posed by the appointments of Bruce Hassall (former PwC CEO) and Brent Goldsack (former PwC Partner) to the Fonterra Board, and the safeguards required to protect against those threats

  • In relation to Fonterra’s Chinese investment in Beingmate (the collapse of which I addressed in my earlier Substack), Skilton was found to have failed to:

    • Adequately evaluate the reasonableness of Fonterra’s assumptions in valuing Beingmate

    • Challenge Fonterra’s valuations

    • Obtain written representations from those governing Fonterra that they (1) prepared the relevant financial statements in accordance with applicable financial reporting standards (2) provided PwC with all relevant information (3) believed Fonterra’s assumptions were reasonable

    • Obtain compliant representation letters. This is an intriguing failure. The accounting standards dictate that prescribed representations be given by those charged with the governance of an entity i.e., in Fonterra’s case, its directors. It was Fonterra’s directors who were responsible for giving the representations because, even though an entity’s management are typically the ones who prepare financial statements, it is an entity’s directors who are legally responsible for the entity’s financials. But Fonterra’s directors resisted giving the required representations – for very good reason, you might think, given the books were cooked -  and Skilton allowed the following departures from the required standards:

      • Fonterra’s directors did not represent they had “fulfilled” their responsibility for preparing the financial statements, instead representing that they “acknowledged” their responsibility

      • In the same vein, Fonterra’s directors “acknowledged responsibility” for making required information available to PwC, without confirming they had actually made it available

      • Fonterra’s directors did not represent they believed that the significant assumptions used in making the accounting estimates were reasonable; instead representing they acknowledged their responsibility to believe the assumptions (cryptic, to say the least!)

    One might sensibly infer that Fonterra’s directors knew full well that the books were cooked, and understandably wanted to wash their hands of them as vigorously as possible - “Out damn spot!”

• In relation to impairment of the values of the assets of Fonterra Brands New Zealand and Dairy Partners Americas Brazil, Skilton failed to request correction of Fonterra’s disclosures (in notes to the financial statements) to reflect Skilton’s own assessment of the decline in value of those assets and was misguidedly prepared to conclude that the relevant financial statements presented those values in materially fair ways. 

Foliaki’s responsibility for Fonterra’s accounts was essentially to be “quality controller” for the PwC audit team in general, and especially for Skilton as the head of that team. In other words, his task was to second-guess the audit team’s judgements in conducting the audit. To put it bluntly, Foliaki failed to challenge the PwC audit team’s performance, one little bit, and was accordingly found guilty of breaching the Code of Ethics.

Even though the Tribunal stepped up, the discerning eye can perceive glinting curiosities in the Tribunal’s decision.

As regards PwC’s audit “independence”, the Tribunal is anxious to distinguish between independence and the appearance of independence, and to confine Skilton’s shortcomings to undermining that appearance.  But, bearing in mind – and as recorded in the Tribunal’s decision – that Skilton and Foliaki had previously unblemished records, over long careers, their year-after-year Fonterra failures can only be explained by actual non-independence. All the indications are that Skilton and Foliaki were intensely conscious that dairy giant Fonterra was generously buttering PwC’s bread and PwC was voraciously and unrelentingly sucking on Fonterra’s udder. Even babies rarely bite the tits that feeds it.

The Tribunal also blithely claims that “there was no claim or evidence of any actual loss or harm as the result of the Members’ failures to adhere to auditing standards”. As identified in my previous Substack, Fonterra suppliers must buy Fonterra shares in order to be entitled to supply. So make no mistake, the harm and losses were categorically “actual” for those Fonterra shareholders who, over the period of the book-cooking, had to buy – with their own real money - Fonterra shares,  at values inflated by Fonterra’s gross over-statement of Fonterra asset values and PwC’s derelictions of its audit duties.

So, what can we make of this?

First, we can’t remotely trust the FMA to take hard action on financial malpractice.

Secondly, Fonterra, our bloated, dysfunctional dairy cooperative, is Teflon. Nothing sticks.

Lastly, it takes enormous tenacity, of the sort only displayed by rare, brave beasts like Colin Armer, to focus the spotlight on the corporate and regulatory rottenness that is all-to-common in New Zealand.