After the shallowness of the MSM this week, I noticed an important issue being raised by Brian Gaynor. The question of “Crisis of accounting’s double standards“. This is a problem that has both an immediate and long-term concern for the confidence of investors in New Zealand businesses.
New Zealand investors are facing an accounting crisis. This is because domestic companies have rejected many of the new international financial reporting standards (IFRS) and are declaring “adjusted”, “underlying”, “operating”, “excluding non-trading” and “from continuing operations” profits that vary significantly from audited IFRS-compliant profits.
When companies are able to invent their own accounting standards we will wind up with the issues that showed up in various shonky investment companies in the 1980’s. The results were a loss on investors money, but more importantly in a loss of confidence in investing in NZ companies that has persisted for decades.
Government tax changes, particularly the removal of depreciation on property and the requirement to make a deferred tax provision as a result, have opened the flood gates of opposition to IFRS.
This is a potential problem for investors as unscrupulous companies could take advantage of a situation where accounting standards have been discredited and develop their own “creative” accounting.
This would be yet another disaster for New Zealand investors because inadequate auditor oversight and “creative” accounting were major contributors to the 1980s sharemarket boom and bust, as well as the finance company debacle.
The main objective of IFRS is to create a common worldwide accounting standard so companies in different countries can be compared with one another.
If you cannot have confidence in investing in NZ companies because they lie about their profits using a non-compliant standard, then you’d be better off putting investments in companies that do comply. The history of companies making up their own accounting standards in NZ means that if a company is unable to present a good picture using the prevailing accounting standards, then you can probably assume that they are trying to scam investors.
Sure there are probably problems with the standards – there always are with any standard. As Gaynor says:-
These developments are extremely disturbing for those of us with a long exposure to New Zealand’s capital markets, as investors can be easily misled when accounting standards are not followed.
The problem is that we don’t have strong leadership in the accounting profession.
Public issuers should be required to follow accounting standards in all aspects of their communications with investors, and if the accounting profession believes that these standards are inappropriate then they should be changed.
The road we are heading down, which is where companies reports their own adjusted profits to shareholders, inevitably leads to tears as far as investors are concerned.
That is the important point. If companies don’t think that the standard is useful, then become activist and work to change the bloody standard. To issue “adjusted” accounts even for good reason has to be viewed as simply an attempt to scam investors. At best those reason should be footnotes on the accounts, not a reason to issue “adjusted” accounts and to push the standard accounts to the background.
The standards are there to allow investors to compare alternative investments on a standard basis and to allow them to invest with confidence of having a full disclosure. They are not there for companies to “adjust” to make their performance look better. That is the road to having failed companies, a loss of investment by small investors, and a subsequent lack of confidence in the local market. Surely we’ve had enough of that for exactly the same reasons over the last 30 years.
To implicitly lie by only having “adjusted” accounts that are not compliant of the standard and making these “adjusted” accounts the primary focus of publicity on results is the behavior of scam artists trying to bilk investors. For the stock exchange, the commerce commission, the various accounting bodies. and other constraining authorities to be complicit in these scams by not clamping down means that these institutions are also suspect. If they are too gutless to do the job, then what use are they?
Ultimately company failures mean that investment based on faulty information causes loss not only for the investors. It also causes problems for people reliant on those companies for wages and salaries. But most of all it means that investment has been directed to inappropriate avenues depriving us from growing companies of substance. This has been all too common in NZ over decades.
Right now, as an investor, it would be better to invest where the standards are upheld. At present that means investing outside of NZ because the lack of a consistent accounting standard across all companies which means that all accounting is suspect. If the accountants and their controlling bodies are complicit in producing publically non-compliant accounts based on their own standards, then what else is rotten in their behavior?