South Canterbury Finance auditor guilty of ethics breach
Byron Pearson, an Ashburton chartered accountant, has pleaded guilty to five amended charges of breaching industry codes of ethics relating to an audit of South Canterbury Finance's financial statements.
At a hearing held in Wellington yesterday, Mr Pearson pleaded guilty to the charges brought by the disciplinary tribunal of the New Zealand Institute of Chartered Accountants.
He was ordered to pay costs of $38,000 plus GST and has been banned from auditing a public issuer for five years with the exception of four non-specified companies on condition of a pre-signed external quality control review.
Mr Pearson was a partner in small Timaru-based Woodnorth Myers, responsible for auditing South Canterbury Finance’s financial statements up until October 2009, when it was replaced by big four firm Ernst & Young, following a peer review.
A year later South Canterbury collapsed into receivership, triggering a $1.6 billion payout to investors under the Crown Retail Deposit Guarantee Scheme.
The five charges varied in substance but all related to the audit of financial statements of South Canterbury Finance for the six months ended December 31, 2008, according to the disciplinary tribunal decision.
The breaches included:
- Accepting assertions from SCF management that no collective provision for doubtful debts was required, when there was information available indicating otherwise;
- Failing to assess, evaluate and document uncorrected misstatements relating to provisions required on individual loans;
- Failing to document conclusions relating to the recognition and valuation of a hedging asset of $48 million;
- Failing to document conclusions as to whether swap transactions referred to in two letters from the BNZ were appropriately reflected;
- Failing to adequately document a basis for concluding that related party transactions did not breach the 35% exposure threshold referred to in SCF’s Trust Deed;
- Failing to satisfy that related party transactions between Hornchurch Limited and SCF were properly disclosed; and
- Failing to exercise due care and diligence, in particular with regard to the recording of capitalised interest in the interest received of $114.48 million.
In his decision, Tribunal chairman Jim Hoare said the case involved issues of “public accountability, and the standing reputation of the profession and the Institute.”
“The member lacked the required depth of experience and expertise of auditing in the finance industry, and the professional skepticism, to undertake an audit of the nature and complexity of South Canterbury Finance. This was exacerbated by the prevailing economic circumstances."
The institute said the charges related to Mr Pearson following deficiencies:
• his lack of professional skepticism and experience in reviewing loan values in an environment where there had been a substantial and rapid decline in asset values;
• his failure to adequately document the audit process and his findings, including aggregating the unadjusted misstatements; and
• his failure to identify disclosure deficiencies within the financial statements where they would have been identified under normal audit circumstances.
In his defence, Mr Pearson informed the Tribunal that he had attempted, without success, to obtain the assistance of an independent New Zealand-based auditor to act as the second partner reviewer on the audit.
The Tribunal accepted Mr Pearson’s assurance that he had no intention of auditing a financial institution in future.
South Canterbury’s receivership followed a failed recapitalisation attempt, which gained increased urgency in April this year when South Canterbury revealed a loss of $198.6 million for the half year to December 31, with individually impaired loans surging to $598.24 million.
The company also had to restate its accounts for the year to June 2009, changing the reported loss of $57.8 million to a loss of $163 million.
Related party lending had blown out to $230.31 million, up from $170.2 million at the end of December and from $64.15 million as at June 2008.
The restatements came after South Canterbury's long-term auditor, Timaru-based Woodnorth Myers, was replaced by big four firm Ernst & Young.
Copies of two Woodnorth Myers letters, signed by Mr Pearson and sent to South Canterbury Finance were brought to the attention of the Securities Commission in December 2009.