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 charges
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.
 

Public accountability
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.

Restated accounts
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.

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23 Comments & Questions

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well no surprise on that one! when you look at the way the various businesses and trusts were actually run it really amounted to nothing short of period fraud - lucky that unlike the USA we dont have that law here - that said the fella in the article must have knowne all about it!

what about some more answers if you will

1. how come SCF & AH have ownership of Show Girls?? a strip club in AKLD - surely that was not amongst the info about how the company invests / investment strategy?
2. how come SCF has an interest over a high rise block yet to built in the Chatham islands??? oh please surely they did not think that would be a winner??
3. and what about the immigrant from Tehran of all places - he had a cafe here that failed, but so lucky for SCF investors SCF actually has a guarantee on the cafe he also owns in Tehran!!! i guess a quick trip over there to see if she was all good!

LOLOLOL - come on please, it must be time for this end!

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Hey donkey, give the poor old guy a break! AH understood he was buying into a pig farm called Sow Girls.

But a high rise on the Chathams - yea, well that is a bit of a worrie....

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Chatham high-rise

You can get that from secrecy - its called Chatham House rules - if you are bit dodgy in the hearing department!

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Did SCF/AH own the business showgirls or the building that the business is in ????
Any answers

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Look like the payments from SCF?AH are paramount, next to nothing.

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The Institute of Accountants has a practice review process.
Why didn't they pick up in the review process that this guy was out of his depth?

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Interesting .. in the NBR report above Pearson was ordered to pay costs of $38k plus GST .. in news reports elsewhere that has morphed into "Pearson has been fined $38k" .. A local sole-audit-practitioner was always going to be inadequate for a $2bn business .. it has overtones of a "tame-rubber-stamp" and audit-shoppping.

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Wonder if AH will cover his costs ?

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Looks like its open season for those who lost money on SCF pref shares to sue this auditor.

Hope his professional indemnity insurance is fully paid up.

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It is the management letters from the auditors that I find scariest. Two letters 6 months apart, and almost nothing had changed. SCF's accountants were overworked and kept in the dark, the records were inaccurate and out of balance, the Board had no idea which loans were to related parties, and on and on. The letters had also been sent to the Trustee company, but the trustee apparently did nothing. Finally the Securities Commission wrote to the the Trustee saying What have you done about this mess? - tell us in the next 3 days. But we don't see the trustee's response.
These letters alone show that SCF was run as a mickey mouse outfit and none of the supposed grown-ups were taking responsibility. There should be enough negligence provable to drag everyone down.

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Most Accountants and Auditors are usually signing when talking to someone. Multiple tasks?

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Woodnorth Joyce is a Timaru Practice.
Myers Business Solutions is an Ashburton Practice.
The Companies Office records reveal that Mr Pearson is one of three directors in Myers Business Solutions Limited.
I would have thought that an entity as large as SCF would have had one of the international practices as its auditor.
However,AH as the historical owner of SCF,made that call.
If you undertake some research in regard to audits carried out offshore,you will discover that the names of international accounting practices are not exactly unassociated with perceived audit deficiencies.

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As for Practice Review,this is a sampling process,and generally takes place each three years.
Do you know the dates of the Reviews carried out on this practice ?
It appears that in the case of practices who have an audit base,the institute is now using higher profile auditors tha historically was the case,which is essential in the light of the complexities of today.
As for taking legal action against the auditor of SCF,I suggest that you consider the limited progress to date in taking legalaction against the auditors of any of the failed finance companies.
Anyone who invested in SCF Perpetual Stock needed to understand the nature of the beast they were investing in.
It appears many did not,which clearly includes those selling these investments to the public,as evidenced by portfolios I have seen.

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So what about the auditors of those other finance companies? Hanover, Strategic etc

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@ Uncle Fred "so what about the others"

As someone who was "once in the job" you can be certain things are being done about the others. Whether those actions will see the light of day and be exercised in the public domain will be highly doubtful. Recently there was a Press Release by the peak-industry-council of Trustees which was an opening shot designed to distract attention away from themselves. Equally the Institute of Accountants will be managing the news on a drip-feed basis. It doesn't take 3 years to address this issue. The SCF investigation was not at the initiative of the Institute itself. While the Institute has expressed concern for its reputation and that of members it would enhance that view if it was being transparent and pro-active. Given the lapse of time one would think it could issue a press release announcing how many investigations have been conducted, anticipated publication, and how many are still in train.

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The context about the Trustees in the above comment above is in respect to a news item published last week where the RBNZ pointed the finger at the failures of the Trustees of the Finance companies. The Trustees peak body then issued a press release pointing the finger at the failures of the Auditors of the Finance companies. The obvious question is who is the disciplinary body for the Trustee industry.

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I am in no doubt that the insititute is undertaking Practice Reviews in regard to the audits of a number of finance companies.
I say that because in error I received an email in regard to such a matter which should have gone elsewhere.
I must say I am impressed that they are utilising the skills of the vastly experienced Bill Heritage in such reviews.

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I resigned from all audits some years ago after a major run in on one audit with a board who refused to sign a management representation letter,which caused substantial friction which quite frankly was not worth the stress. of further involvement.
When you are requested to tender a price for what is a dangerous job,and if you state the facts in a report which the board do not want to accept,things come to a head.
Just as CEOs tend to railroad boards,the danger is also that the board will railroad an auditor.
Who would want to be an auditor ?
There are plenty of other work avenues in the commercial world.

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From the other side of the fence. Some years ago I was recruited by a large NZ public company (who had their accounts qualified by one of the larger firms) to fix the problem and given a year to do so. Not hard. In the process I was exposed to the inner-most workings of the requirements of the auditors. And they weren't gentle. Hence I am not too sympathetic towards either the Institute for its lack of action, or the auditors involved in the Finance Company Audits. Perhaps I was fortunate the company took the situation seriously.

On a constructive note I cant understand why, given the industry wide systemic failure, the Government hasn't unleashed the weight of the Auditor General on the issue.

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Sometimes you have to do things differently and think outside the box. Sometimes following protocols doesnt produce results, and having regard to professional sensitivities produces un-acceptable unintended consequences

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What does this actually mean ? This one man band accountant has been censured by the same body who "fined" the Earnest & Young auditor running the Feltex audit ! It is odd to me that people are saying a bigger firm is better, especially now that Earnest & Young were appointed to audit SCF ! co-incidence !

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This is what you are dealing with :-

SCF was not the first to fail, yet the Auditor of SCF is the first of the Finance Company auditors to be pinged

And the Ernst & Young partner was pinged $150,000 while Pearson copped $38,000. No explanation of the difference. The Institute is not very transparent

And still would like to know who is the disciplinary organisation or reponsible body for oversight of the Trustee industry. Cone of Silence so far.

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Not quite correct.
You overlook the auditors of National Finance[2000] and Nathans.
I suppose Dave Fraser and Kiwi hardly counts as it is a minnow.
Perhaps E & Y were levied a larger amount on the same basis that a professional would traditionally charge a higher fee to a doctor than a plumber.

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