CEO Message: WTF is Happening in the Accounting World?

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CEO Message: WTF is Happening in the Accounting World?

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In this issue of On-Target, I thought I will highlight some of the bizarre happenings, fiascos and other tit-bits recently reported in the Newspapers relating to our profession.

The two most bizarre are the Woolworths and Target Fiascos (WTF).

Case one was of Woolworths (supermarket retailer); that took the concept of money laundering and applied it literally.

Prof-Janek-Ratnatunga

What happened was that the cost accountants in the laundry detergents industry worked out it could save packaging and space if it delivered laundry detergent in an ‘ultra’ concentrate form. The trick was to do so without having to cut prices (Durie, 2016).

The danger was that if consumers saw smaller packages on shelves, they might think there was less detergent; and think they should pay less for the smaller packages. This reasoning would especially apply if the smaller packs were placed next to bigger ‘less concentrated’ ones on an adjoining shelf.

So the detergents manufacturers in Australia (Unilever, Colgate Palmolive and PZ Cussons) came up with a plan to co-ordinate the launch date of the smaller ‘ultra’ concentrate packs, whilst simultaneously withholding supply of the bigger packs; so that consumers would not know what had happened and would happily pay the same price for the smaller packages because the detergent inside was meant to be twice as strong.

Woolworths the retailer admitted that they knew of these arrangements by the multi­national detergent companies and agreed to go along. After all, the accounting numbers showed that everyone was a winner. The retailers saved retail space, the manufacturers saved costs and the environment with small packaging, while ­consumers were agreeing to pay more for what could have looked like less.

The Australian Competition and Consumer Commission (ACCC) disagreed said it was anti-competitive cartel behavior, and fined the manufacturers and retailers. Woolworths was given a $9 million fine for its part in the cartel.

The extraordinary thing about this case is that the laundry detergents industry tried the same thing in 2002 in Europe, and in 2011, Unilever and Procter and Gamble paid $US457m ($630m) in fines for substantially the same behaviour. These cases attract widespread publicity yet somehow multi­national companies either do not talk across borders or believe that if they are caught in one juris­diction, then they might get away with it in another.

Case two involved Target (department store) which developed their own version of transfer pricing.

In this case, some Target staff increased the chain’s earnings by almost 40 per cent by colluding with suppliers to book extra rebates in return for promises of higher prices (Mitchell, 2016).

Wesfarmers (the owners of Target) and its external auditors, Ernst & Young, commenced an investigation after irregularities with regards to rebates were reported to senior Wesfarmers’ executives in March.

After checking about 10,000 emails and interviewing employees, Wesfarmers found that a group of about 10 staff were involved in a scheme to offer about 31 overseas clothing suppliers price rises averaging 4 per cent in the June half in return for extra rebates in the December half. Letters offering price rises were concealed from Wesfarmers and its auditors.

Rather than being booked against the cost of inventory, in line with accounting standards and Wesfarmers’ protocols, the rebates were taken to profit, boosting Target’s December-half earnings by about $21 million, almost 40 per cent.

Target’s earnings before interest and tax would have been $53 million in the December half compared with the $74 million reported, and Wesfarmers’ group net profit would have been $15 million, 1.1 per cent, lower than reported.

Wesfarmers said the arrangements had no cash flow implications, as the rebates were not collected but treated as receivables, and would have a negligible impact on full-year results as any benefit would have been unwound in the current half.

A number of senior Target executives have either resigned or been sacked over the accounting scandal as Wesfarmers sought to reassure investors and regulators that the collusion was an isolated event and not a sign of deeper cultural and compliance problems at Australia’s largest retailer.

Target’s former managing director, Stuart Machin, has said he was not aware of the accounting issues but has accepted his share of the responsibility, given his leadership role, and resigned from Wesfarmers last Friday. Target former finance director Graeme Jenkins had resigned in December 2015 to take a new role as chief financial officer at UK pet care chain ‘Pets At Home’. The UK company said that it is no longer hiring him as its new finance officer following an investigation into supplier payments at his former employer, Target.

What’s so disappointing for the accounting profession is that people who are well trained and experienced in such matters made a multitude of decisions, probably through an implied pressure they felt to boost short-term earnings, to do something that is mind-blowingly stupid.

Case Three was ANZ (Bank) and its reaction to criticism of its Chief Financial Officer (CFO).

Here a stockbroker with Bell Potter (Stockbroking Firm) named Angus Aitken sent a highly amusing note to clients; in which he criticised the appointment of ANZ’s new CFO saying that it was one of the “dumber appointments” he has seen. This was based on Aiken’s analysis of some of the new CFO’s performance in an earlier job as an investment banker; such as recommending Slater and Gordon (legal firm) to buy UK professional services outfit Quindell for $1.3 billion in 2015. The shares of Quindell are worth “bugger all” said Aitken in his email. Thus, his advice to clients: “Sell ANZ”.

What happened next is just bizarre (Overington, 2016). One of ANZ bank’s employees, Paul Edwards, pinned the note to a tweet, saying: “Sexism alive and well in stockbroking?”

Sexism? The new CFO is Michelle Jablko; but the CFOs name or gender was never even mentioned in the email.

Next, for reasons that are truly hard to fathom, ANZ bank’s CEO, Shayne Elliott, then “liked” the tweet. After this high level tweet, Aitken got in trouble from his employer, Bell Potter, and he has now left the company. Aitken says that his reputation is in ruins; and has sued ANZ bank.

So, what was the bank thinking? Well, it’s not that hard to figure out says Overington (2016). The ANZ is having an annus horribilis. The share price is slumping. The exposure to Asia is a worry. It’s fighting an expensive, ugly case hinged on racism in Melbourne, plus another featuring lap dancers and gold coin in Sydney.

And so when Aitken put his note out to “sell ANZ”; it was just one more blow. The bank panicked, took a turn to what it hoped was the high road, and dug itself in even deeper. Aitken may be rude, and he may even be wrong, but he was not sexist in that email. Apparently, ANZ is set to apologize to Aitken over the sexism claim.

Case Four was Rupert Murdoch (billionaire media mogul) and his views on Google’s tax avoidance.

Rupert Murdoch attacked Google parent’s tax deal with the UK, and tweeted that (although) “Google et al broke no tax laws”, (it is) “Now paying token amounts for PR purposes. Won’t work. Need strong new laws to pay like the rest of us” (Hutton, 2016).

Murdoch was referring to Alphabet (Google’s parent) company’s agreement to pay £130 million pounds in taxes dating back to 2005.

It is interesting that such a view comes from Rupert Murdoch, whose own company, News Corp, had paid a tax rate of 6 percent over the previous four years, according to a 1999 report by The Economist magazine. In the UK, it had paid no net tax at all on £1.4 billion of profits made since 1987. In fact, News Corp paid no UK net tax at all between 1987 and 1999; and eight of the 10 media companies that paid no income tax in Australia are linked to the Murdoch family. Murdoch’s company has 23 tax haven subsidiaries, according to a 2015 report by Citizens For Tax Justice, including three in the Cayman Islands, six in Hong Kong and four in Luxembourg (Hutton, 2016).

Maybe his new wife, model Jerry Hall (former wife of Rolling Stone, Mick Jagger) has made Murdoch ignore the advice of all those highly paid Tax Accountants he has hired in the past; and now he wants to be a better corporate citizen who pays his fair share of taxes.

So is there any ‘Good News’ stories about accountants?

Case four is about the Federal election that Australia will be having on July 2, 2016.

“There has never – in the history of this nation – been a more exciting time to be an accountant”, says Australian journalist Annabel Crabb (2016).

She says that it seems increasingly clear that the election battle will be fought over concepts about which most sensible people have no idea, such as ‘Thin capitalisation’.

It appears that Australia is heading for its first thin capitalisation election, in which Labor and the Coalition (the two major political parties in Australia) will do battle over which of them can more convincingly bring multinational companies to heel by fiddling with the amount of debt they can tax-deductibly load into their Australian interests.

Crabb (2016) then poses some of the burning questions of this election, and the answers that are been given by the party spokespersons:

Question: “What do we want?”

Answer: “A reasonable prescribed debt-to-equity ratio for multinationals that ensures a morally defensible degree of taxation return without adversely affecting foreign investment!”

Question: “When do we want it?”

Question: “Just as soon as we’ve seen the modelling!”

Those who are not accountants, she says, will have to sling a couple of hundred bucks at the nearest CPA to get even a vague feel for what these answers mean.

The other burning issues of this election are: Negative gearing! Reduced income thresholds for superannuation contribution discounts! Taper rates! Bracket creep!

Even Australian government ministers cannot, on occasion, quite work out whether Labor’s proposal to fool about with negative gearing will make house prices go up (disaster for house-hunters!) or down (disaster for house-owners!) This is why they settle instead for a blanket warning of generalised disaster and leave it at that.

At social functions, no one flocks round the sports star or fashion model any more. Nor the private detective, the hostage negotiator or the chick who was a producer on MasterChef. Times are tough, and if you can find someone who not only knows what negative gearing is but can have a stab at whether you’d be better off renting or selling or buying or sinking your capital into Cartier watches or just moving to a small unnamed island, then what do you do? Well get an accountant, says Crabb (2016).

She says that there has never been a hotter time to be an accountant!

Professor Janek Ratnatunga, CMA, CGBA

CEO, ICMA Australia

References:

Crabb, Annabel (2016) “The economists desperately trying to explain what the Budget might mean”, Sunday Age, May 1, p.40.

Durie, John (2016). “Woolworths’ dirty laundry”, The Weekend Australian, June 4-5, p. 41.

Hutton, Robert (2016). “Rupert Murdoch attacks Google for paying ‘token’ taxes”, Sydney Morning Herald, Business Day, January 28, p.19.

Mitchell, Sue (2016). “Wesfarmers takes action against staff over Target rebates”, The Age, Business Day, April 12, 2016, p. 19.