$34m auditing blunder forces review

By PHILIPPA STEVENSON agricultural editor

A $34 million discrepancy in reported accounts has shaken dairy giant Fonterra and auditor KPMG.

KPMG partner Joanna Perry, who was responsible for the Fonterra audit, said yesterday that there would be a review of the co-op's financial reporting processes.

That is likely to gain support from company observers concerned that the mistake has revealed Fonterra's subsidiaries, NZMP with $7 billion turnover and NZ Milk with $5 billion, are not being audited.

Perry, a member of the Institute of Chartered Accountants financial reporting standards board, said the discrepancy between figures reported a month apart for the NZ Milk consumer products division was extremely unfortunate.

"It's given everybody a great shake-up because certainly people at Fonterra and others who have been involved are extremely disappointed and upset that it has happened. It will be looked at to see how we ensure it doesn't happen again. But mistakes always happen, unfortunately."

When Fonterra announced its audited full-year result to the Stock Exchange on July 19, it separately reported NZ Milk's earnings of $336.2 million and revenue of $5.604 billion.

But when the company released its annual report this week, NZ Milk's earnings were down to $302 million and revenue to $5.583 billion.

Fonterra's chief financial officer, Graham Stuart, told the Business Herald the error arose because Fonterra's result had been audited by July 19 but NZ Milk's audit was not completed until later.

But Perry said KPMG did not audit NZ Milk.

Under the Companies Act, companies can choose whether to audit wholly owned subsidiaries. "Fonterra chose not to," she said.

"Obviously we audit the underlying entities to the degree of materiality in order to sign off on the group financial statements."

However, accounting specialists questioned how a group audit could be completed without a full audit of a subsidiary as significant as NZ Milk.

Canterbury University accountancy lecturer Alan Robb said having no audit raised questions about what mistakes could be made within the huge company.

Stuart said most of the $34 million discrepancy in NZ Milk's earnings related to restructuring Fonterra's British operation for the joint venture with Arla Foods.

Robb asked, "What possible costs amounting to millions of dollars could relate to a restructuring?" and added that such transactions would be reviewed in an audit.

Fonterra shareholders would need to question what internal audits were being done, and to whom the internal auditor reported.

A senior academic specialising in auditing concurred with Robb. "Maybe under law they are not required to [audit the subsidiary] but it is not possible, in my view, to complete an audit without it," said the lecturer, who declined to be named.

Perry said KPMG had completed the audit of Fonterra group accounts, including relevant underlying figures from subsidiaries, on July 18. The result was released to theStock Exchange the next day.

In a media briefing on the result on July 19, Stuart had included the NZ Milk figures. "At that point we had not seen those numbers as they were reported," Perry said.

When the annual report was being finalised, KPMG discussed the NZ Milk figures and how they had been calculated with Stuart. They were changed as a result, she said.

The 26 pages of financial statements in the annual report contained audited figures, but numbers within the text, including those of NZ Milk, were not defined as audited.

Asked whether KPMG would have advised the company to acknowledge the changed figures, Perry said: "In best circum-stances that would be the best case."

She added: "To me, it is a total, inadvertent mistake - an overlooking that previously those numbers, or supposedly the same numbers, had been reported. And no one realised they were different."

She said there should be no lack of confidence in Fonterra's result.

"The group financial statements have been audited. There is nothing that has changed from July 19 to now in relation to those group numbers, and they are the key numbers in relation to Fonterra's performance."

The performance of the subsidiaries was important, but it was a matter of judgment and management what costs were attributed to which entity.