NZ Herald
  • Home
  • Latest news
  • Herald NOW
  • Video
  • New Zealand
  • Sport
  • World
  • Business
  • Entertainment
  • Podcasts
  • Quizzes
  • Opinion
  • Lifestyle
  • Travel
  • Viva
  • Weather

Subscriptions

  • Herald Premium
  • Viva Premium
  • The Listener
  • BusinessDesk

Sections

  • Latest news
  • New Zealand
    • All New Zealand
    • Crime
    • Politics
    • Education
    • Open Justice
    • Scam Update
  • Herald NOW
  • On The Up
  • World
    • All World
    • Australia
    • Asia
    • UK
    • United States
    • Middle East
    • Europe
    • Pacific
  • Business
    • All Business
    • MarketsSharesCurrencyCommoditiesStock TakesCrypto
    • Markets with Madison
    • Media Insider
    • Business analysis
    • Personal financeKiwiSaverInterest ratesTaxInvestment
    • EconomyInflationGDPOfficial cash rateEmployment
    • Small business
    • Business reportsMood of the BoardroomProject AucklandSustainable business and financeCapital markets reportAgribusiness reportInfrastructure reportDynamic business
    • Deloitte Top 200 Awards
    • CompaniesAged CareAgribusinessAirlinesBanking and financeConstructionEnergyFreight and logisticsHealthcareManufacturingMedia and MarketingRetailTelecommunicationsTourism
  • Opinion
    • All Opinion
    • Analysis
    • Editorials
    • Business analysis
    • Premium opinion
    • Letters to the editor
  • Politics
  • Sport
    • All Sport
    • OlympicsParalympics
    • RugbySuper RugbyNPCAll BlacksBlack FernsRugby sevensSchool rugby
    • CricketBlack CapsWhite Ferns
    • Racing
    • NetballSilver Ferns
    • LeagueWarriorsNRL
    • FootballWellington PhoenixAuckland FCAll WhitesFootball FernsEnglish Premier League
    • GolfNZ Open
    • MotorsportFormula 1
    • Boxing
    • UFC
    • BasketballNBABreakersTall BlacksTall Ferns
    • Tennis
    • Cycling
    • Athletics
    • SailingAmerica's CupSailGP
    • Rowing
  • Lifestyle
    • All Lifestyle
    • Viva - Food, fashion & beauty
    • Society Insider
    • Royals
    • Sex & relationships
    • Food & drinkRecipesRecipe collectionsRestaurant reviewsRestaurant bookings
    • Health & wellbeing
    • Fashion & beauty
    • Pets & animals
    • The Selection - Shop the trendsShop fashionShop beautyShop entertainmentShop giftsShop home & living
    • Milford's Investing Place
  • Entertainment
    • All Entertainment
    • TV
    • MoviesMovie reviews
    • MusicMusic reviews
    • BooksBook reviews
    • Culture
    • ReviewsBook reviewsMovie reviewsMusic reviewsRestaurant reviews
  • Travel
    • All Travel
    • News
    • New ZealandNorthlandAucklandWellingtonCanterburyOtago / QueenstownNelson-TasmanBest NZ beaches
    • International travelAustraliaPacific IslandsEuropeUKUSAAfricaAsia
    • Rail holidays
    • Cruise holidays
    • Ski holidays
    • Luxury travel
    • Adventure travel
  • Kāhu Māori news
  • Environment
    • All Environment
    • Our Green Future
  • Talanoa Pacific news
  • Property
    • All Property
    • Property Insider
    • Interest rates tracker
    • Residential property listings
    • Commercial property listings
  • Health
  • Technology
    • All Technology
    • AI
    • Social media
  • Rural
    • All Rural
    • Dairy farming
    • Sheep & beef farming
    • Horticulture
    • Animal health
    • Rural business
    • Rural life
    • Rural technology
    • Opinion
    • Audio & podcasts
  • Weather forecasts
    • All Weather forecasts
    • Kaitaia
    • Whangārei
    • Dargaville
    • Auckland
    • Thames
    • Tauranga
    • Hamilton
    • Whakatāne
    • Rotorua
    • Tokoroa
    • Te Kuiti
    • Taumaranui
    • Taupō
    • Gisborne
    • New Plymouth
    • Napier
    • Hastings
    • Dannevirke
    • Whanganui
    • Palmerston North
    • Levin
    • Paraparaumu
    • Masterton
    • Wellington
    • Motueka
    • Nelson
    • Blenheim
    • Westport
    • Reefton
    • Kaikōura
    • Greymouth
    • Hokitika
    • Christchurch
    • Ashburton
    • Timaru
    • Wānaka
    • Oamaru
    • Queenstown
    • Dunedin
    • Gore
    • Invercargill
  • Meet the journalists
  • Promotions & competitions
  • OneRoof property listings
  • Driven car news

Puzzles & Quizzes

  • Puzzles
    • All Puzzles
    • Sudoku
    • Code Cracker
    • Crosswords
    • Cryptic crossword
    • Wordsearch
  • Quizzes
    • All Quizzes
    • Morning quiz
    • Afternoon quiz
    • Sports quiz

Regions

  • Northland
    • All Northland
    • Far North
    • Kaitaia
    • Kerikeri
    • Kaikohe
    • Bay of Islands
    • Whangarei
    • Dargaville
    • Kaipara
    • Mangawhai
  • Auckland
  • Waikato
    • All Waikato
    • Hamilton
    • Coromandel & Hauraki
    • Matamata & Piako
    • Cambridge
    • Te Awamutu
    • Tokoroa & South Waikato
    • Taupō & Tūrangi
  • Bay of Plenty
    • All Bay of Plenty
    • Katikati
    • Tauranga
    • Mount Maunganui
    • Pāpāmoa
    • Te Puke
    • Whakatāne
  • Rotorua
  • Hawke's Bay
    • All Hawke's Bay
    • Napier
    • Hastings
    • Havelock North
    • Central Hawke's Bay
    • Wairoa
  • Taranaki
    • All Taranaki
    • Stratford
    • New Plymouth
    • Hāwera
  • Manawatū - Whanganui
    • All Manawatū - Whanganui
    • Whanganui
    • Palmerston North
    • Manawatū
    • Tararua
    • Horowhenua
  • Wellington
    • All Wellington
    • Kapiti
    • Wairarapa
    • Upper Hutt
    • Lower Hutt
  • Nelson & Tasman
    • All Nelson & Tasman
    • Motueka
    • Nelson
    • Tasman
  • Marlborough
  • West Coast
  • Canterbury
    • All Canterbury
    • Kaikōura
    • Christchurch
    • Ashburton
    • Timaru
  • Otago
    • All Otago
    • Oamaru
    • Dunedin
    • Balclutha
    • Alexandra
    • Queenstown
    • Wanaka
  • Southland
    • All Southland
    • Invercargill
    • Gore
    • Stewart Island
  • Gisborne

Media

  • Video
    • All Video
    • NZ news video
    • Herald NOW
    • Business news video
    • Politics news video
    • Sport video
    • World news video
    • Lifestyle video
    • Entertainment video
    • Travel video
    • Markets with Madison
    • Kea Kids news
  • Podcasts
    • All Podcasts
    • The Front Page
    • On the Tiles
    • Ask me Anything
    • The Little Things
    • Cooking the Books
  • Cartoons
  • Photo galleries
  • Today's Paper - E-editions
  • Photo sales
  • Classifieds

NZME Network

  • Advertise with NZME
  • OneRoof
  • Driven Car Guide
  • BusinessDesk
  • Newstalk ZB
  • Sunlive
  • ZM
  • The Hits
  • Coast
  • Radio Hauraki
  • The Alternative Commentary Collective
  • Gold
  • Flava
  • iHeart Radio
  • Hokonui
  • Radio Wanaka
  • iHeartCountry New Zealand
  • Restaurant Hub
  • NZME Events

SubscribeSign In
Advertisement
Advertise with NZME.
Home / Business

Fonterra defends audit despite $34m mistake

23 Aug, 2002 08:42 AM6 mins to read

Subscribe to listen

Access to Herald Premium articles require a Premium subscription. Subscribe now to listen.
Already a subscriber?  Sign in here

Listening to articles is free for open-access content—explore other articles or learn more about text-to-speech.
‌
Save

    Share this article

By PHILIPPA STEVENSON agriculture editor

Fonterra has admitted an embarrassing $34 million mistake in its end-of-year financial reporting but has defended the auditing procedures that caused it.

Fonterra director Graeme Hawkins, who chairs the board audit committee, moved to clarify the $14 billion dairy giant's auditing process after contradictory statements from chief
financial officer Graeme Stewart and KPMG partner Joanna Perry, who is responsible for the Fonterra audit.

But Hawkins' explanations have not satisfied some accounting and audit experts, who remain concerned that New Zealand's biggest company risks "financial timebombs" going undetected in its 200 or more subsidiaries.

The $34 million discrepancy emerged in the earnings of Fonterra subsidiary NZ Milk after the co-op released its annual report last week.

When Fonterra reported its full-year result on July 19, NZ Milk's earnings before interest and tax (ebit) were reported as $336.2 million but the figure reduced to $302 million in the annual report.

NZ Milk's reported revenue also dropped from $5.6 billion to $5.58 billion.

Neither change altered Fonterra's overall financial position.

Hawkins said Fonterra acknowledged NZ Milk's higher ebit was a mistake in the July 19 accounts.

He said there was a lot of subjectivity about where costs and revenues fell within the group. When the company came to write the annual report commentary, KPMG auditors had raised questions about figures relating to a joint venture with Arla in Britain that had been allocated to NZ Milk. The amounts were re-allocated, changing both the ebit and revenue figures.

"It's just the shuffling of an activity from one pot into another," Hawkins said.

"What we weren't bright enough to do was change the website at the same time ... or the printout that everyone received [on July 19].

"It's a mistake. We are embarrassed by it. It shouldn't have happened and I guess we were trying to be too quick off the mark. Probably what would have helped is if we had acknowledged the difference in the reported figures from the earlier release. So we accept the rap for that."

The error has raised concerns about the auditing of Fonterra's subsidiaries. Stewart told Weekend Business that NZ Milk's audit was not completed until after July 19, but Perry said Fonterra had chosen not to audit the wholly owned subsidiary.

However, Hawkins said KPMG had audited Fonterra's subsidiaries by July 18 "in as full a way as if we produced audit certificates by subsidiary". But the auditors were not required to produce audit reports.

It saved money if auditors did not produce audit reports for each individual company "with views on the rightness of that company in relation to the rest of the group".

"For example, on the trading accounts they would get in to all sorts of issues on the appropriateness of inter-company and head office charges for each individual subsidiary which, from a group point of view, is irrelevant. It all comes out in the wash whether we charge someone - it's all consolidated out in consolidation [of group accounts]."

Hawkins said no one cared what the accounts showed for Fonterra's 200 or so subsidiaries in which it was the only investor.

By law, a company could not make a subsidiary off limits to the auditors. "If they are forming a group of consolidated set of accounts they audit the lot."

The audit was on consolidated accounts, not an individual subsidiary's, but the "difference was a highly technical one", he said. "It doesn't mean there is a lesser audit."

Hawkins said the operations of NZ Milk and Fonterra's other main business unit, NZMP, were still entwined in some subsidiary companies. Fonterra, not the auditors, decided how to split allocations between the two business units and their parent.

The mistake has sparked calls to Fonterra from concerned farmers, one describing it as shabby stuff. Another said he could not believe a company as big as NZ Milk was not audited.

It has become a hot discussion topic in accounting circles where debate is being led by Canterbury University senior accountancy lecturer Alan Robb.

He is concerned that Hawkins said some sales revenue and costs were allocated within the group by management. Bonuses paid to executives - understood in some instances to range between 20 per cent and 50 per cent of their remuneration - if based on sales or ebit could vary depending on how things were allocated within the group by management.

The reported cost of milk to the New Zealand consumer was a number that could vary materially depending on how management allocated costs.

And it was a concern that some key figures were being, in Hawkins' words, "shuffled from one pot to another", Robb said.

Fellow Canterbury financial accounting lecturer Dr Sue Newberry said Fonterra's situation highlighted an unrealised consequence of changes in 1993 to the Companies Act and to the Financial Reporting Act.

If a company's subsidiaries, especially ones the size of Fonterra's, were not audited there was a greater likelihood that mistakes or intentional wrongdoing would go undetected, she said.

For shareholders' benefit the issue could immediately be addressed by auditors voluntarily disclosing which of a group's companies had, or had not, been audited. Long-term, the situation could be dealt with by changing the legislation.

An auditing authority, who declined to be named, said the Fonterra auditing process was Mickey Mouse.

It was appropriate to claim an audit had been done only if a report was written, and it was farcical to suggest not writing one was a significant money-saver when it involved a small amount of time in the auditing process, he said.

"An audit implies that they [auditors] can put their hand on their heart to say these accounts are true and fair. Anything less than that is not an audit."

A company's management and directors should be responsible for deciding where allocations to accounts lay, and the auditor had to form a view whether they had been properly accounted for.

"There seem to be limitations on the coverage of the audit and how much of the activity and the transaction base of this large organisation is available for audit or examination by the auditors. I would be concerned if it is less than 100 per cent."

While important subsidiaries should be routinely audited, even Fonterra's smaller ones should eventually be scrutinised to be sure none contained a "financial timebomb" or an embarrassment that could cost the company money.

Chartered accountant Elizabeth Hickey, a member of the Accounting Standards Review Board and the Securities Commission, said an auditor did not need to split a group "into individual bits" to audit the consolidated accounts. "It can just audit the consolidation."

Asked whether auditing the consolidation would be sufficient to know whether the subsidiary was being operated appropriately, Hickey said: "The auditor is not asked to make that comment.

"The auditor is asked to say that the financial statements comply with generally accepted accounting practice and give a true and fair view."

Hickey said the review board did not consider auditing standards or the Companies Act. "That is for Parliament. It is a legislative matter."

Advertisement
Advertise with NZME.
Advertisement
Advertise with NZME.
Save

    Share this article

Latest from Business

Media Insider

'Pushing them hard': Media Minister on TVNZ's financials ... and RNZ's falling radio ratings

29 May 08:30 AM
Premium
Shares

Market close: NZ sharemarket falls as major Ebos Group shareholder sells stake

29 May 06:17 AM
Premium
Official Cash Rate

End of floating rate fad to unleash stimulatory effects of OCR cuts

29 May 05:38 AM

Deposit scheme reduces risk, boosts trust – General Finance

sponsored
Advertisement
Advertise with NZME.

Latest from Business

'Pushing them hard': Media Minister on TVNZ's financials ...  and RNZ's falling radio ratings

'Pushing them hard': Media Minister on TVNZ's financials ... and RNZ's falling radio ratings

29 May 08:30 AM

Media Insider podcast: Minister's advice to RNZ - never lose sight of core radio business.

Premium
Market close: NZ sharemarket falls as major Ebos Group shareholder sells stake

Market close: NZ sharemarket falls as major Ebos Group shareholder sells stake

29 May 06:17 AM
Premium
End of floating rate fad to unleash stimulatory effects of OCR cuts

End of floating rate fad to unleash stimulatory effects of OCR cuts

29 May 05:38 AM
1.5ha Newmarket site valued at $64m sells to mystery buyer

1.5ha Newmarket site valued at $64m sells to mystery buyer

29 May 05:38 AM
Gold demand soars amid global turmoil
sponsored

Gold demand soars amid global turmoil

NZ Herald
  • About NZ Herald
  • Meet the journalists
  • Newsletters
  • Classifieds
  • Help & support
  • Contact us
  • House rules
  • Privacy Policy
  • Terms of use
  • Competition terms & conditions
  • Our use of AI
Subscriber Services
  • NZ Herald e-editions
  • Daily puzzles & quizzes
  • Manage your digital subscription
  • Manage your print subscription
  • Subscribe to the NZ Herald newspaper
  • Subscribe to Herald Premium
  • Gift a subscription
  • Subscriber FAQs
  • Subscription terms & conditions
  • Promotions and subscriber benefits
NZME Network
  • The New Zealand Herald
  • The Northland Age
  • The Northern Advocate
  • Waikato Herald
  • Bay of Plenty Times
  • Rotorua Daily Post
  • Hawke's Bay Today
  • Whanganui Chronicle
  • Viva
  • NZ Listener
  • What the Actual
  • Newstalk ZB
  • BusinessDesk
  • OneRoof
  • Driven CarGuide
  • iHeart Radio
  • Restaurant Hub
NZME
  • About NZME
  • NZME careers
  • Advertise with NZME
  • Digital self-service advertising
  • Book your classified ad
  • Photo sales
  • NZME Events
  • © Copyright 2025 NZME Publishing Limited
TOP