Adding spice to the world of accounting

BUSINESS OPINION: Independent News & Media has added a little spice to the otherwise dull-as-ditch-water world of Irish company accounts by "departing" from standard accounting practice in the preparation of its 2001 accounts. Wait. Before you stop reading bear in mind that this "departure" boosted profits by a much needed €32.5 million which turned a loss for the year after tax and finance costs into profit.

The money came from the sale last year of INM's New Zealand subsidiary - Wilson & Horton - to its Australian subsidiary, APN. In the normal way any profits that arise from this sort of transaction between subsidiaries of the same group are cancelled out in the parent company's accounts. The reason for this is obvious. If it was not done then firms would be constantly doing deals between subsidiaries to boost profits. This is not to suggest that INM is engaged in this sort of activity, but at the same time its decision to deviate from the norm required a fairly complex explanation.

INM argues that the key issue is that although it controlled APN it does not own it, having only a 39.5 per cent stake. It maintains that it did not exert a "dominant influence" in relation to the Wilson & Horton deal because the INM directors of APN excluded themselves from discussion and voting on the issue. In addition the non-INM directors took independent legal advice. As a result the blanket ban on consolidating profits generated by transaction between subsidiaries does not apply. The next step in the INM reasoning is that because it owned only 39.5 per cent of APN, only 39.5 per cent of the money paid by APN for Wilson & Horton was INM money and therefore only 39.5 per cent of the profit should be eliminated. The other 60.5 per cent is profit made at the expense of a third party - that is, the other shareholders in APN - and accrues to INM. As a consequence INM then booked 60.5 per cent of the €57.3 million proceeds of the sale, avoiding a bottom line loss for the year.

There is a clear logic to this and INM is relying on the overriding proviso in preparing company accounts that they must give a true and fair view of the financial position of the company.

Presumably the true and fair override - as it is known - also lay behind the company's interpretation of accounting rules when it came to consolidating its interest in Chorus Communications Limited, the loss-making cable television group. Although INM owns 50 per cent of CCL it has opted not to consolidate its share of the company's 2001 losses into the group accounts "because the Group no longer intends to hold the investment for the long-term and accordingly does not exercise significant influence". If INM had booked its 50 per cent share of Chorus's €36.6 million loss, the group's bottom line for 2001 would have been some €18.3 million worse.

It all goes to show - if there was ever any doubt - that Sir Anthony O'Reilly's education at the hands of the Jesuits was not wasted.

When challenged over the probity of its apparently à la carte approach to accounting regulations, INM points out that the accounts were audited and signed off on by PricewaterhouseCoopers. INM is perfectly entitled to interpret the accounting rules in ways that are advantageous to it, but is it the role of the firms's auditors to be the final arbiter of whether what it is doing is correct? This would be the equivalent of equating a senior counsel's opinion with a judicial ruling. The analogy breaks down, however, because in the Irish regulatory structure there is no higher arbiter of whether or not the accounting rule book is being interpreted correctly. The Institute of Chartered Accounts - which is the regulatory body for the large audit firms - does not see it as one of its functions.

The only body whose writ seems to run in this area is the Irish Stock Exchange and then only for quoted companies. The listing rules of the ISE stipulate that companies must prepare their accounts in line with recognised accounting practices and regulations. According to the ISE, any material departure from these guidelines is examined as matter of routine and discussed with the company and its auditors. It is then up to the ISE to determine whether the company is in breach of the rules.

The obvious failings of this system led to the establishment in the UK of the Financial Reporting Review Panel which is charged with examining apparent departures from accounting regulations and if necessary seeking orders from the court to remedy them. Something similar is envisioned in the Audit and Accountancy Bill which the outgoing Government promised but failed to deliver. It would have formally established the Irish Auditing and Accounting Supervisory Authority which would have had oversight of the profession.

The UK panel recently examined a departure from FRS2 by Liberty plc, the UK property group. The accounting treatment in question bore no real resemblance to what INM has done other than that it was a transaction involving subsidiaries. But, after examining the issue the panel allowed the treatment on the basis of the true and fair override. It would be comforting to have a similar judgment passed on the INM accounts and the company no doubt would welcome it given the recent comments of the company's chief operating officer Mr Gavin O'Reilly. At the publication of the companies preliminary results in April he told journalists: "Our accounts are not found wanting in any regard. If you understand accounting then these accounts are crystal clear." Unfortunately for Mr O'Reilly the panel's writ only runs to UK registered companies.