Government in $112b barney

17:00, Mar 31 2012

An Australia-based New Zealand economist is criticising the accounting practices of the New Zealand government, saying there are glaring omissions in the figures, the finance minister has too much power and the recently released "Investment Statement" is an inappropriate description for "what is really a piece of accounting fiction".

Associate professor Dr Sue Newberry, from the University of Sydney, told an audience at the University of Auckland's Business School that government accounts ignore "off-balance sheet exposures" amounting to more than $112 billion.

Newberry expressed concern about the lack of information on the state's operations in financial and derivatives markets.

The criticisms preceded an announcement last week by state-owned generator Mighty River Power that movement in the value of derivatives cut into the company's bottom line to the tune of $106 million.

However, Treasury responded that New Zealand's accounts provide detailed information, including use of derivatives. and have been cited worldwide.

Newberry said New Zealand's Constitution Act 1986 requires parliament to approve borrowing and spending, but the Public Finance Act delegates these powers to the minister of finance, along with the power to delegate further.

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Those powers appear to be delegated without limit and are exercised outside of the parliamentary process, Newberry said.

"Even a company does not delegate powers without putting a limit on it," she said.

There has been a significant increase in the government's activity in financial markets over the past decade, she said. However, the government's accounts do not show that clearly.

"What happens if you do show the extent of exposures to derivatives is really quite massive," she said.

Derivatives are both an asset and a liability. Newberry said the way these are accounted for is by netting these off rather than showing the totals of each. However, the dangers of derivatives were revealed in the global financial crisis in that one side of a contract can collapse while the other side remains in force. "Netting off obscures that," she said.

Newberry, hosted by the Business School's Retirement Policy and Research Centre, said adopting "Generally Accepted Accounting Practice" standards is disguising the rapid growth in financial market activities and the extent of the government's exposures.

A spokesman for Treasury said the government's financial statements provide detailed information on the Crown's financing, including derivatives.

"Analyses of financial instruments, of risk management policies, of exposures to market risk, credit risk and liquidity risk, are provided and New Zealand government accounting standards have been cited for their strong levels of transparency in international studies," Treasury said.

Derivatives with the Debt Management Office (NZDMO) mainly consist of interest rate and cross currency swaps used to manage risks associated with either debt issuance or with fixed-income asset purchases. The office also executes derivatives with other parts of the Crown.

"NZDMO tends to manage risk associated with these trades by transacting with the private sector. The other Crown entities use the trades with NZDMO as hedges for their own risks," it said. However, to get a complete picture of derivatives used would require talking to all entities involved.

Delegation to transact is subject to controls and managed by skilled professionals, Treasury said.

"These professionals act within transparent risk policies and parameters and are accountable for their efforts and must meet detailed reporting guidelines and frameworks."

Sunday Star Times