Is ZB Cooking the Books?

ZB FINANCIAL Holdings chief executive officer Elisha Mushayakarara has come under fire from the board amid suspicion he could have sanctioned cosmetic accounting at the financial services group, businessdigest can reveal.

Non-executive director John Nhavira, in correspondence to hand, has accused Mushayakarara of turning a blind eye to illegal, hard-to-detect tricks that made earnings look a whole lot better than they are.
“Basically, the gist of my argument is that in order for financial statements to reflect the institution’s operations and financial conditions in terms of 36b means indicating the long term and current assets and liabilities. In the extreme going so far as to show net current assets,” said Nhavira in correspondence to Mushayakarara, which was copied to all board members.
“Net current assets may be an extreme which has not happened before and may not be necessary. The basics at least as previously reported in this market as they had been displayed in the power point presentation does seem to satisfy the issue of ‘reflecting …financial condition’.”
Mushayakarara is also accused of board contempt. According to documents dated August 26 the week the financial result were unveiled to the public, Mushayakarara called the financial institutions directors on short notice to adopt the financials but did not give them the actual financial statements.
ZB spokesperson James Hove confirmed the correspondence saying: “Indeed a board member wrote a letter to our group chief executive, Mr Elias N Mushayakarara and copied to all board members expressing concerns about the accounting treatment of a number of issues during the process of consideration and approval of the group’s half-year financial results for the period ended 30 June, 2009.”
ZB says concern raised centred on the appropriateness of proposed accounting treatment of the group’s insurance operations –– ZB Life and ZB reinsurance –– particularly the life assurance business.
“Accounting standards extant at the moment provide two methods of treating insurance operations on consolidation of financial statements. The first option is to show the gross position of the assets, liabilities and profit or loss. This option shows the total assets, liabilities and profit or loss of both the group and policyholders’ funds. Transfers to the insurance fund of the policyholders’ assets, liabilities and profits or losses are then effected leaving a net position reflecting the group’s assets, liabilities and profit or loss position,” said Hove.
Another option the group considered is to show the shareholders’ assets, liabilities and profit or loss.
He said: “The policyholders’ assets, liabilities and profit or loss are then shown by way of a note to the accounts. You will appreciate that both methods will result in the net position being the same. The board adopted the net reporting position and the performance of the policyholders’ funds was shown as a note to the published financial statements. This accounting treatment was deemed to be the fair and accurate.”
ZB says there was no intention or attempt “to conceal, misrepresent or cover up anything regarding the performance of the Group.”
Instead, insiders say Mushayakarara and his executives took the board through a power point presentation of the financials and considered the accounts adopted.
“The change then, when read together with the clauses in the Companies Act gives the impression of concealment. Cosmetic or creative accounting in the suggested manner as proposed, that is simply listing assets and liabilities; it is in my view concealing the financial condition of the institution,” alleged Nhavira.
“If this was not the case, there would be no incentive to change. Cosmetics by nature hide, conceal and designed to deceive the beholder that the face presented is without blemish, that there is no acne, black spots or wrinkles,” he said.
According to the correspondence, Mushayakarara was warned of jail time should it be proven that he sanctioned “cooking of financial books”.
“The penalties, as you may have seen are one or two years in prison. The question to be addressed therefore is that shall we take the risk, are we prepared to stand before a judge and defend our assumed position and categorically state that the change as envisaged was not designed to conceal or to deceive the public?” Nhavira asked.
In earlier communication, Mushayakarara was accused of pursuing a Machiavellian principle at the bank — the means justify the ends — and was accused of leading the group towards a scandal such as Enron and Century bank where executives connived with auditors to mislead the market and shareholders.
“However, I fear that ‘Machiavellian’ principles are leading us to ‘Enron’ and ‘Century Bank’ practices. In both these instances, the management and board ‘knowingly’ concealed or falsified material matters concerning their institutions. In our case the board was placed in an invidious position — to connive in the concealment of the true state of the institution’s financial state — all in the name of Machiavellian principles,” Nhavira alleged.
“Machiavellian principles are by nature unethical and immoral. All those who practise such principles always end badly because they contain within them the seeds of their own destruction,” he said. ZB confirmed that a board member had raised concerns over proposed accounting treatment but denied wrong doing.
The group says its life assurance business in question has never had an adverse actuarial report.
The ZB spokesperson added: “Existing accounting standards provide for two methods of disclosing assets and liabilities; either separating current and non-current portions of the balance sheet, or as a listing in order of liquidity. The group adopted the former approach after it was felt that such disclosure would provide better information to the readers of the financial statements.”
The financial services group says all issues raised by the director where addressed and is pleased with its accounting practices.
“The group complies with International Financial Reporting Standards (“IFRS”) and consults widely when there is need,” ZB said.
ZB Financial Holdings interim results for the interim period saw its flagship ZB Bank posting a loss of US$$1,5 million while ZB Building Society posted modest profit at US$91 000.
Intermarket Banking Corporation made a loss of US$7 200.
The group’s reinsurance business, ZB Reinsurance saved the day with a pre-tax profit of US$1,71 million and achieved an underwriting profit of US$1,4 million.
Commenting on the results Mushayakarara said banking operations were largely subdued during the interim period as a result of the unavailability of liquidity and the rapid turnover on customer balances which made it difficult to structure longer-term products desired by businesses.
Mushayakarara added that the group’s life assurance business “largely remained inactive” for the half year under review owing to the generally low levels of disposable income obtaining across the economy.
He said: “The re-insurance, business on the other hand, enjoyed better fortunes as businesses reviewed their insurance portfolios in anticipation of increased production.”
ZB life Assurance posted a loss of US$5,1 million after distribution to minority shareholders emanating from the fair value loss on the Mashonaland Holdings stock on the ZSE.
ZB Financial Holdings in June had announced that it planned a private placement. A signal which analyst said showed that the financial sector was cracking silently under the weight of dollarisation or more importantly the minimum capital requirements for the financial industry.
Analysts also said it could signal that government which is the major shareholder in ZB Financial Holdings with a 67% equity holding was willing to dilute its stake, perhaps in a very significant way.

 

Chris Muronzi/Paul Nyakazeya

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