The NKF scandal 1 comments

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The NKF saga has become a full-blown financial scandal with the public release of the KPMG report whose juicy details were splashed across the front pages of the papers today. It just goes to show that the art of creative accounting is not just limited to public listed companies -- charities can do it quite well too. No wonder they're one of the most "professional" charities around.

To be frank, when an accountant with decades of experience decides to scrutinise the books of a company item by item, there are bound to be "revelations". Anyone who has been through a company audit will know. Of course, that is taking nothing away from the abuses of power that have quite clearly taken place at NKF as temptations grew with financial assets.

The auditors knew where to look. As far as the balance sheet goes, it was probably as clean as any blue chip company: all cash in the bank, no massive receivables or inventory that had to be written off (ACCS) or off-balance sheet items that amounted to hundreds of millions (CAO). Naturally, since it did not really engage in the business of selling goods or trading. No, the auditors targeted the P&L statement (or its equivalent for non-profit organisations), in particular, the expense items, and there they found the skeletons in the closet. It is interesting to look at some of the reported accounting irregularities that KPMG has uncovered.

No effective check and balance mechanism:
The executive committee was supposed to provide the checks and balances, but apparently met only twice since mid-2001. They were informed of decisions after they were already made. The key directors had multiple roles which basically negated the purpose of some in-built check-and-balance mechanisms eg. the Exco chairman was also a member of the finance committee and hence could make finance decisions without the Exco's approval.

Excessive expenses by CEO:
The huge charges run up by the CEO on company charges reminds one of Richard Grasso who paid himself over US$100M as head of the NYSE; when it was made public Grasso was forced to leave. Of course, all this is legal since it had been passed through committees, but sometimes it is easy to tell where professionalism ends and greed begins.

Advance booking of revenue:
Revenue from Aviva was recognised even though the contract had not been fulfiled entirely. In fact, it was recognised as a donation although it was actually a sponsorship.

Incorrect recognition of expenses:
Expenses spent on lucky draw prizes were charged to previous years' accounts. Staff bonuses given for organising the charity shows were not accounted as show expenses. These, and the practice of advance revenue booking above, were of course meant to fulfil the requirement that <30% of the donation amount could be spent on raising that amount. If we consider that the cost of staging these shows (payments to Mediacorp) were fixed costs, it is now clear why they had to set high fund-raising targets for every show: they had to fulfil that 70-30 requirement. But where it failed the requirement, it was still possible to "massage" the figures. Well, does the end justify the means? I think it's debatable.

Inaccurate reporting of figures:
As a charity organisation, NKF's source of revenue lay in obtaining the sympathy of the public for its cause. That, to put it crudely, was its "business model". Just like a company advertises the strength of its products, NKF "advertised" the suffering of its patients and the value-add it could provide for them. A company's products come with accreditation and warranties which guard against false information declaration; in NKF's case, it appears there was insufficient auditing and cross-checking of its publicity figures: of percentage donations going to patients, of patients cared for, of subsidies given, of available reserves: all these figures were apparently played with to give the impression that NKF was in dire need of funds. Misrepresentation is a serious offence in the corporate world; people have gone to jail for it. But I guess the figures can still be justified if the creativity exhibited in the charity show accounting above is applied to explaining how the publicity figures were arrived at.

At the end of the day, the NKF saga is just another illustration of how financial statements and publicly released figures can be manipulated to suit various purposes (for tax avoidance, for profit inflation, and for satisfying regulations in NKF's case). It just increases my conviction that directors and CEOs should be made legally liable for the financial statements their companies release: that would make them think twice. The Sarbanes-Oxley Act in the US, introduced following the Enron and Worldcom scandals in 2002, has such legal provisions. The other lesson from the NKF scandal, of course, is that absolute power corrupts, although I hesitate to make any final judgment before the courts do.