Nec timens nec favens – “Without fear or favour” – is the motto of the Institute of Chartered Accountants in Australia (ICAA). It is in this spirit we examine its “One New Institute” proposal to expand into Asia (via New Zealand).

Jeffrey Knapp, the disclosure and regulation expert from the University of NSW, is a member of the ICAA and so we asked him to come along for the ride.

It is not easy to become a chartered accountant in Australia. It requires years of study and work experience, culminating in rigorous professional exams in financial reporting, management accounting, audit and taxation. The long hours of dedication, study and countless coffees are finally rewarded with a “designation” worthy of respect.

Yes, there may be a chartered accountant behind every second dodgy stock market deal. Yes, there may be a chartered accountant behind every insolvency rip-off. But, by and large, chartered accountants take their duties seriously. They go about their business with pride and professionalism.

They also pride themselves on understanding the detail. The average chartered accountant is no mug.

And so it is that when the average chartered accountant peruses the explanatory memorandum (EM) that landed in his or her inbox this week espousing the creation of One New Institute, the average chartered accountant may wonder … why?

Knapp said: “I will be voting no to the new institute proposal and I hope many Australian chartered accountants join me in rejecting the proposal.”

The centrepiece of the proposal is to merge with the New Zealand Institute of Chartered Accountants (NZICA). It is essentially a takeover; the latter has half the members of the former and appears to be “technically insolvent” as they say in the profession.

“What is driving this proposal?” asks the EM. “Globalisation … evolving member needs … the changing competitive landscape” are the answers given.

But it seems another answer – an answer not given – is that the institute is getting torched by its rival professional body CPA Australia in a membership drive and has decided to shop for new members.

While its arch-rival is expanding into Asia at a rapid clip – and the rhetoric of the One New Institute proposal is Asian expansion – the institute is heading south rather than north. South-east to be precise – in the direction of Patagonia.

Perhaps a new motto is in order: Eamus ad meridiem (Let us march to the south).

Not only does the trans-Tasman campaign take the institute into a market where there is already heavy competition from its nemesis, the CPAA, but it appears to be buying something which would soon fall over on its own, were it not to be acquired.

By taking over NZICA, the institute is buying 33,774 members, but these include “provisional” and “accounting technician” members; categories that don’t exist here. In light of the long hours and, in some parts, the elitism of some chartered accountants, embracing these less-qualified members may ruffle the odd feather.

Looking at the financial statements, Australia, with its 60,000-odd members, has nearly $45 million in cash at June 30, whereas New Zealand has just $2.2 million.

If you take the assets and liabilities of NZICA, you get $7 million net. The institute has a $47 million surplus versus $6.5 million for New Zealand.

The institute has just six offices, while the NZICA has 16 offices throughout the Shaky Isles. These are in leased premises, with leases that “typically run for a period of 10 years”; non-cancellable leases requiring future lease payments of $16.3 million.

Ironically, these are the sort of leases Australian standard-setters intend to recognise as liabilities. Were the institute – being at the vanguard of standards as it is – to add them in as a liability, the NZICA’s assets would not cover its liabilities, ergo “technical insolvency” (or decoctor as the Romans would have put it).

NZICA’s rate of member increase is slowing. In 2012 it added 560 members in New Zealand ,although in 2013 it was down to 117.

It would seem that the NZICA is easy prey for the institute, because the only way the Kiwis can get more money – and they need it – is by charging their members more or by getting taken over.

There is also a matter of disclosure.

The NZICA is subject to an action before the High Court of New Zealand for defamation. Arch-foe the CPAA brought the claim against NZICA after chief operating officer Kirsten Patterson accused it of bribing New Zealand students to join up with the offer of a free iPad.

Notwithstanding the consternation it has caused, the free iPads appear to have worked, as CPA’s growth has been strong over there.

According to the claim, one of the imputations made by the NZICA was: “CPA Australia is not a member of the Global Accounting Alliance (GAA) because their education standards were not good enough”.

However, by the look of the GAA website, this is hardly the most dynamic of global institutions. Despite “working together to represent over 785,000 members in over 165 countries around the globe”, the GAA has failed to update the most important bit on its website – what it actually does – since 2012.

In any case, there is a nasty spat going on behind the scenes between professional bodies in Australia and New Zealand, a contingency which has not been disclosed in the merger documents for the institute’s deal. Knapp reckons the omission is surprising because chartered accountants usually operate by the maxim “If in doubt, disclose”.

The defamation claim is for only $NZ50,000 but High Court costs can ramp up. Moreover, materiality is about nature as well as about the amount of money. Allegations before a high court that go to the conduct and reputation of NZICA would seem relevant.

Ernst & Young is investigating accountant for the explanatory memorandum but it is also the auditor of both the ICAA and NZICA. Perhaps a fresh set of eyes from another firm might have picked up the outstanding legal claim against NZICA that ought to have been disclosed.

Novi oculi sunt boni (It is better to have fresh eyes than to not).

For non-accountants, some cultural background may be in order. The longstanding ICA/CPAA rivalry has elements of the Upstairs, Downstairs saga about it – fading aristocracy versus the bourgeoisie, if you like, patricii contra plebeios.

The institute, established by Royal Charter in 1928, has the more rigorous designation. Although becoming a CPA member is no cakewalk either, the more imperious members of the institute tend to look down their noses at their plebeii colleagues.

Historically, the institute is the professional body for “big four” types – Deloitte, PwC, Ernst & Young and KPMG – while CPAA has tended to appeal to the suburban accountant. The EM notes on page 41, however, that ICAA research finds the difference between CA and CPA designations is becoming of less importance to employers. Ironically, the research runs counter to one of the three drivers of the NZICA merger proposal.

Another of the imputations in the High Court claim concerns a flyer that made out that the average starting salary for a NZICA member was $NZ140,000, as opposed to just $NZ100,000 for the CPAA.

In any case, should the merger proceed – and it needs 66.6 per cent of members to say yes in Australia and 50 per cent across the Ditch – it is mooted to save $15.8 million a year (in a “steady state” sense). The main point in its favour is scale.

Yet the EM goes on to say that there will be no “steady state”. Rather, ”the change would be significant” because the plan after New Zealand is to open offices in Kuala Lumpur, Singapore, Hong Kong and elsewhere in Asia.

These won’t come cheap. Essentially, the institute is selling its members the idea that they bail out New Zealand then head off to Asia on a “greenfields” basis. The savings would not last long expanding into the likes of Singapore and Hong Kong.

And there is scant detail on how the savings would be achieved. Generally in mergers and takeovers, cost savings means “headcount”. How much of this would derive from New Zealand is uncertain because, although there are 10 more offices there, they are on long-term leases. Australia has more “headcount” to lose.

By far the most logical way to expand into Asia would be by merging with the dreaded counterparts at the CPAA. This ought to be the sine qua non. Instead, it appears to be the unutterable, even though CPAA is already there with 25,000 of its 145,000 members. It would certainly be logical to at least consider the idea (which would incidentally deliver the trans-Tasman presence too).

Knapp says his main reason for rejecting the proposal to merge with NZICA is because he has not been provided with sufficient information about the alternative of merging with CPA Australia.

Interred on page 50 of the independent expert’s report from Leadenhall it says the institute did not explore in depth merging with CPAA, FINSIA or other Australian bodies.

Knapp says a strong unified Australian professional accounting body that leverages off CPA Australia’s significant Asian presence has the potential to be eminently superior to the proposed trans-Tasman tie-up.

While a CPAA merger – the logical thing to do – is an afterthought in the bowels of the expert’s report, prominently displayed as one of the main reasons “you should vote in favour” is “reduced fees for most members”. Note the words “most members”.

With just four days until the vote begins, the fee schedule has been dressed up with something of a bribe. There is a forecast saving of $150 for 2015 ($785 to $635 in member fees).

But not all chartered accountants can expect a 19 per cent saving. If you are a retired chartered accountant residing in Australia, your fees will increase 183 per cent from $77 to $222. There are roughly 6000 members over 60.

Reddant seniores (Let the old people pick up the tab).

And if you are young and still studying, you have to stump up $317. As these members can’t vote, they have little chance to disrupt the process, even if they could.

Iuvenes ignorabunt (The young ‘uns won’t notice anyway).

Knapp says the offer of a reduced membership fee is tainted by increasing the expenses of other members and non-members who are likely to be on lower incomes.

Further, scale for the sake of scale is hardly a sound case for a merger. Or “globalisation”. If they really wanted members, they could merge with India. There must be a lot of accountants there.

Another aspiration cited by the institute is “to be leader in business education in Australia and New Zealand”. Yet this is a professional services body, not a university. The focus could be better directed towards an active program of professional discipline, checking compliance and so forth.

Chartered accountants have even been chided for their falling standards by the Australian Securities & Investments Commission in recent times. It is a rich call coming from ASIC but auditors have been under fire for the quality of their work. And the institute has done little or said little about the deviant conduct of liquidators and administrators – a constituency which should adopt the motto nos celemus sub rupe (come, let us hide under a rock).

There are thousands of complaints against insolvency practitioners, barely any are ever acted upon.

And now a final forensic review of the EM.

The financial position of NZICA at June 30, 2013 suggests that it would be appropriate for the EM to include additional information of its financial affairs after June 30.

Some of the comparisons made about the membership of the professional bodies do not appear to be on a like-for-like basis because NZICA has lower classes of membership (see the bar chart on page 40).

The latest member numbers in the EM are from 2012. Perhaps more timely data could have been presented?

On page 42 cash and investments are lumped together in the NZICA statement of financial position. This is an accounting freshman’s no-no. It is not valid to compare the ICAA cash with NZICA cash and investments.

Page 42: trade and other receivables for NZICA includes inventories.

Knapp said the standard of the EM sent to him one week before voting on the merger is beneath his expectations. “The errors and omissions apparent in the EM have raised my professional scepticism to the point of high alert,” he said.

Chartered accountants in Australia may endeavour to follow the spirit of Nec timens nec favens (Without fear without favour) for fee-paying clients, but the merger proposal for chartered accountants of ICAA and NZICA may require a special purpose motto – Sine causa propria sine pleno indicio (Without proper cause without full disclosure).