Recently there has been an uproar over how one of Zimbabwe’s so-called blue-chip companies, Delta Beverages, chose to prepare its accounts. Apparently, the management at Delta turned down the advice of its auditors Enerst and Young (EY) to use the official/auction-rate when preparing and presenting its financial results. You would think Delta had committed some sort of fraud or crime in doing so from the way the issue is being reported by mostly amateurs who have zero knowledge of how accounting is done.

To be clear Delta did nothing wrong and their doing so is not in violation of accounting principles at all rather their act is in harmony with accounting standards and principles. For the sake of those who are not trained as accountants, I will try to avoid technical terms and explain them when I have no choice but to use them.

First and foremost you need to understand that there are two main branches of accounting. There is Management Accounting i.e an internal form of accounting which is meant to provide information to management and decision making. Accounting standards do not normally apply to this form as accounting and while most entities use generally accepted formats for various things they do not have to. The information provided by this form of accounting is meant to aid the decision making so those who make decisions often choose the format and practices they follow.

The second branch of accounting is known as Financial Accounting. This deals with the preparation of accounting information for external consumption. This means that the information provided by this branch of accounting is meant to be used by external stakeholders of the company including investors (shareholders), potential investors, regulators including the government and others. This branch of accounting is often regulated by International Accounting Standards and the so-called IFRSes.

These are the accounts that Delta was preparing in this case. The main purpose of this accounting branch is to present a true and fair view of the business at a particular point in time and after a given period of time-normally a year. The financial statements have to be free from material misstatements and faithfully represent the financial position and positioning of an entity.

At the heart of these financial statement is the principle that a business should not seek to overstate it’s position by including unrealised profits in its financial statement even if those unrealised profits are probable. Conversely, a business should report all losses that it incurs as soon as it becomes aware that such losses are probable/certain. We call this the prudence concept and this concept overrides any other concept.

There are other principles as well such as the Historical Cost and the Realisation Concept which are encapsulated in various accounting standards. The former says that revenue should be matched with costs incurred in generating that revenue and the latter says we should only include costs that were actually incurred unless we have a strong reason not to. Again all those fancy financial standards you hear accountants repeating are just an expansion of these principles.

This brings us to the Delta issue. Delta’s management has a duty to make sure that they present financial statements that show a true and fair view of Delta’s financial position as well as performance in the period in question. This is why it’s a bit bizarre that their Auditors would advise them to use the auction rate to present their financial statements.

I have to be clear, we are not privy to all the facts here but as far as we know based on data published by the RBZ, it doesn’t seem like Delta Beverages partakes in the official foreign currency auction. We do not know the reason for this but it’s almost certain that Delta gets it’s foreign currency from the alternative market somehow. This means for reporting purposes they have to use the rate they actually paid not some made-up rate even if it’s official.

Using the official rate would lead to misleading results which goes against the foremost principle and purpose of preparing these financial statements. Delta’s management felt strongly, based on the information available, that they ought to use an alternative rate that gives a more prudent position of their entity as well as the business’s performance during the period in question.

Now for the final part here is something those screaming headlines seem to miss. While businesses normally follow the advice of their auditors when preparing their financial statements they don’t have to. Bizarre or not, Delta’s choice to diverge away from their auditor’s advice is not a crime. That’s why it’s clearly labelled as advice and not some imperative/order from auditors.. Auditors are also free to clearly state in the same statements that the client disregarded their advice.

In this case, Delta did not violate financial reporting standards as what they did is also allowed under the same said standards. Some amateurs are screaming and howling as if Delta committed some sort of forbidden sin. They didn’t. They just decided to take an alternative approach that is clearly permitted. Clearly they strongly feel that this approach better reflects Delta’s performance and financial position.