NB Liquor inflated profits by using 53-week fiscal year

A claim by New Brunswick's Liquor Corporation that its profits last year "remained steady" was true only because of seven extra days it included in its financial year, an issue that needs to be explained in detail, accounting experts say.

Experts question why Crown corporation did not explain accounting change

NB Liquor extended its fiscal year by a week, allowing the Crown corporation to post positive earning results. However, it did not disclose that another week figured into their numbers. (Jordan Gill/CBC)

A claim by New Brunswick's Liquor Corporation that its profits last year "remained steady" was true only because of seven extra days it included in its financial year, an issue that needs to be explained in detail, accounting experts say.

"In a set of financial statements, you have a current year and a prior year so there can be a comparison and a reader can make some conclusions about how things went," said Andrew Logan, a partner with the New Brunswick accounting firm Teed Saunders Doyle.

"If they've added extra days and its added extra sales and profits to their results, then that information should be disclosed."

New Brunswick accountant Andrew Logan says NB Liquor should have reported in its annual report in detail changes it made to its financial year that improved its results. (Submitted)

NB Liquor is New Brunswick's most successful Crown corporation, generating $834 million in profit for the province over the past five years. But its annual level of earnings peaked three years ago and has been in decline since, as double-digit growth in expenses at the corporation outpace single-digit growth in sales.

However, sagging earnings are hard to track in the agency's financial reporting because of subtle and unexplained changes it has been making in the dates those reports cover.

'A violation of accounting principles'

R. Ramy Elitzur, an associate professor of accounting at the University of Toronto, says financial statements need to be clear and consistent and when changes to reporting periods occur they have to be noted and explained.

"The idea is to provide useful information to the readers," said Elitzur. "Lack of disclosure is a violation of accounting principles."

It's amazing to me what management is doing to manipulate financial statements.- Associate professor R. Ramy Elitzur

In its current annual report, NB Liquor lists profit for its latest fiscal year at $168.4 million, exactly the same amount it reported in 2017. The difference is the 2017 results were generated over 52 weeks of operation, while the 2018 results cover 53 weeks.

That's because NB Liquor switched its fiscal year end from the last Sunday in March in 2017 (March 26) to the Sunday closest to the end of March this year, which was April 1.

That created the extra long, 53-week financial year, stretching from March 27, 2017, to April 1, 2018.  

The extra week allowed NB Liquor to book another $7 million in sales and post approximately $3 million in additional earnings, padding results just enough to match 2017 earnings and avoid reporting a decline in its profits.

There are no notes in the financial statements to explain the change.  

Selective approach

In addition, NB Liquor then switched back to using the old system — the last Sunday of the month for its latest financial results when it reported its first-quarter earnings for the current year "ended June 24" even though the closest Sunday to the end of June this year was July 1.

Elitzur said moving quarter-end and year-end dates back and forth between the last Sunday of the month and the Sunday closest to the end of the month is not a normal practice and can produce misleading financial results.

"It's amazing to me what management is doing to manipulate financial statements," said Elitzur of NB Liquor's various quarter-end and year-end closing dates.

University of Toronto accounting professor R. Ramy Elitzur says NB Liquor's creation of a 53-week fiscal year that boosted it sales and profits needs to be explained. (Submitted)

"You can do it two ways. You can do the closest Sunday to the end of the month or you can do the last Sunday before the end of the month. They seem to be moving between the two systems.

"The date could be and in this case I suspect it is, manipulated to fit their purpose."   

Not the first time

It's not the first time NB Liquor has reported positive financial results without disclosing the effect timing has had on the good news.

In May, the agency reported that it had posted a $9.1-million increase in sales for its fourth quarter compared to the previous year's fourth quarter. About 75 per cent of the difference was because last year's quarter had 13 weeks in it and this year's had 14 — but that was not explained in the press release which credited good management.

"NB Liquor has experienced a great fourth quarter," the press release quotes NB Liquor CEO Brian Harriman as saying about the improvement.  

Brian Harriman is president of NB Liquor. The Crown corporation says using different fiscal year-ends and beginnings than those outlined in legislation over two years was a management decision. (CBC)

"We have grown the business by $9.1 million in sales versus the same quarter last fiscal. Fourth-quarter results were higher than last year's fourth quarter which was driven by well-planned marketing programs like the Expérience Wine program and our everyday beer price offer."

NB Liquor has been required by legislation to use the closest Sunday to the end of the month in its year-end financial reporting since 2013. It initially adhered to that date in 2014 and 2015 but switched to the final Sunday of the month in 2016 and 2017 before switching back again in 2018.  

'Decisions of management'

NB Liquor spokesman Mark Barbour said the agency is too busy this week with the launch of Cannabis NB to be interviewed on its 2018 financial reporting and why changes it made to cause the 53-week fiscal year were not explained in the annual report.

But in an email Barbour said not using the year-ends prescribed by legislation in 2016 (April 3) and 2017 (April 2), or by extension the prescribed starting dates for 2017 and 2018, were decisions of management.

"The New Brunswick Liquor Corporation Act states in sec.18, the fiscal year of the Corporation ends on the Sunday closest to March 31," wrote Barbour.

"When changes to the Act were put forward and approved in legislation (in 2013) our planning and reporting period were underway and established. As such, we implemented the compliance to the year end date as soon as it was possible and properly fit with the comparative reporting weeks."