Securities Commission faults company disclosures

Monday 19th October 2009

Company accounts show a widespread lack of transparency, especially around revaluations, International Financial Reporting Standards, and underlying assumptions relating to areas of risk, says the Securities Commission chair, Jane Diplock.

In the first statement issued since publication of a review urging the commission to take a more direct approach to its communications, Diplock warns directors "not to sign off financial statements that do not comply with New Zealand IFRS because they could be failing in their duty to inform investors".

The commission based its findings on a review of 20 annual reports for listed and unlisted issuers with balance dates between January and March 2009, as part of a routine review of financial statements' compliance with Securities Act and other statutory requirements.

The lack of transparency around underlying assumptions used to derive values, disclosures about transactions with related parties, and the composition of unexplained expenses were of particular concern.

"The assumptions used to value assets have become particularly relevant bacuse of the global recession. In many cases, the recession has caused significant revaluation of assets, but too often investors aren't being given enough information to make informed judgements on whether a revaluation is fair," said Diplock.

These assumptions were not being stated in some financial statements.

"For example, for intangible assets such as goodwill, investors have a right to know what trading projections a company is using to value their assets. How much sales growth is being projected? Do the projections vary in different markets? In most cases, this level of information is not provided."

Related party disclosures also continued to be weaker than desirable, especially where directors and senior managers are involved. The commission has written to six of the 20 companies surveyed seeking further explanations of related party transactions.

"The high level of unexplained expenses in financial statements is another matter requiring attention," said Diplock. "In this cycle, we wrote to five companies asking them to provide more detail on these expenses" and seeking greater future transparency.

"Company directors should remember that they can be prosecuted under the Financial Reporting Act if their company publishes non-compliant financial statements.

"New Zealand companies have had long enough to comply with NZ IFRS," she said. "The standards demand greater transparency."

Businesswire.co.nz

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