New Zealand must keep up - financial reporting, corporate governance New Zealand's financial reporting and underlying corporate governance need to be on a par with best international practice if we are to increase investor confidence in our markets and attract investment in this country. Court action not an option for the Commission Recent news media reports have criticised the Securities Commission for not taking court action against directors of both Vertex Group Holdings Limited and Wakefield Hospital Limited. "These reports show a lack of understanding of the law," Chairman Jane Diplock said. The Commission inquired into the initial public offer of each of these companies and published reports of its findings. "The Securities Commission cannot take legal action in such cases," Jane Diplock said. "It has no mandate under the Securities Act 1978 to either bring civil actions on behalf of shareholders under section 56, or to bring prosecutions under section 58." The Commission is empowered to review practices relating to securities, and to comment on these. It does this by conducting inquiries and publishing reports of these inquiries. Where appropriate a report is referred to other parties to consider whether they may be able to take some further action on the matter.   ALSO IN THIS ISSUE: Working with the NZSE Vertex IPO Vertex insider trading inquiry Warning on internet offer Financial reporting is a significant part of the information provided for investors. The Commission believes that financial reporting must be relevant, reliable, understandable, and comparable so that investors can make informed decisions. International standards The move to adopt International Financial Reporting Standards (IFRS) is gaining considerable momentum. The International Organisation of Securities Commissions (IOSCO) endorsed a set of international accounting standards in May 2000 with the aim of having them adopted around the world. The European Commission has agreed to recommend legislation to adopt international accounting standards across all listed companies in the European Union by 2005. The Financial Reporting Council in Australia has formally endorsed the adoption of IFRS by 2005, and late last year the national accounting standardsetter in the United States (FASB) announced that it would establish an agenda for convergence with the International Accounting Standards Board. Our Accounting Standards Review Board (ASRB) has recommended to Government that New Zealand adopt IFRS. Importance of IFRS The ASRB decision is important. Adopting IFRS may help reduce information risks perceived by investors where our markets appear unfamiliar or different from markets overseas. IFRS will also help where companies are listed on stock exchanges in more than one country. Confusion can result from using different financial reporting standards. An example of this occurred when Telecom New Zealand Limited released its interim financial statements for the 2001/2002 financial year. Telecom is listed on the New York Stock Exchange and, as well as reporting under New Zealand GAAP, it must describe how its financial statements differ from US GAAP. Telecom's earnings reported in the US GAAP reconciliation were lower than the earnings reported under New Zealand GAAP. This apparent anomaly was caused by differences between US and New Zealand GAAP. The resulting public comment and market uncertainty had an adverse effect on Telecom's share price in New Zealand and Australia. The Commission's review found that Telecom's interim financial statements did accord with New Zealand GAAP, and commented that the matters raised highlighted the importance of working towards international convergence in financial reporting. One of IOSCO's objectives in promoting international accounting standards was to allow financial reports to be easily compared and thereby facilitate capital flows across borders. A small and geographically remote market like New Zealand stands to gain more than most from this opportunity. (continued page 2)

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THE BULLETIN April 2003

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