REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 3

RESULTS OF THE REVIEW

15.

As with Cycles 1 and 2 few serious problems were identified in the Cycle 3 review. However, also similar to the earlier reviews, Cycle 3 found that some issuers need to raise the standard of their financial reporting.

16.

Most of the identified shortcomings can be remedied by greater attention to detail in respect of the requirements of NZ GAAP.

Follow-up Action

17.

As with Cycle 2, reports of 19 issuers had matters that the Commission considered should be addressed. Letters were sent to these 19 issuers asking them to clarify some matters, and/or to address specific shortcomings when preparing their next financial reports.

18.

The Commission's approach is to write to issuers whose reporting raises matters of significance. A matter is considered "significant" if further clarification or information is needed. For example, where a matter:

1. appears to be wrong;
2. does not appear to make sense;
3. is not clear and lacks transparency;
4. seems unusual or irregular;
5. raises questions about its validity; or
6. has insufficient explanation.

19.

In some cases the disclosures raised questions which prompted the Commission to seek further explanation. Some responses from issuers explained the situation, indicating that the questions would not have been raised if the issuer's original disclosure had been clearer or more transparent.

20.

In the letters on significant matters any minor matters were also drawn to the attention of the issuer. We did not write to issuers whose reports raised only minor matters.

21.

A copy of the letter was sent to the issuer's auditor in most cases. Auditors have an important role in encouraging companies to comply not only with the statutory requirements but also with best practice. The Commission encourages auditors to be vigilant in the audit of financial statements. High quality external auditing is critical to integrity in financial reporting. Investors rely heavily on the external assurance of an issuer's financial reporting.

22.

For the first time as part of the on-going surveillance programme a matter relating to an auditor was referred to NZICA for consideration for follow-up action.

Outcome of Matters Raised

23.

Thirty-nine percent of the matters raised in letters to issuers were viewed by the Commission as significant. This compares with fifty-two percent for Cycle 1 and twenty-nine percent for Cycle 2.

24.

Table 1 on page 8 shows the outcome of matters raised with issuers.

25.

The significant matters that came up several times in Cycle 3 related to:

1. the format of the Statement of Movements in Equity - lack of a total recognised revenues and expenses line (6 instances);
2. Non-compliance with FRS-41 Disclosing the Impact of Adopting New Zealand Equivalents to International Financial Reporting Standards.(3 instances);

These matters are explained further below.

26.

Satisfactory agreement was reached with issuers on 81% of significant matters raised. Three of the remaining five significant matters were reiterated in a second letter and will be monitored on an on-going basis. Two are being followed up separately.

27.

On a more positive note, the number of instances of failure to date and/sign the financial report had decreased. The Cycle 3 review found only one instance of such non-compliance compared with four in Cycle 2 and three in Cycle 1.

28.

No improvement was found regarding the disclosure of total recognised revenues and expenses lines in the Statement of Movement in Equity. Cycle 3 review found six instances of this non-compliance, the same number as in Cycle 2.

29.

Apart from the matters noted in paragraph 23 above, other significant matters noted are generally of a different nature from those in Cycles 1 and 2.