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REVIEW OF FINANCIAL REPORTING BY ISSUERS
CYCLE 7

Financial Reporting Surveillance Programme

6 August 2008

INTRODUCTION

  1. The Securities Commission is the main regulator of the New Zealand securities market. Our purpose is to strengthen investor confidence and foster capital investment in New Zealand by promoting the efficiency, integrity and cost-effective regulation of our securities markets.
  2. The Commission regards quality financial reporting by issuers1 to be fundamental to the fairness, efficiency and transparency of New Zealand's securities markets.

The Commission's Financial Reporting Surveillance Programme

  1. The Securities Commission is required under section 10(c) of the Securities Act 1978, "to keep under review practices relating to securities, and to comment thereon to any appropriate body".
  2. As part of its work to carry out this function the Commission established the Financial Reporting Surveillance Programme (FRSP) in 2004, with its first Cycle review taking place in 2005. The FRSP is an ongoing surveillance programme.
  3. The aim of the Commission's FRSP is to encourage New Zealand issuers to improve the quality of their financial reporting so that:
    1. issuers' financial statement disclosures are clear and comprehensive;
    2. investors can have confidence in the credibility of financial information provided by issuers; and
    3. high quality financial reporting contributes to the integrity of New Zealand's securities markets.
  4. The FRSP involves biannual reviews of selected issuers' financial statements. At the end of each Cycle the Commission publishes a report on this surveillance work to provide market participants with a summary of its findings. Copies of reports for all Cycles are available on the Commission's website www.seccom.govt.nz.

New Zealand Generally Accepted Accounting Practice

  1. Under the Financial Reporting Act 1993 issuers are required to prepare financial statements that comply with New Zealand Generally Accepted Accounting Practice (NZ GAAP) and provide a true and fair view of the matters to which they relate2.
  2. The Commission reviews financial statements of issuers against NZ GAAP. For the purpose of the Financial Reporting Act financial statements and group financial statements comply with NZ GAAP only if those statements comply with:
    1. applicable financial reporting standards; and
    2. in relation to matters for which no provision is made in applicable financial reporting standards and that are not subject to any applicable rule of law, accounting policies that:
      1. are appropriate to the circumstances of the reporting entity; and
      2. have authoritative support within the accounting profession in New Zealand.
  3. The term "applicable financial reporting standard" is defined in the Financial Reporting Act to mean an approved financial reporting standard that applies to a reporting entity (or group) and to an accounting period (or interim accounting period) in accordance with a determination of the Accounting Standards Review Board (ASRB) for the time being in force or any election made under section 27 of the Financial Reporting Act.
  4. In December 2002 the ASRB determined that entities required to comply with NZ GAAP under the Financial Reporting Act would be required to apply New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) in the preparation of their financial statements for annual accounting periods commencing on or after 1 January 2007 with the option to early adopt from annual accounting periods commencing on or after 1 January 2005.
  5. The purpose of the Commission's Cycle reviews is to form a view on:
    1. the level of compliance with NZ GAAP by issuers in their financial statements prepared under the Financial Reporting Act;
    2. whether any breach of NZ GAAP identified in those financial statements is likely to cause the financial statements to not show a true and fair view or is likely to be materially misleading to users in the context of information disclosed for investment decision-making under the Securities Act and therefore require enforcement action; and
    3. the overall quality of financial reporting practices by issuers.
  6. The Commission has used the term "previous NZ GAAP" in this report to mean the basis of accounting that an issuer uses for preparing historical financial information before adopting NZ IFRS. Previous NZ GAAP is still current for issuers that have not yet adopted NZ IFRS.

Selecting issuers

  1. The FRSP aimed to review all listed issuers at least once over a three to four year period. Cycle 7 represents the conclusion of the Commission's first round of its FRSP which began in 2005. On completion of Cycle 7 the Commission has achieved this aim. Except for some dual or overseas listed entities, all NZX Limited (NZX) listed issuers have been reviewed. The next Cycle will begin the second round of reviews where listed issuers will be selected again for review. The focus of the next round will be on financial statements prepared under NZ IFRS.
  2. Issuers trading on Unlisted3 and issuers not listed on any exchange are also included in the Cycle reviews. No issuers on Unlisted were selected for review in Cycle 7. Seventeen issuers not listed on any exchange were reviewed in this cycle.
  3. Issuers may also be selected based on particular criteria as determined by the Commission: issuers may be selected based on areas of particular risk affecting the issuer and/or the sector the issuer is in at the time of selection. Issuers may also be selected based on the balance date of the issuer to ensure timely feedback of information. Issuers can be reselected for a subsequent review where the nature of issues identified in an earlier Cycle raised concerns. Two issuers were reselected for review in this Cycle. The Commission did not write to these two issuers in Cycle 7.
  4. In reviewing all listed issuers, dual and overseas listed issuers are also selected. Overseas listed issuers are issuers domiciled or incorporated outside New Zealand which have a recognised stock exchange as the home exchange and are also listed on NZX. One overseas listed issuer, with a primary listing in the UK, was selected for review in this Cycle.
  5. Dual listed issuers are issuers incorporated in Australia which are on the Australian Stock Exchange's (ASX) Official List and which are also listed on the NZX. Two dual listed issuers were reviewed in Cycle 7.
  6. In the case of dual and overseas listed issuers the Commission first writes to the regulator in the overseas jurisdiction to determine whether a review of the financial reporting of the issuer has already been undertaken locally. If so, these issuers are not reviewed by the Commission. Where the issuer has not been reviewed by the overseas regulator, the Commission undertakes a review of the annual report, NZX announcements and, if applicable, the current prospectus. Where appropriate, findings are communicated to the overseas regulator. If the Commission communicates a matter about an issuer that it considers to be significant to an applicable overseas regulator and the overseas regulator proposes to take no action, the Commission will write directly to the overseas or dual listed issuer on the matter. In Cycle 7 no matters were raised in relation to the dual listed or overseas issuers to prompt the Commission to communicate any findings to the overseas regulators.

Identifying matters and taking action

  1. The Commission reviews an issuer's financial statements when reviewing its annual report and, in the case of listed issuers, this includes a review of any NZX announcements for the period. While the NZX announcements are not comprehensively reviewed, any market matters relating to continuous disclosure, disclosure of relevant interests by directors and officers, and substantial security holder disclosure, are followed up where necessary.
  2. Matters identified in the review are referred to as matters raised4 or other matters. Matters raised include market matters.
  3. Financial reporting requires the exercise of professional judgement. The Commission takes this into account when reviewing the financial statements and determining which matters to follow up.
  4. Matters raised are matters that are important or where further clarification or information is needed. For example, the Commission is likely to write to an issuer 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. is insufficiently explained.
  5. The Commission writes to an issuer requesting additional information and in some cases asks the issuer to revise or enhance disclosures in future financial statements.
  6. When writing to an issuer in respect of matters raised the Commission also includes other matters found in the review in relation to that issuer. Other matters are miscellaneous matters that the Commission considers could be better disclosed.
  7. The Commission's policy is not to write to an issuer whose financial statements raised only other matters, unless the number of those matters is so numerous that it is useful to provide feedback to the issuer. In this respect the Commission is mindful of its educative role in the FRSP.
  8. In each case where the Commission writes to an issuer, a copy of the letter is also sent to the issuer's auditor. This practice acknowledges the role of auditors in helping to maintain and improve the standard of financial reporting in New Zealand. It also alerts an auditor to the particular aspects of its client's financial statements that may be of concern to the Commission.
  9. 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 the integrity of financial reporting and to the efficiency and integrity of the securities markets.
  10. Where a matter is identified that may have a significant market impact the matter is removed from the FRSP and considered separately as an enforcement matter.
  11. Referrals are also made to relevant bodies where matters identified in the FRSP are considered likely to be a breach of the:
    1. Financial Reporting Act;
    2. Rules or the Code of Ethics of the New Zealand Institute of Chartered Accountants (NZICA); or
    3. NZX Listing Rules.
  1. An issuer is defined by the Securities Act 1978 to mean:
    1. In relation to an equity security or debt security, or to an advertisement, investment statement, prospectus, or registered prospectus that relates to an equity security or a debt security, or to a trust deed that relates to a debt security, the person on whose behalf any money paid in consideration of the allotment of the security is received:
    2. In relation to a participatory security, or to an advertisement, investment statement, prospectus, or registered prospectus, or to a deed of participation that relates to a participatory security, the manager:
    3. In relation to an interest in a contributory mortgage offered by a contributory mortgage broker, or to an advertisement that relates to such an interest, the contributory mortgage broker;
    4. In relation to a unit in a unit trust, or to an advertisement, investment statement, prospectus or registered prospectus that relates to such a unit, the manager:
    5. In relation to a life insurance policy, or to an advertisement, investment statement, prospectus, or registered prospectus that relates to a life insurance policy, the life insurance company that is liable under the policy:
    6. In relation to an interest in a superannuation scheme, or to an advertisement, investment statement, prospectus, or registered prospectus that relates to such an interest, the superannuation trustee of the scheme.
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  2. Part II of the Financial Reporting Act 1993 requires every 'reporting entity' to prepare financial statements that comply with generally accepted accounting practice and to provide any additional information required to ensure those statements are a true and fair view of the matters to which they relate.

    Part I defines a reporting entity as :

    1. An issuer; or
    2. A company, other than an exempt company; or
    3. A person that is required by any Act, other than this Act, to comply with this Act as if it were a reporting entity.
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  3. Unlisted is an unregistered securities trading facility; it is not a registered stock exchange or authorised securities exchange under the Securities Markets Act 1988. Unlisted provides a facility for trading previously allotted securities.

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  4. Prior to Cycle 6, the Commission referred to matters raised as significant matters.

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