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REVIEW OF FINANCIAL REPORTING BY ISSUERS
CYCLE 9

Review of Financial Reporting by Issuers

For the period ending 30 June 2008 - 31 December 2008

CONCLUSION

  1. In a recent speech Robert Herz (Chairman of the US Financial Accounting Standards Board) stated:
"Transparency is not just a buzz word or a cliché It is a fundamental and absolutely essential attribute of sound financial markets. Relevant, trustworthy, and timely information is the oxygen of financial markets. Depriving markets of such information - or polluting the information - can have very adverse consequences."6
  1. The Commission remains of the view that the priority for issuers, auditors, standard-setters and other market professionals in the current economic environment is to ensure that complete and transparent disclosures are provided in the financial statements of issuers to restore investor and market confidence in the securities market. This requires, where necessary, the inclusion of explanatory disclosures to support the financial information that is presented.
  2. New Zealand issuers should pay particular attention to improving their disclosures in relation to financial instruments, related parties, impairment testing as well as management judgements and estimates. Issuers should also carefully consider what information in addition to the minimum requirements should be disclosed in their interim financial statements.

ONGOING REVIEW AND ENFORCEMENT

  1. The Commission will continue to review issuers' financial reporting as part of its Financial Reporting Surveillance Programme.
  2. The Commission appreciates that issuers may face difficulties when reporting in the current market environment. In particular, entities are likely to find valuation of both financial instruments and non-financial assets subject to a higher degree of judgement. Therefore it is very important for these entities to be transparent and disclose clearly their specific underlying assumptions and estimates. When circumstances change users can re-assess the information based on new assumptions.
  3. In addition, the Commission will follow up and review the next annual reports of those issuers who have agreed to make the necessary changes to ensure that those matters raised have been taken into account.
  4. The Commission will take any appropriate steps to encourage and ensure compliance with NZ IFRS (and other aspects of NZ GAAP) and relevant legislation.

APPENDIX 1: BACKGROUND TO THE SECURITIES COMMISSION'S FINANCIAL REPORTING SURVEILLANCE PROGRAMME

  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 issuers7 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 reviews of selected issuers' financial statements. At the end of each cycle the Commission publicly reports 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 relate8.
  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. All issuers are required to apply NZ IFRS in the preparation of their financial statements for annual accounting periods commencing on or after 1 January 2007.
  4. 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.

Selecting issuers

  1. The FRSP aims to review all issuers listed on NZX Limited (NZX) at least once over a three to four year period.
  2. In reviewing all listed issuers, dual and overseas listed issuers may also be 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.
  3. 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.
  4. Where dual and overseas listed issuers are selected 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.
  5. Issuers trading on the Unlisted9 exchange and issuers not listed on any exchange may be also included in the cycle reviews.
  6. Issuers may be selected based on particular criteria as determined by the Commission: issuers may be selected based on areas of particular risk affecting the issuer, the sector the issuer is in at the time of selection and/or their balance dates. Issuers can also be reselected for a subsequent review where the nature of issues identified in an earlier cycle raised concerns.

Identifying matters and taking action

  1. The Commission reviews an issuer's annual report when reviewing its financial statements and, in the case of listed issuers, this includes a review of any NZX announcements for the period and any relevant prospectuses. 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 raised10 or other matters. Matters raised include market matters.
  3. 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.
  4. 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.
  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 those matters are 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 appropriate bodies where matters identified in the FRSP are considered likely to be a breach of:
    1. the Financial Reporting Act;
    2. the Rules or the Code of Ethics of the New Zealand Institute of Chartered Accountants; or
    3. the NZX Listing Rules.

Footnotes

  1. Hertz, R.H. (2009) "History Doesn't Repeat Itself, People Repeat History - Front-Line Thoughts and Observations on Creating a Sounder Financial System." Available online at: http://www.fasb.org/
  2. An issuer is defined by the Securities Act 1978 (section 2) 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.
  3. Part II of the Financial Reporting Act 1993 (section 11) 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, Section 2 of the Financial Reporting Act 1993 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.
  4. 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.
  5. Prior to Cycle 6, the Commission referred to matters raised as significant matters.
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