Feltex Carpets Limited
IPO Prospectus, Financial Reporting and Continuous Disclosure

From 2003 to 2006, Ernst & Young provided audit and review engagement services to FTX. Ernst & Young New Zealand was the contracting party with FTX for these services. However, Ernst & Young New Zealand had Ernst & Young Australia conduct some of the work because FTX had its headquarters in Australia. When the Commission requested working papers prepared by Ernst & Young Australia, Ernst & Young New Zealand took the position that it was a separate entity from Ernst & Young Australia and that Ernst & Young New Zealand did not have control over any working papers produced by Ernst & Young Australia.

Ernst & Young New Zealand told the Commission that the work carried out by Ernst & Young Australia was carried out pursuant to a subcontracting relationship in accordance with Ernst & Young's standard terms and conditions which reflect current market practice.

The Standard Terms and Conditions of Business as articulated by Ernst & Young New Zealand's contract with FTX for the review engagement of the 31 December 2005 FTX financial statements state that, at times, Ernst & Young New Zealand may use the partners or staff of other member firms of Ernst & Young Global Limited and Ernst & Young International Limited, wherein the other members are deemed to be acting as servants or agents of Ernst & Young New Zealand and Ernst & Young New Zealand is liable for the activities of partners or staff of other members as if they were the partners or staff of Ernst & Young New Zealand.

Ernst & Young New Zealand submitted to the Commission that it is a separate legal entity from Ernst & Young Australia and that, pursuant to New Zealand Auditing Standard 602, Ernst & Young New Zealand does not have control over the working papers of Ernst & Young Australia in regard to the FTX review engagement.

New Zealand Auditing Standard 602, Using the Work of An Other Auditor, states that "[u]nless otherwise agreed, the working papers of the other auditor shall remain the property of the other auditor."

The Commission concludes that under Ernst & Young New Zealand's Standard Terms and Conditions of Business, the work undertaken by Ernst & Young Australia was done on an agency basis for Ernst & Young New Zealand.

Notwithstanding that the working papers are the property of Ernst & Young Australia under New Zealand Auditing Standard 602, the Commission considers it is unacceptable for the auditor of a New Zealand issuer not to retain control of the full records of its audit (or review), which would include the records of the work done by any agent, even though considered the property of such agent under New Zealand Auditing Standard 602.

We refer this matter to NZICA to consider whether the New Zealand Auditing Standards should be reviewed in this regard.

The Commission reviewed the IPO allocations of the joint-lead IPO managers, Forsyth Barr Limited and First New Zealand Capital and the institutional and investor participation in the IPO. The Commission found no unusual activity.

The Commission reviewed trading in the FTX shares of two companies, Forsyth Barr Limited and First New Zealand Capital, including their employees, officers, and directors during time periods surrounding certain of their market announcements. The Commission found no unusual trading activity.

The Commission considered the trading activity of FTX directors and officers. The Commission found that the executive officers of FTX properly disclosed their transactions to the NZX.

The Commission also considered the disclosure of information by FTX to analysts relating to the breach of banking covenants around the time of FTX's second profit downgrade on 20 June 2005. Three analysts who forecast in research reports the possible breach by FTX of its banking covenants were interviewed. The Commission found that there was no indication that the analysts had access to non-public information from FTX when they forecast the possible breach of banking covenants.