Discussion Documents: REVIEW OF FINANCIAL REPORTING BY ISSUERS


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REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 1

EXECUTIVE SUMMARY

The Commission has established a financial reporting surveillance programme to review financial reporting practices of issuers. The aim is to encourage New Zealand issuers to improve the quality of their financial reporting.

In Cycle 1 of the programme the Commission reviewed the financial reports of 40 issuers. This report on the Cycle 1 Review provides market participants with the Commission's findings from this review, and gives some guidance on the Commission's expectations of disclosure by issuers.

The purpose of the Cycle 1 review was to identify the level of compliance with Financial Reporting Standards and other elements of Generally Accepted Accounting Practice and to assess the overall quality of financial reporting.

Few serious problems were identified. However, a number of issuers need to raise the standard of their financial reporting. Reports of two issuers of the 40 reviewed had serious problems and were already subject to scrutiny by other agencies. Reports of 16 issuers had some shortcomings that need to be addressed. One of these reports was referred to the Commission's enforcement staff. We wrote to the other issuers.

Some of the matters found were:

valuation of property, plant and equipment, and intangibles;
the appropriateness of a prior period adjustment;
non-disclosure of a share-based arrangement with a product distributor;
lack of actual versus prospective financial information comparisons and explanation;
format of the Statement of Movements in Equity;
undated financial statements; and
unusual differences in the dates of the annual report, shareholder information, and the audit report.

The Commission has been pleased with the cooperation from issuers and their willingness to improve the quality of their financial reporting.

The review also identified some inconsistencies in substantial security holder disclosures and some potential gaps or delays in continuous disclosure notices. Instances of lack of compliance with the continuous disclosure requirements of the NZX Listing Rules were also found. These matters have been referred to the NZX.

The Commission will continue its Financial Reporting Surveillance Programme and is likely to broaden its scope. Later review cycles will include reviews of disclosures and adjustments made by issuers as they move to New Zealand equivalents of International Financial Reporting Standards.

INTRODUCTION

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 has established a financial reporting surveillance programme to review financial reporting practices of public issuers.

3.

The aim of the programme is to encourage New Zealand issuers to improve the quality of their financial reporting so that:

a.: issuers' financial report disclosures are clear and comprehensive;
b.: people reading financial reports will fully understand them;
c.: investors can have confidence in the credibility of financial information provided by issuers; and
d.: high quality financial reporting will contribute to the integrity of New Zealand's securities markets.

Cycle 1 Review of Financial Reporting by Issuers

4.

In the first cycle of the programme the Commission reviewed the financial reports of 40 issuers with balance dates from 31 March to 31 July 2004.

5.

The reports were reviewed against New Zealand Generally Accepted Accounting Practice (NZ GAAP). Financial statements comply with NZ GAAP only if they comply with:

a.

applicable Financial Reporting Standards (FRS) approved by the New Zealand Accounting Standards Review Board; and

b.

where there are no such standards, accounting policies that:

i.: are appropriate to the circumstances of the reporting entity; and
ii.: have authoritative support within the accounting profession in New Zealand. This includes Statements of Standard Accounting Practice (SSAP).

6.

The purpose of the review was to form a view on:

a.: the level of compliance with NZ GAAP by issuers in their financial statements prepared under the Financial Reporting Act 1993;
b.: whether any breaches of GAAP identified in those financial statements were likely to cause the financial statements to not show a true and fair view, or were likely to be materially misleading to users in the context of information disclosure (for investment decision making) as envisaged under the Securities Act 1978 and therefore require enforcement action; and
c.: the overall quality of financial reporting practices by issuers.

7.

Although the main focus of the review was the financial statements, other sections of the annual report and continuous disclosure notices for the period were also considered. These were not comprehensively reviewed, however any obvious issue related to continuous disclosure, substantial security holder disclosure, or auditors, was followed up.

8.

Financial reporting requires the exercise of professional judgment. The Commission took this into account when reviewing the financial reports and determining which matters to follow up.

Background and Work Undertaken

9.

The Commission reviewed the audited full-year financial reports of 40 companies with balance dates from 31 March to 31 July 2004. To gain a complete view of financial reporting practices we also reviewed:

a.: financial information in any current prospectuses;
b.: substantial security holder information;
c.: continuous disclosure notices; and
d.: sections of the annual reports (e.g. the chairman's report).

10.

The review of the wider information was to identify any inconsistencies between the various documents, which in turn helped assess the adequacy of GAAP compliance.

11.

The selection of 40 issuers was made up of:

a.: 28 issuers listed on the NZX
b.: 8 issuers listed on the NZAX, and
c.: 4 issuers whose shares are traded on Unlisted.

12.

We made further enquiries of some issuers. In some instances this was because it was not possible to assess whether FRS had been fully complied with from the information provided in the financial statements and other documents.

Purpose of this Report

13.: This report on Cycle 1 of the Commission's Review of Financial Reporting by Issuers aims to provide market participants with the Commission's findings from this review. It also provides some guidance on the Commission's expectations of disclosure by issuers.

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