Discussion Documents: REVIEW OF FINANCIAL REPORTING BY ISSUERS

REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 1

RESULTS OF THE REVIEW

14.

Few serious problems were identified in the Cycle 1 review. However, the review indicates that a number of issuers need to raise the standard of their financial reporting.

Follow-up Action

15.

Reports of two of the 40 issuers reviewed had serious problems and were already subject to scrutiny by other agencies. One issuer had received an audit report with multiple audit opinion qualifications. The other issuer had received an audit report with two fundamental uncertainty paragraphs. The Commission will monitor these entities as part of future surveillance reviews.

16.

Reports of 16 issuers were found to have some shortcomings that need to be addressed. One of these was referred to the Commission's enforcement staff. We wrote to the other 15 issuers asking them for clarification of some matters, and/or asking them to address specific shortcomings when preparing their next financial reports.

17.

We wrote to issuers whose reporting raised at least one matter of significance. In these letters any minor matters were also drawn to their attention. We did not write to issuers whose reports raised only minor matters.

18.

A copy of the letter was sent to the issuer's auditor. Auditors have an important role in encouraging companies to comply not only with the essential 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.

Outcome of Matters Raised

19.

Fifty-two percent of the matters raised in letters to issuers were viewed by the Commission as significant.

20.

Table 1 on page 8 outlines the outcome of matters raised in these letters.

Table 1: Outcome of matters raised in letters to issuers

Notes	Outcome	"Significant"	%	Other	%	Total	%

(1)	Resolved	3		3		6
(2)	Point taken/change agreed	13		16		29
	*Agreement reached*	16	73%	19	95%	35	83%

(3)	Second letter sent	4		1		5
(4)	Other follow-up action	2		0		2
	*Further follow-up action taken*	6	27%	1	5%	7	17%

	Total matters raised	22		20		42
	%'s	52%		48%		100%

Notes to the Table

(1): Resolved: a satisfactory explanation was provided by the issuer on the matters raised.
(2): Point taken / change agreed: the issuer has acknowledged the point made / agreed to make changes in the 2005 financial statements.
(3): Second letter sent: a second letter closed the matter but reiterated the points made.
(4): Other follow-up action: more action required, e.g. as a result of the response the matter has been referred to the NZX.

21.

Satisfactory agreement was reached with issuers on 73% of significant matters raised. Four of the remaining significant matters were reiterated in a second letter and will be monitored on an on-going basis One matter has been referred to the NZX, and one matter is still under review.

Significant Findings

Financial Reporting Disclosures

22.

The nature of many of the matters raised with issuers suggests that issuers should consider:

a.: whether they have been sufficiently transparent in their disclosures;
b.: whether they could pay greater attention to detail in complying with some of the ancillary financial reporting disclosures (e.g. disclosures in respect of financial instruments and related party disclosures); and
c.: whether they could better manage some of the year end processes for finalising the annual report.

23.

In some cases the disclosures provided raised further questions prompting us to write seeking further explanation. Some of the responses explained the situation, indicating that more clarity or transparency by the issuer would have meant that we would not have had to ask the questions.

24.

One matter relating to large differences between actual and prospective information was referred to the Commission's enforcement staff. The Commission's interest is whether the original prospectus is misleading, and whether prospective financial information is correctly labelled as a forecast or a projection.

25.

Other significant matters followed up with the issuers were:

a.: the reconition and measurement of an intangible asset;
b.: the basis for valuation of property, plant and equipment;
c.: an audit report which did not provide an opinion over the issuer's group financial statements; and
d.: the appropriateness of a prior period adjustment.

26.

The intangible asset had been recognised on acquisition and we queried whether all the residual balance on acquisition should have been allocated to the intangible asset as opposed to some of it being allocated to goodwill. The Commission will continue to monitor this issuer's financial report to see whether the life and value of the intangible is being reassessed on a regular basis to determine if any provision for impairment is necessary.

27.

The issue relating to the valuation of property, plant and equipment concerned the basis of valuation used to determine fair value for a major class of assets. The issuer's disclosures suggested non-compliance with FRS-3 Property, Plant and Equipment.

28.

Section 16 of the Financial Reporting Act 1993 requires an audit report to give an opinion on the parent and group financial statements. In this instance the checking processes surrounding the production of the annual report failed to identify that the audit opinion included in the financial report covered the parent only. These processes would normally include checks of the printer's proofs and website postings by management and the auditor.

29.

The explanation for a prior period adjustment was difficult to understand. Such adjustments are rare and therefore warrant very clear explanation.