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REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 2

RESULTS OF THE REVIEW

Few serious problems were identified in the Cycle 2 review as was the case with Cycle 1. However, the review indicates that a number of issuers need to raise the standard of their financial reporting.
Most of the identified issues can be remedied by greater attention to detail in respect of the requirements of NZ GAAP.

Follow-up Action

Reports of 19 issuers were found to have matters that the Commission considers should be addressed. Letters were sent to these 19 issuers asking them to clarify some matters, and/or to address specific shortcomings when preparing their next financial reports.
The Commission's approach is to write to those issuers whose reporting raises matters of significance. In these letters any minor matters were also drawn to their attention. We view a matter as "significant" if further clarification or information is needed.
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 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 integrity in financial reporting. Investors rely heavily on the external assurance of an issuer's financial reporting.

Outcome of Matters Raised

Thirty-six percent of the matters raised in letters to issuers were viewed by the Commission as significant. This compares with fifty-two percent for Cycle 1.
Table 1 on page 8 outlines the outcome of matters raised with issuers.

Notes	Outcome	"Significant"	%	Other	%	Total	%
Table 1: Outcome of matters raised in letters to issuers
(1)	Resolved	6		19		25
(2)	Point taken/change agreed	14		19		33
	Agreement reached	20	83%	38	88%	58	87%

(3)	Second letter sent	3		5		8
(4)	Other follow-up action	1		0		1
	Further follow-up action taken	4	17%	5	12%	9	13%

	Total matters raised	24		43		67
	%'s	36%		64%		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 or 2006 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. the need for subsequent correspondence to seek answers to follow-up questions.

The significant matters that came up several times in Cycle 2 related to:
1. the format of the Statement of Movements in Equity - lack of a total recognised revenues and expenses line (6 instances);
2. failure to date and/or sign the financial report (4 instances); and
3. inadequate actual versus prospective financial information comparison (3 instances).
These matters are explained further below.
Satisfactory agreement was reached with issuers on 83% of significant matters raised. Three of the remaining four significant matters were reiterated in a second letter and will be monitored on an on-going basis. One matter is still under review.
There was a reasonable degree of similarity between matters found in Cycle 1 and Cycle 2.
It is acknowledged that Cycle 2 issuers did not have the benefit of being able to read the Cycle 1 report before preparing their financial statements. The Cycle 1 report is expected to provide a guide for issuers with balance dates after its publication.

Significant Findings

Financial reporting disclosures

The nature of many of the matters raised with issuers suggests that issuers should 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).
In some cases the disclosures provided raised questions which prompted the Commission to seek further explanation. Some of the responses explained the situation, indicating that the questions would not have been raised if there had been more clarity or transparency by the issuer in the original disclosure.
One issuer reported large differences between actual and prospective financial information. The Commission's interest is in:
1. the basis for the projections;
2. the basis for the prospective financial information included as a comparison in the year end financial report; and
3. inconsistencies in labelling of prospective financial information between the prospectus and the annual report.

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