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Report of the Securities Commission on Aspects of the Affairs of Max Resources Limited

2
EXECUTIVE SUMMARY OF VOLUME 2

2.1

The following are the key points arising from Volume 2 of our report:

There are inherent difficulties for non-resident directors and regulatory authorities when a company is incorporated and listed in one country but operates and is managed in another country. Max is a New Zealand incorporated and listed company with its registered office in Tauranga but its principal place of business in West Leederville, Perth, Western Australia;

The two New Zealand directors of the Company were concerned at the direction the Company was taking and attempted to take over its administrative control. Subsequently they instituted court proceedings in Western Australia to wind up the Company, and approached regulatory authorities in Australia and New Zealand;

Max entered into certain transactions in October 1997 involving the sale of shares it held in Intrepid Mining Corporation NL ("Intrepid"). The Company's audited financial statements for the year ended 30 June 1997, and a statement to the NZSE, gave a misleading impression concerning the profit earned by Max from the sale of its Intrepid interests;

Max suffered a significant loss of wealth following the sale of most of its largest mining asset, its interests in the Norseman Gold Joint Venture ("the Norseman Venture"), to Australasian Gold Mines NL ("AusGM") in exchange for shares in AusGM. The value of the AusGM shares received by Max was close to the book value of the Norseman Venture assets at the time the selling contracts were agreed. However the AusGM shares dropped in value soon after Max acquired them and had fallen significantly by the date of the Annual Report. We do not believe this loss of value was adequately disclosed in the Annual Report or financial statements;

Max's investment in the French Venture resulted in funding demands on the Company that it was not able to meet, or met only with difficulty, and involved commitments to provide funding that were not disclosed in the audited financial statements;

In its 1997 Annual Report and financial statements Max made certain statements concerning events subsequent to balance date. These statements gave a misleading impression of the effect of those transactions on the Company's financial and liquidity positions and failed to refer to the decline in value of assets acquired and to conditions attached to the transactions, particularly relating to the timing of receipts and payments;

Max, like many small companies, had inadequate staff to maintain proper internal controls. In the absence of adequate internal controls the auditor, Mr Peter M Wood of Sinclair & Wood, Tauranga, needed to take a substantive approach to the audit of the Company's financial statements. We do not think he did this to the extent required by auditing standards;

Max's internal control procedures leave open to question the reliability of the disclosed financial information concerning the Company's expenses, outstanding creditors and amounts owing to debtors;

We believe the audit of Max's financial statements was deficient and was not carried out in accordance with generally accepted auditing standards;

Max had an Audit Committee which met by telephone several times a year but had no formal charter, did not meet formally, and did not formally report to the board of the Company until early 1998;

The registered office of the Company was at the offices of the company's auditors. We consider this is an inappropriate practice, at least in the case of a listed company with a diversity of public shareholders. This raises questions about the perceived independence of the auditor and puts the auditor at risk of being considered an officer of the company;

Contrary to law, most of the Company's principal records were kept in the Perth office rather than at the registered office in New Zealand. This initially inhibited the efforts of the Commission, the Registrar of Companies and other agencies to investigate the Company's affairs. Once appointed the statutory managers gained control of the Company's records.

2.2

This volume of our report raises questions as to whether any one or more of the directors failed to comply with:

duties they owed to the Company;

obligations they owed to the NZSE to use their best endeavours to procure the Company's compliance with the relevant Listing Rules;

obligations under the laws of New Zealand in relation to financial reporting and related requirements.

2.3

This volume of our report also raises questions as to whether the auditor of Max failed to comply with:

responsibilities as auditor under the Companies Act 1993 and the Financial Reporting Act 1993;

obligations as a chartered accountant and member of the Institute of Chartered Accountants of New Zealand.