Other publications: Report on Aspects of the Affairs of Max Resources Limited

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

		3.22		As described in detail in Volume 1 of our Report, Max made loan payments of NZ$1.18 million to CR2I, at least one via WRS Europe, including NZ$240,000 after balance date of 30 June 1997. As also described in Volume 1, these payments were made even though shareholder approval had not been obtained to Max's agreed acquisition of the Verheggens' interest in WRS Europe.
		3.23		According to the Horwath report the post balance-date payments included a payment of NZ$240,000 made to WRS Europe on 21 October 1997. Horwath said that, as the payment had been made before the Annual Report had been signed, it should have been disclosed in the financial statements. Had reference to the payment been made in Max's financial statements it would have alerted shareholders that the Company had been continuing to fund obligations in relation to the French Venture after balance date.
		3.24		No reference was made in the text of the Annual Report to any obligations on the part of Max to finance the building of the plant at St Thois. Note 16 to the financial statements, under the heading "Expenditure Commitments" says that the Company had no expenditure commitments other than an agreement to advance up to a further US$300,000 in relation to the Indonesian WRS operation. In Volume 1 of our Report we comment at some length on what appear to be commitments on the part of Max to fund the French Venture (see section headed "The French Venture" in section 6 of Volume 1).
		3.25		The failure to refer in the financial statements to Max's apparent obligations to provide significant further funding for the French Venture may be considered a material omission, particularly given the Company's precarious cash position.

				*Comparison with published prospective financial information*
		3.26		For the purposes of the Extraordinary General Meeting held on 8 May 1997 to approve the change in the Company's principal business (see para 1.12 above) an Information Memorandum, which included detailed financial forecasts for the group, was provided to shareholders.
		3.27		Note 19 to Max's June 1997 published financial statements stated: The Company published prospective financial statements in its Information Memorandum to shareholders dated 18 April 1997. The assumptions contained in those prospective financial statements are not consistent with the basis of the preparation of these financial statements and it is not considered appropriate to make a comparison.
		3.28		FRS-29 "Prospective Financial Information" issued by the Institute of Chartered Accountants of New Zealand in April 1996 requires (para 5.9), among other things, that prospective financial information, where covered by the standard ⁶, shall be prepared in accordance with the accounting policies expected in the future for reporting historically orientated general purpose financial reports. In addition, if a "forecast" were to be disclosed, it would need to be "prepared on the basis of assumptions as to future events that the governing body reasonably expects to occur associated with the actions the governing body reasonably expects to take as at the date that the information is prepared (best estimate assumptions)."
		3.29		Para 5.4 of FRS-9 "Information to be disclosed in financial statements" states that: Where an entity has published prospective financial information (in accordance with FRS-29 ...) for the period of the financial report, the entity shall present a comparison of the prospective financial information previously published with the actual financial results being reported. Explanations for major variations shall be given.
		3.30		The Company does not appear to have complied with FRS-9 because it did not publish a comparison between the actual results and the prospective financial information, nor did it explain any major variances.
		3.31		A memorandum dated 29 October 1997 from Wood to Max included: We discussed briefly the requirement to publish forecast figures as a comparison - this is in accordance with FRS-9 paragraph 5.4 enclosed. Reviewing the forecasts it can be seen that they bear no resemblance to the actual figures at May 1997 because of the different method of consolidation. It may be appropriate for a note to the financial statements giving a brief explanation as to why these comparisons are not given.
		3.32		The audit report was not qualified in respect of this non-compliance with an approved financial reporting standard. While the true and fair view may not have been affected, we think a qualification should have been considered.
		3.33		Wood submitted that, because the original forecast assumed certain companies would be consolidated but were in fact equity accounted as a result of a different acquisition strategy, he considered compliance with FRS-9 may have been misleading. For this reason a note was inserted in the financial statements explaining why no reconciliation was provided. In Wood's view the true and fair view was not impaired and no qualification was required.

				*Recording and approving company expenditure and borrowing*
		3.34		Note 14 to Max's June 1997 financial statements disclosed creditors and accruals for Max of NZ$479,000 and amounts owed to directors of NZ$153,000.
		3.35		The Horwath report included a review of loans made to the Company by its directors since balance date. It recorded that the amounts owed by Max to its directors and their associated companies had risen to NZ$1,212,329 by 31 December 1997, an increase of just over NZ$1 million from the position disclosed at balance date. While Horwath was able to substantiate some of this increase its report recorded that many items required follow up (with Langoulant).
		3.36		This escalation in the amounts owed by Max to its directors would seem to be consistent with a company that was having difficulty in meeting its day to day financial obligations. However there may also be other reasons. Horwath said in its report: Lack of documentation for certain director related transactions In a number of instances Mr Mike Langoulant authorised reimbursements for his own expenses without providing full or adequate documentation to support the claim. An example of this can be seen in ... where Mr Langoulant has claimed for all of his overseas telephone calls on his private phone. The documentation he has provided is the summary of his phone bill cost and not an itemised list of all the phone calls made, the duration of these, the destination of the phone call and the date and time of these calls. This does not permit an independent assessment of the validity of such claims. Langoulant describes this as a "petty" comment and said that when he and Jeff Verheggen were travelling on Company business they "... did not claim the full extent of all sundry travel costs they incurred."
		3.37		Horwath also looked at Max's expenditure control systems. Its review revealed: Many invoices in the unpaid invoices file had not been included in the creditors listing. A number of amounts were estimated or rounded down, when there was a specified amount payable printed on the invoice. Many invoices which were overdue by several months, including a few which were at debt collection agencies. In his affidavit of 2 April 1998 Langoulant said that he "...disputed Horwath's statement that many unpaid invoices were not included in the creditors listing. There may have been some accidentally omitted or for which details were subsequently received. ..."
		3.38		Horwath commented generally on Max's accounting systems. Its report said: In conducting our review we have encountered significant difficulties in obtaining documentary evidence for transactions made by Max, including payments, receipts and accounting journal entries. We do not believe that the system of control and audit trail of transactions is adequate. We have specifically noted the following issues, together with our recommendations: there were no cheque requisitions attached to any of the payments made; the filing of payments was not systematic; there was no indication that invoices had been paid; there was no authorisation for payment on any of the invoices reviewed. The risk of not having a cheque requisition attached to paid invoices is that: payments could be made more than once for the same transaction; payments could be made that are not properly authorised." Horwath recommended introduction of a cheque requisition template with appropriate space for verification and authorisation of payments to be made. Langoulant said this was unnecessary because of the small number of cheques issued by the Company.
		3.39		Max's auditor, Wood, in a letter dated 18 January 1996 to Johnson (as a member of Max's Audit Committee), and written, we have been told by Johnson, at the request of the Audit Committee, said: Further to our recent discussion as part of the audit review of the company for the year ended June 1995 we set out below comments made by us. The records of the company for the year were well presented to us and were in order in all material matters. Due to the nature of the administration of the company it is impossible to provide adequate internal controls in respect of the cash affairs of the company. Therefore the directors play an additional role as part of the internal control procedures. In this regard we recommend - A summary of all deposits made into the company bank accounts be presented to each directors meeting. The directors will be aware what receipts of both income or capital nature that the company would be expecting to receive and can therefore monitor these expectations against the report. That a listing of all cheques issued be presented to each directors meeting covering items paid out since the previous report. This should include the name of the payee and the cheque amount. It could simply be a copy of the cashbook. This would give the directors the opportunity to review in detail the payments made by the company between directors meetings and question individual items.
		3.40		We are advised that Johnson and McShane, in response to Wood's recommendations, followed up the question of internal controls with Langoulant. Johnson has told us that Langoulant provided the Audit Committee with information confirming that various improvements had been made. Notes Johnson made of a directors' meeting of 3 December 1997 indicate various administrative matters were discussed. Langoulant says he has no recollection of Johnson and McShane making any enquiries concerning internal controls.
		3.41		However, on the basis of Horwath's comments, supported by Wood's letter of January 1996, and despite the assurances apparently given by Langoulant to the Audit Committee and the comments of Langoulant recorded in paragraphs 3.36 to 3.40, we believe there are questions about: the reliability of the Company's reported expenditure and amount of outstanding creditors; the reliability of amounts reported as being owed by Max to its directors and companies associated with them.

Consolidated statement of financial position for Max at 31 December 1997

3.42

As part of their review Horwath compiled a balance sheet for Max at 31 December 1997, taking into account a number of adjustments arising as a result of their enquiries. In summary form this revised statement showed:


Total Current Assets		$2,026,000
Investments
	Shares and options	$352,000
	Other (mostly WRS interests)	$4,727,000
Other non-current assets		$2,215,000

TOTAL ASSETS		$9,320,000


Total Current Liabilities		$2,930,000
NET ASSETS (EQUITY)		$6,390,000

Notes:

Max's audited financial statements for the year ended 30 June 1997 had disclosed shareholders' equity of $12.79 million.
Horwath excluded all Max's interests in Norseman but included Max's holding of 9.409 million AusGM shares at zero value because that company was under administration and quotation of its shares had been suspended. However AusGM shares were reinstated to Official Quotation on 29 June 1998 and have since traded at around A$0.3� per share. At that value Max's holdings would be worth around NZ$312,000 and its net equity around NZ$6.7 million. Recent trading has been at around A$0.8� per share, giving the holding a value of A$0.8 million.

		3.43		The Horwath analysis suggests that the net value of Max had declined by some NZ$6 million in the six months to December 1997 from its reported position of NZ$12.79 million at 30 June 1997 to NZ$6.4 million. An analysis by PPB Ashton Read, referred to in Herbert's affidavit and prepared for Langoulant and Verheggen, estimated that Max had equity of A$5.5 million by 31 March 1998, although on a realisable basis they estimated this figure would have been A$1.6 million.
		3.44		Once the statutory managers had taken control of the Company they undertook a comprehensive review of Max's financial position. In doing so they had access to the Company's financial records held in the Perth office, interviewed the directors of the Company, and inspected all important assets. On 1 March 1999 they released a report to shareholders. The statutory managers' view of the financial standing of Max was that the "realistic value of Max's assets could be less than the Group's liabilities" and that "there may be little if any surplus available for shareholders after the sale process." They are now undertaking a controlled sale of all assets.
				Footnote(s): FRS-29 generally covers prospective financial information in prospectuses and other offer documents, also annual and other reports provided to shareholders, regulatory bodies and other interested parties. Return