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Surveillance review finds shortcomings in New Zealand financial reporting
The Securities Commission has just released the findings of its first review of financial reporting under its new surveillance programme.
Financial reports of 40 unnamed companies were reviewed against New Zealand Generally Accepted Accounting Practice (NZ GAAP). Shortcomings were found in 16 reports and the shortcomings of one report were considered serious enough to be passed to the Commission's enforcement staff. While overall there were few serious problems, the Commission says that the sample indicates that companies need to raise the standard of their financial reporting.
In this update, we look at what has prompted the review and some of the Commission's key findings.
Financial Reporting Surveillance Programme
The Commission has established the programme to review the financial reporting practices of public issuers. Its key aim is to encourage New Zealand issuers to improve the quality of their financial reporting – to give investors clear, comprehensive and credible information and to contribute to the overall integrity of New Zealand's securities markets.
The first review
In what the Commission terms as "Cycle 1" of the surveillance programme, earlier this year it reviewed the audited full year financial reports of 40 companies which were included in each company's annual report to shareholders. The majority were NZX listed but the review also included some NZAX companies. The reports were measured against NZ GAAP. The Commission also assessed the overall quality of reporting.
Although the main focus was the financial statements, other sections of the annual reports and continuous disclosure notices were also considered. The Commission also reviewed wider company information such as current prospectuses and substantial security holder information to identify any inconsistencies and to aid the assessment of NZ GAAP compliance.
Key findings
Financial reporting disclosures
After reviewing reports, the Commission went back to companies with whom it had concerns, raising a number of matters. Significant matters raised with companies were:
- whether they had been sufficiently transparent in their disclosures
- whether they could pay greater attention to detail to comply with some ancillary financial reporting disclosures; and
- whether they could better manage some year end processes for finalising the annual report
- recognition and measurement of intangible assets
- the basis for valuation of property, plant and equipment; and
- an audit report not providing an opinion over the company financial statements.
Share-based arrangement
One company had a share-based arrangement with a distributor of its product, in which share options would be issued if certain product order targets were met. The arrangement was mentioned in a Continuous Disclosure Notice but not in the company financial report.
The Commission says that there is now a specific New Zealand Financial Reporting Standard (FRS) dealing with share-based payments, requiring a company to disclose information in financial statements to enable readers "to understand the nature and extent" of share-based payment arrangements.
Actual v prospective
The Commission considers actual versus prospective financial information (PFI) comparison disclosure as important to give investors information on the relative reliability of prospective financial information, including audited reasons for variances.
It found several instances of comparison of actual and PFI but no explanation of major variations as required.
Statement of Movements in Equity
Many reports did not comply with the format of Statements of Movements in Equity required by the NZ GAAP in that they did not disclose a total recognised revenues and expenses (TRRE) line. The Commission said that although the components were included so that a knowledgeable reader could calculate the figure, it believed it was important that it was disclosed.
Dating of information
Some reports indicated that companies were not well organised in the final stages of the reporting process, although on the whole the Commission felt that most handled it well.
Findings of concern were:
- undated financial statements
- differences between dates for signing financial statements and/or annual report, and the date of security holder information
- one situation where the audit report was dated before the date of the accounts.
The Commission says that the sequence of events needs to be better managed to ensure that directors and auditors are properly reviewing the annual report in line with their responsibilities.
Other matters
A number of other matters of lesser significance were mentioned, including: subsequent event disclosure, total operating revenue data, exceptional risks of operation, disclosure of discount unwind for provisions, independent foreign operations, employee share ownership plans, financial instruments and other disclosure issues.
Market matters
Inconsistencies were uncovered in the substantial security holder disclosures along with potential gaps or delays in continuous disclosure notices.
Instances were found of a delay in notification of what appeared to be material information, or of failure to notify the market, as required under continuous disclosure notice regulations.
Actions taken
The Commission contacted all companies when issues arose and most were resolved. A number of companies acknowledged that greater clarity and transparency would have enabled them to avoid Commission questioning.
One matter involving large differences between actual and prospective information was referred to Commission enforcement staff for an investigation into whether prospective financial information is correctly labelled as a forecast or a projection.
Matters concerning market notification have been referred to the NZX.
What next?
The Commission will continue to review financial reporting under its surveillance programme and also intends to broaden its scope.
Future reviews will include a look at disclosures and adjustments made by companies as they move to the New Zealand Equivalents of International Financial Reporting Standards.
Any breaches of the law will be raised with companies and enforcement action taken as appropriate. This could include referring cases to other agencies such as the Ministry of Economic Development, the Accounting Standards Review Board, and the Institute of Chartered Accountants.
The Commission has clearly put a stake in the ground, outlining its expectations and its willingness to act. It is in the best interests of companies and the integrity of the New Zealand markets in general, that business follows the Commission’s proactive lead before it comes knocking on the door.
The Securities Commission report can be viewed in full on its website:
www.sec-com.govt.nz or a hard copy can be ordered by calling 04 472 9830 or emailing: seccom@sec-com.govt.nz.
Should you wish to discuss any matter arising from the review or your own annual reporting process, please contact your usual Bell Gully adviser or:
AUCKLAND
Brynn Gilbertson
Partner
James Gibson
Partner
WELLINGTON
Andrew Brown
Partner
Mark Freeman
Partner
Disclaimer
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
