Directors warned about transparency of financials

Directors warned about transparency of financial statements

The Securities Commission is warning company directors not to sign off financial statements that do not comply with New Zealand International Financial Reporting Standards (NZ IFRS), because they could be failing in their duty to inform investors.

Securities Commission Chairman Jane Diplock said the Commission’s latest surveillance cycle of 20 companies’ financial statements has shown a widespread lack of transparency.

Ms Diplock said all directors should remember that ensuring financial statements comply with the law was a primary duty of company directors. NZ IFRS have been mandatory in New Zealand since 2007.

“New Zealand companies have had long enough to comply with NZ IFRS. The standards demand greater transparency and if their financial statements are not fully compliant, then company directors should be concerned that they are failing one of their basic duties to shareholders,” she said.

Ms Diplock said the Commission was particularly concerned about the lack of transparency around the underlying assumptions used to value assets, disclosures about transactions with related parties and the composition of unexplained expenses.

“The assumptions used to value assets have become particularly relevant because of the global recession. In many cases the recession has caused significant revaluation of assets, but too often investors aren’t being given enough information to make informed judgements on whether a revaluation is fair.

“We are concerned that the underlying assumptions being used to revalue assets are not stated in some financial statements. For example for intangible assets, such as goodwill, investors have a right to know what trading projections a company is using to value their assets. How much sales growth is being projected? Do the projections vary in different markets? In most cases this level of information is not provided, which means investors cannot make informed judgements about asset valuations.

“We are also concerned about the lack of transparency in related party disclosure, particularly where directors and other key management personnel are involved. The Commission has not seen any significant improvement in this area from previous reviews. In our most recent surveillance cycle, we were prompted to write to six companies asking for explanations.

“The high level of unexplained expenses in financial statements is another matter requiring attention. In this cycle, we wrote to five companies asking them to provide more detail on these expenses. We also requested that they revise their financial statements to be more transparent in future.

Ms Diplock said that the Commission would continue to use the surveillance cycles to educate companies about the greater transparency requirements under the NZ IRFS, but that directors were personally responsible to ensure that financial statements told an entity's story completely and transparently.

“Company directors should remember that they can be prosecuted under the Financial Reporting Act if their company publishes non-compliant financial statements. If misleading financial information is published in a prospectus, directors can also face prosecution under the Securities Act” she said.

ENDS

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