REVIEW OF FINANCIAL REPORTING BY ISSUERS - CYCLE 4

RESULTS OF THE REVIEW

17.

As with the previous Cycles few serious problems were identified in the Cycle 4 review but some issuers should raise the standard of their financial reporting.

18.

Most of the identified shortcomings can be remedied by greater attention to detail in respect of the requirements of NZ GAAP when compiling financial statements.

Follow-up Action

19.

In Cycle 4, reports of 17 issuers had matters that the Commission considered should be addressed. Letters were sent to these 17 issuers asking them to clarify matters, and/or to address specific shortcomings when preparing their next financial reports.

20.

The Commission's approach is to write to issuers whose reporting raises matters of significance. A matter is considered "significant" if it is considered of regulatory importance and further clarification or information is needed. For example, where a matter:

a.

appears to be wrong;

b.

does not appear to make sense;

c.

is not clear and lacks transparency;

d.

seems unusual or irregular;

e.

raises questions about its validity; or

f.

has insufficient explanation.

21.

In some cases the disclosures raised questions which prompted the Commission to seek further explanation. Some responses from issuers explained the situation, indicating that the questions would not have been raised had the issuer's original disclosure been clearer or more transparent.

22.

In the letters on significant matters any minor matters were also drawn to the attention of the issuer. Our policy is that we do not write to issuers whose reports raised only minor matters other than if the number of minor matters is so numerous that, taken together, their effect is potentially significant with regard to the integrity of the financial statements.

23.

In each case a copy of the letter was also sent to the issuer's auditor. This practice acknowledges the role that auditors have in helping to maintain and improve the standard of financial reporting in New Zealand. 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.

Outcome of Matters Raised

24.

Thirty-three percent of the matters raised in letters to issuers were viewed by the Commission as significant.

Table 1: Percentage of matters raised that are considered significant
	Cycle 1	Cycle 2	Cycle 3	Cycle 4
Significant matters	52%	29%	39%	33%

The Commission's definition of a "significant" matter is in paragraph 20 above.

25.

Table 2 shows the outcome of matters raised with issuers.

Table 2: Outcome of matters raised in letters to issuers
Notes	Outcome	Significant	%
(1)	Resolved	9
(2)	Point taken/change agreed	14
	Agreement reached	23	85%
(3)	Second letter sent	1
(4)	Other follow-up action	3
	Further follow-up action taken	4	15%
	Total matters raised	27

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 subsequent 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.

26.

Satisfactory agreement was reached with issuers on 85% of significant matters raised. Three significant matters are being followed up separately.

27.

It is encouraging to see that the number of instances of failure to date and/or sign the financial report had decreased. The Cycle 4 review found only one instance of such non-compliance.

Table 3: Instances of failure to date/sign the financial report
	Cycle 1	Cycle 2	Cycle 3	Cycle 4
Number of instances	3	4	1	1

28.

The number of instances of failure to disclose the total recognised revenues and expenses lines in the Statement of Movement in Equity had also decreased. Cycle 4 review found only two instances of this non-compliance.

Table 4: Instances of failure to disclose TRRE line
	Cycle 1	Cycle 2	Cycle 3	Cycle 4
Number of instances	4	6	6	2

29.

Apart from the matters noted in paragraphs 27 to 28 above, other significant matters noted are generally of a different nature from those in previous Cycles.

30.

We have split feedback of our findings into:

(a)

findings under NZ IFRS;

(b)

findings under previous NZ GAAP; and

(c)

market matters: NZX referrals

For the purposes of this report, the Commission has used the term 'previous NZ GAAP' to mean the basis of accounting that an issuer uses for preparing historical financial information before adopting NZ IFRS.