Published 21 October 2009
Securities Commission chairman Jane Diplock issued a warning to company directors this week, saying the commission’s latest surveillance cycle of 20 companies’ financial statements showed a widespread lack of transparency.
She warned company directors not to sign off financial statements that don’t comply with New Zealand international financial reporting standards (NZ IFRS) because they could be failing in their duty to inform investors.
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 judgments 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 judgments about asset valuations.
"We are also concerned about the lack of transparency in related-party disclosure, particularly where directors & 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 6 companies asking for explanations.
"The high level of unexplained expenses in financial statements is another matter requiring attention. In this cycle, we wrote to 5 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.”
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Attribution: Commission release, story written by Bob Dey for the Bob Dey Property Report.