Governance: NZ Securities Commission's warning to directors: audit is not enough

Securities Commission Chairman Jane Diplock said the Commission's latest surveillance cycle of 20 companies' financial statements has shown a widespread failure to fully disclose matters that must be made plain.

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.

Banks and other financial services groups are in the firing line: Mrs 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.

And she took aim at something both we and our sister publication BankingInsuranceSecurities.Com have often taken issue with: the value of goodwill appearing in balance sheets: "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."

"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" Diplock said in a statement issued this morning.

And she made it plain that audit statements are not enough to save directors when saying that directors are personally responsible to ensure that financial statements told an entity's story completely and transparently.