Securities Commission report on investor disclosure

The Securities Commission has published a report on Cycle 1 of its broad financial reporting surveillance programme, which is reviewing the standard of financial reporting by New Zealand public securities issuers.

One of the functions of the Securities Commission is "to keep under review practices relating to securities, and to comment thereon to any appropriate body". The Commission has therefore been undertaking a general review of financial reporting standards.

Cycle 1 of this surveillance programme involved a review of the financial reports of 40 public issuers, in order to ascertain the level of compliance with the Financial Reporting Standards and New Zealand Generally Accepted Accounting Practice (NZ GAAP), and to assess the overall quality of the reporting.

The Securities Commission's report on Cycle 1 has now been provided to the market to give specific guidance on the Commission's expectations for disclosure. Although the report concludes that only two issuers had serious problems with their reports, 16 other issuers had some shortcomings in their reports that needed to be addressed.

The report observes that the nature of many of the matters raised suggests that issuers should consider:

1. whether they have been sufficiently transparent in their disclosures;
   
   
2. whether they could pay greater attention to detail in complying with some of the ancillary financial reporting disclosures (e.g. disclosures in respect of financial instruments and related party disclosures); and
   
   
3. whether they could better manage some of the year-end processes for finalising the annual report (noting that the annual report, comprising the financial report and other statutory disclosures, should be reviewed before being dated and signed by the directors, and auditor sign-off should follow signing of the financial report).

In particular, it was noted that some disclosures simply raised further questions, which could have been avoided by more clarity and openness.

The report also identifies some inconsistencies discovered by the Cycle 1 review in substantial security holder disclosures and some potential gaps or delays in continuous disclosure notices. These issues were referred to the NZX.

Further surveillance is expected before the end of the year, and enforcement action could follow if breaches of disclosure requirements are revealed. Later review cycles will, in particular, look at adjustments made by issuers as they move towards New Zealand Equivalents to International Financial Reporting Standards.

For more information, see www.sec-com.govt.nz.

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