Big private firms in spotlight

Publicity shy private equity firms and other big privately held companies are among "economically significant" entities that may be forced to open their books to public scrutiny following a wide-ranging review of the financial reporting framework taking place at present.

The review looks set to rekindle the debate which accompanied proposals four years ago to force large private businesses to file financial reports.

While some commentators say such disclosure is society's "quid pro quo" for the benefits private incorporated entities enjoy, business people facing the prospect have in the past derided it as "nonsense" and "socialistic".

The Ministry of Economic Development (MED) late last month released a document seeking submissions on a series of proposals stemming from its review of the statutory framework for financial reporting.

The MED's Geoff Connor said yesterday that the review was a wide-ranging one which had "inevitably" raised questions around financial reporting requirements of "economically significant" private entities.

"The essence of the argument is that when large entities fail, it comes out of the blue and tends to have quite a harmful effect on a lot of people.

"If you think about creditors, people who pay for services and goods in advance and employees who have some of their remuneration delayed till later years, they are in effect providing capital to companies ... therefore there should be the same accountability as there is for people who seek money direct from the public in an IPO or whatever. We just want to see whether people agree with that proposition or not."

The MED looked at the question in 2005, although this time around it has widened the scope of the proposal, asking for comment whether large partnerships, such as law firms or accountancy practices, should be included.

It has also proposed a "grandfathering" provision as Australia did when it introduced similar requirements in 1995 which exempted entities incorporated prior to the enactment of relevant legislation.

At first blush, that would appear to let a number of entities, including some associated with the wealthy families who vehemently opposed similar proposals previously, off the hook.

When then-Commerce Minister Pete Hodgson rejected the proposals Neil McKay of Todd Corporation - a business interest of the Todd family - said the company saw the decision as "consistent with fundamental principles of New Zealand business, being privacy and commercial confidentiality".

Independent Fisheries director Mike Dormer said the decision amounted to a victory for "commercial common sense" over proposals that were "nonsensical" and "socialist".

Yesterday however, former head of accounting at Canterbury University Alan Robb said he saw merit in requiring significant economic entities to have some accountability to the public.

"In many cases they expect some sort of support and I think there's a social obligation to make some information available." He said key information was primarily the amount of tax and wages paid.

"People should see whether significant economic entities are contributing to the tax base of the economy or whether they're beneficiaries of it."

His former colleague Sue Newberry, now associate professor of accounting at the University of Sydney, also supported greater disclosure as "society's quid pro quo for granting the benefits of incorporation".

But Chapman Tripp partner Pip England, whose firm helped clients prepare submissions opposing the 2005 proposals and which is likely to be directly affected if the latest suggestions were adopted, saw the proposals as "a very bad idea".

"The fact that the information is disclosed is not necessarily going to lead to the result they are anticipating, or a more robust financial market."

He also believed the proposals may give "an unfair advantage" to smaller companies over their big privately owned rivals.

OPENING UP
* The MED has proposed that large private companies and partnerships should have to file public financial statements each year.
* It defines "large" as being entities that have any two of the following criteria: total assets of $10m or more; annual revenue of $20m or more, 50 or more full-time staff.
* Similar proposals were dropped in 2005 after vociferous opposition from interests associated with some of New Zealand's richest families.
* This time MED is proposing a "grandfathering" mechanism which would exempt existing "large" entities.