Ernst & Young hired to ensure compliance with new reporting standards, court told
Tim Saunders, the former chairman of carpet-maker Feltex, said Ernst & Young "slipped up" in its review but conceded his finance team did not pick up the mistakes either, the Auckland District Court heard yesterday.
Directors Saunders, Peter Thomas, John Feeney, John Hagen and Peter David Hunter are defending allegations Feltex's half-year accounts to December 31, 2005 did not disclose it was in breach of its loan agreement with ANZ.
They have pleaded not guilty.
The accounts did not include that the company was in breach of its loan agreement and did not classify its debt as current, meaning it was on call.
Saunders said he believed the company's auditor, Ernst & Young, should have "picked those issues up" as they were the experts on the newly-adopted, international financial reporting standards (IFRS).
Saunders said Ernst & Young was paid to review the company's statements to ensure compliance was met and they "slipped up".
Judge Jan Doogue questioned Saunders on this: "Didn't your management slip up? You didn't join the dots in your own organisation. You'd have to concede that."
Saunders said the finance team may not have been up to speed on all the IFRS requirements as it was the first time they were being applied to the company's accounts, and Ernst & Young was hired to review the statements and also educate Feltex's staff on the IFRS standards.
"Tolan [Feltex's chief financial officer] had a huge amount on his plate, I'm not making excuses, but there is a limit to what a CFO can do. He conceded there were mistakes made. The finance team was always a diligent and competent department. Why did they slip up this time? I go back to Ernst & Young," he said.
Saunders said because they were changing from one accounting regime to another, Ernst & Young were hired to see the changes through. "The reason we brought Ernst & Young in was to ensure we were compliant and the directors relied on that."
Hunter also took the stand yesterday. Apart from being a director he was also the chairman of the company's internal audit committee that worked closely with Ernst & Young on the application of IFRS.
Hunter said at the time the statements were prepared he was unaware of the two standards the company failed to include - the breach of its loan agreement and the classification of its debt.
Prosecutor Brian Dickey questioned whether Hunter should have known this and whether a person reading the company's accounts would assume he was schooled up on IFRS.
Hunter said a person reading the accounts could assume he had a reasonable knowledge of IFRS, which he did, but not a specific knowledge.
He said this was why Ernst & Young were hired to assist the committee.
A review of interim statements is voluntary.
The case continues.
