Feltex auditor breached accounting code: tribunal

Feltex director Peter Thomas and chairman Tim Saunders. Photo / Dean Purcell

Gordon Fulton, the New Zealand partner of Ernst & Young who signed off a review of the 2005 six month accounts of failed carpet maker Feltex, has been found guilty of a charge of breaching an accounting industry code of ethics.

A Disciplinary Tribunal of the New Zealand Institute of Chartered Accountants found Fulton guilty of the charge of breaching the institute's code of ethics in a decision published today.

The tribunal is not imposing a penalty.

"In our view the finding of guilt together with the considerable level of present and prospective publicity is in itself a sufficiently punitive result and gives appropriate effect to the institute's responsibility to maintain professional standards," the tribunal said.

The Securities Commission had earlier said it did not consider the work done by Ernst & Young and the responsible partner Fulton, in their review of the accounts to December 31, 2005, met the required standards of a review engagement.

It referred the matter to the institute.

Feltex went into receivership in September 2006 and then into liquidation, leaving 8000 shareholders who had invested $254 million in its public float just two years earlier holding worthless shares.

Today's report noted that a review engagement was not an audit and that the review of the accounts published on February 20, 2006 was unqualified.

Feltex had moved it head office to Melbourne but because the Feltex directors wished to "do everything feasible to reinforce Feltex as an iconic Kiwi brand" it was arranged that the review would be signed by Mr Fulton, enabling Feltex to have a review report with a New Zealand letterhead.

All the work relating to the review was carried out by Ernst & Young Australia under the supervision of Australian partner Stuart Painter.

Fulton accepted that he was professionally responsible for the engagement.

The tribunal accepted that Mr Fulton was entitled to place considerable reliance on Painter and Ernst & Young Australia.

The tribunal said the level of enquiry made by Fulton fell short of standards required by the institute.
Fulton was "on notice" of possible breaches of banking covenants with ANZ and he had an obligation to make specific inquiries to satisfy himself regarding the firm's banking arrangements.

He did not make such inquiries.

Fulton is a former chairman of the board of Ernst & Young New Zealand.

He spent two years in Cleveland in the United States directing the development of computer-based tools and audit techniques for the worldwide Ernst &Young firm and is a former audit partner in the London office.

- NZPA