Feltex accountants didn't know firm had breached loan

Former Feltex chairman Tim Saunders. Photo / Dean Purcell

The accounting firm that reviewed Feltex's financial statements said it did not know the carpet-maker was in breach of its loan with ANZ because the company said it had the bank's "full support".

Ernst & Young's review of the statements for the six-month period to December 31, 2005, were discussed in detail at the Auckland District Court yesterday.

Feltex's five directors are in court defending allegations the company's half-year accounts to December 31, 2005, did not disclose it was in breach of its loan agreement with ANZ.

The directors, Tim Saunders, John Feeney, Peter David Hunter, Peter Thomas and John Hagen, each face two charges under the Financial Reporting Act for allegedly failing to disclose proper financial records for the six-months to December 31, 2005. They have pleaded not guilty.

Ernst & Young conducted an interim review of Feltex's financial statements for the period in question but did not perform an audit.

The accounting firm also advised Feltex on the newly-adopted international financial reporting standards and assisted the company's internal steering committee that was established to ensure it met compliance.

Painter said a review was based on inquiry and analytical diagnostics and at the time the statements were prepared the firm was not aware Feltex was in breach of its facility.

Defence lawyer, Alan Galbraith, QC, said Ernst & Young had "clearly got it [the review] wrong".

Painter said this was not the case and that at the time the review was conducted all the information that was provided to the firm was included in the statements.

He added that Saunders' confirmation that the company had the bank's full support at its annual meeting on December 1, 2005, had lead the firm to believe there was no breach.

"I believe we did everything expected of us at the time. I believed it [the breach] had been waived and therefore we had done everything we could at the time," Painter said.

The directors say if they had been aware the records had not met required standards, they would have done everything in their power to ensure the records were compliant.

Feltex paid Ernst & Young A$25,000 ($33,000) to conduct the review of its financial statements for that period. The trial continues.