Nick Main: Disclosure rules will bring NZ into line

Proposed new rules requiring private companies to publicly disclose their financial statements are overwhelmingly opposed by businesses, judging by the block of submissions recently made public.

The proposals stem from a fundamental review of the Financial Reporting Act by the Ministry of Economic Development. The public disclosure issue is just one of the issues covered by this review but is the focus of these comments.

A total of 172 submissions were received in relation to the current review. Many are not public. But of those that are, a significant number are against public disclosure.

The public disclosure debate, centres on two competing views:

* The argument that stakeholders such as creditors, employees and customers should have full access to financial information of businesses that have taken the privilege of limited liability.

* Arguments around respecting personal privacy and commercial sensitivities.

There are also issues around the imposition of further compliance costs on business and the position taken by other developed countries on disclosure.

Numerous submissions come from private entities opposing the ministry's "preferred" approach of requiring large, economically significant entities to file their financial reports on a public register.

As expected, personal privacy and commercial confidentiality were the most common concerns raised by affected businesses.

Other submissions support the ministry's "preferred" approach, pointing out that the purpose of financial statements is to provide information to those unable to contract for it, and mandatory filing would ensure the flow of financial information.

Most of these submissions came from entities with public ownership that already have to file financial statements. It could be said that such entities would only gain by further disclosure from competitors. They include academics and some accountancy firms.

For many businesses the issue was particularly contentious.

Submitters said public disclosure of such information could damage them commercially and, in the case of closely held entities, be an unwarranted intrusion on the privacy of shareholders.

Many felt that the main beneficiaries, if the proposals were to proceed, would be a company's competitors and curious members of the public. Legitimate stakeholders are able to obtain the required information from other sources anyway.

Although appreciating the ministry's desire to adopt the "preferred approach" to align New Zealand's financial reporting environment with Australia, many submitters felt any change should be based on sound principles of public interest and not politically motivated.

And given that Australian reporting requirements themselves are currently under review, now is not the best time to be seeking transtasman harmonisation anyway.

Last year Commerce Minister Margaret Wilson said the aim of the review was "to ensure New Zealand's financial reporting regime is tailored to the country's unique environment and strikes a balance between the costs and benefits of financial reporting".

Clearly, in view of the concerns expressed by the submitters, a better job needs to be done on demonstrating this balance.

But let me put down a challenge. The arguments come from a position that the status quo is the proper starting point and any change has to be justified.

But New Zealand is out of step with the rest of the world. The ministry's paper elsewhere has proposed changes which are not based on a smoking gun, a disaster in capital markets or evidence that the current system has failed.

Instead, the proposed changes are in order to demonstrate that the markets operate in an organised and controlled manner and have features that would be expected in a developed country.

We need to be wary of always thinking that we have got it right and the rest of the world wrong.

Secrecy has a bad name as it always raises the question, what do you have to hide?

Perhaps the rebuttable presumption should not be the continuance of the status quo but that rules that have been shown to work in similar countries should be adopted.

A unique aspect of New Zealand's business environment is the large number of small- and medium-sized enterprises that form its backbone.

Such companies make a significant contribution to the country's growth and competitive advantage because of the risks they take and innovation they bring.

According to many companies that made submissions, this is likely to be seriously jeopardised if the public disclosure proposals proceed.

I am not convinced I have seen any overwhelming arguments that this is the case. From the information provided it is therefore very difficult to see that the assumed public benefit of such disclosure is outweighed by the cost to both the company and its shareholders

It is also worth noting that many large companies likely to be affected were apparently not aware of the proposals and therefore were not in a position to submit their views.

Officials are set to make their recommendations to the minister, who will then report to the public on conclusions reached later this year.

My view is that despite the balance of the submissions there is still a need for change on the basis of alignment to practice in other developed countries. But the issues raised are real. They are not able to be dismissed with the arguments that have currently been provided for debate in the public arena. It has still not been made clear what the problem is that needs to be solved.

Entities raising money from the public are subject to a rigorous disclosure regime and specific legislation deals with the interests of the Inland Revenue.

But let's not wait until there is a crisis. Let's continue to improve the legislative environment in which our businesses operate.

* Nick Main is chief executive of Deloitte.