Annual reports: could do better

Close examination has revealed some company reports don't obey disclosure rules and are selling investors short. Photo / Greg Bowker

Changes in accounting requirements last year have put additional pressure on companies to get annual reports right, the Securities Commission says.

And a random sample reviewed by the commission has shown that many didn't.

Yesterday the commission released its final Review of Financial Reporting by Issuers March 31, 2010 - July 31, 2010, which stressed that companies must keep up to date with changes in financial reporting.

The report sampled 25 unnamed companies, 14 of which were listed on the New Zealand Stock Exchange, and raised a number of issues with the companies relating to amendments to financial reporting standards, and in particular to changes in financial instruments reporting.

The commission wrote to 17 of the 25 sampled companies (68 per cent), on a variety of issues such as inadequate disclosure of assumptions used in valuing investments and derivatives, non-disclosure of fees paid to auditors for non-audit services, and failure to provide separate financial statements for segregated funds within a scheme.

The commission is still discussing two matters with a company, but none of the issues raised with the others has warranted action or referral to other regulatory bodies.

Financial reporting was a "dynamic process", the commission said, and the importance of particular disclosures, changes and standards continued to evolve.

"Issuers [companies] must stay on top of developments and tailor disclosures to ensure they disclose their business activities coherently and transparently."

The commission said the reports were designed to encourage high-quality financial reporting.

"This enhances the credibility of the financial information that issuers provide, thus strengthening investor confidence in the New Zealand securities market."

Since 2005, the reports have used persuasion and education to improve financial reporting quality.

The commission added this was especially important during New Zealand's adoption of the International Financial Reporting Standards, which replaced the Generally Accepted Accounting Principles.

The reports, the commission said, had allowed it to interact regularly with companies and auditors and highlight areas where reporting was deficient and could be improved.

General compliance had improved but there was still "considerable" scope for improving financial reporting.

The report stated that companies needed to keep refining financial reporting to ensure it was coherent, consistent, clear and concise in order to be transparent.

"Transparency isn't just a buzz word or a cliche. It's a fundamental and absolutely essential attribute of sound financial markets. Relevant, trustworthy and timely information is the oxygen of financial markets.

"Depriving markets of such information - or polluting the information - can have very adverse consequences."

From Monday, the New Zealand market will be regulated by the new Financial Markets Authority.