Huge pressure on company advisers, says expert

Cathy Quinn. Photo / Sarah Ivey

There is "massive pressure" on professional advisers to ensure the information they give clients is accurate and this existed even before the Feltex decision, a legal expert says.

Minter Ellison Rudd Watts chairwoman Cathy Quinn said yesterday's judgment in favour of Feltex's five former directors - Tim Saunders, Peter Thomas, Peter David Hunter, John Hagen and John Feeney - showed a board can and should be able to rely on the expert advice of legal teams and accounting firms.

"There is massive pressure on professional advisers. Clients expect us to perform to the highest standards. In this case they [directors and Ernst & Young] were learning the ropes [under new reporting standards]. Unfortunately, the case was brought on a very technical area."

The directors were charged for alleged breaches of the Financial Reporting Act (FRA) for not disclosing certain information under International Financial Reporting Standards (IFRS).

Feltex was an early adaptor of these standards, which were introduced around the globe to harmonise accounting standards, and hired Ernst & Young to conduct a review of the accounts to ensure they were compliant.

The Crown alleged the directors failed to report it was in breach of its A$100 million ($124 million) loan with ANZ and that its debt with the bank was current - meaning it was on call - in the company's interim financial statements to December 31, 2005.

The directors concede that at the time they signed and registered the documents they believed the accounts met all the necessary standards and requirements.

Feltex paid accounting firm Ernst & Young A$113,000 to conduct a voluntary review of the listed company's half-year accounts. The firm, like Feltex's own finance team, did not pick up the disclosure mistakes.

The directors core defence against the Companies Office charges was that they relied on the professional advice of Ernst & Young and they took all reasonable steps to ensure the accounts were correct.

Quinn said the complexity of listed companies and disclosure requirements made it impossible for directors to do everything, adding that the notion directors should do everything themselves and oversee every part of a company is "completely ridiculous".

"The board employs and monitors the chief executive and endeavours to manage the company correctly. If the company performs well, it is to the benefit of the shareholders.

"Directors are entitled to seek and rely on professional advice. This was the fundamental defence under the Companies Act."

Institute of Directors chief executive Nicki Crauford said the risks associated with being a director of a listed company could be enough to deter people from such positions as there are "easier ways to make money".

"A couple of the [Feltex] directors said this case has caused long-term damage to their reputations," she said. "They were found not guilty but you're never found innocent. Is it [being a director] worth that kind of risk?"

Auckland District Court judge Jan Doogue said: "Directors are entitled to rely on advice where appropriate conditions are satisfied. It can be seen that the 'they should have done it themselves' proposition is utterly unrealistic. It also demonstrates why reliance on advice, where appropriate conditions are satisfied, does not detract from, but enhances, the quality of directors' duties."

Ernst & Young declined to comment on the case.