Liam Dann: Allied Farmers' audit shows need for reform

Allied Farmers managing director Rob Alloway. Photo / Dean Purcell

Last week I wrote that the NZX should carefully consider whether to accept Allied Farmers' audited accounts.

The accounts were signed off by PricewaterhouseCoopers (PWC) but came with big caveats which meant shareholders didn't really get any meaningful assurance about the state of the company.

The NZX has since been in touch to point out it has no legal power to reject a set of accounts once they have been signed off by an auditor.

This is a shame and highlights once again the way the interests of investors in this country fall through regulatory cracks.

To recap, PWC said it couldn't "obtain sufficient audit evidence upon which to form an opinion whether application of the going concern assumption remains appropriate". In other words, they hadn't seen enough to say for sure whether the company had a viable future.

The auditor also said it was unable to form an opinion on whether the accounts complied with generally accepted accounting practice in New Zealand or international standards.

Then it said it couldn't form an opinion of whether the accounts actually "give a fair and true view of the company's financial position as at June 30".

That pretty much covers PWC as far as any liability for the accounts goes. But it doesn't help investors at all.

The reason that stock exchange rules require accounts to be independently audited is so investors can be confident they have an accurate picture of a company's health.

PWC's caveats devalue the whole process. The firm could have opted not to sign off - but it didn't.

So what next? What can the NZX do to ensure that investors are getting the appropriate information from its issuers? Very little, as it turns out.

An NZX spokesperson says: "The correctness of audited accounts is not something over which NZX has any jurisdiction under regulation or law. A matter such as this comes under the Financial Reporting Act and the Companies Act, over which the MED [Ministry of Economic Development] and the SFO have jurisdiction."

The NZX can take action only when reports are filed late or when wrong documents are filed.

The spokesperson does note that: "If we identify deficiencies (ie, missing information) we write to the issuer and, in very serious matters, refer it to the National Enforcement Unit."

As is consistent with NZX policy on these matters, the exchange declined to make any comment on whether it has either written to Allied or forwarded any concerns to another regulatory body.

It is questionable, though, whether another regulator is best placed to deal with this kind of problem.

No one is suggesting that thelack of information in the accountsis fraudulent or in any waycriminal.

Allied Farmers is simply a company fighting hard to rebalance itself against a backdrop of very difficult economic conditions.

But it is a listed company and going through tough times shouldn't give it an exemption from fully disclosing its financial position to a standard which allows investors to have faith in its status as a going concern.

The NZX - as front-line regulator - is probably best placed to deal with its own listed companies quickly and efficiently.

But, to be fair to the exchange, it is not set up to act as auditor so expecting it to make subjective judgments about the quality of accounts is problematic too.

None of which gets the investor any closer to the certainty they deserve about company information. Those charged with reforming our regulatory system clearly face some very big challenges.

www.twitter.com/liamdann