Ernst & Young partner guilty of Feltex books breaches

Director Tim Saunders was acquitted last month. Photo / Dean Purcell.

An Ernst & Young audit partner has been found guilty of accounting breaches and ordered to pay $150,000 in costs after approving Feltex's six-month review to December 2005 which failed to disclose the company's debt with lender ANZ.

The Securities Commission alleged that work conducted by the firm and the responsible partner, Gordon Fulton, failed to meet the required standards of a financial review, and referred the case to the New Zealand Institute of Chartered Accountants.

The institute found Fulton guilty of breaching the institute's code of conduct, which included failing to reasonably plan his work to enable him to conduct an effective review, failing to correctly direct, supervise and review work delegated to junior staff and signing a review that asserted nothing had come to the firm's attention regarding the company's financial position or performance that should be disclosed.

The institute said that although the firm and Fulton had failed in their duties, the Feltex directors were responsible for its interim financial statements and the review was mainly performed by the firm's Melbourne office and by audit partner Stuart Painter.

Therefore, the institute did not impose a penalty on Fulton, saying "the finding of guilt together with the considerable level of present and prospective publicity is in itself a sufficiently punitive result".

The institute added that Fulton had an "unblemished record" and there had been no "deliberate deception or wilful misconduct involved".

But he was ordered to pay $150,000 in costs for the hearing of the Disciplinary Tribunal and the investigation by the Professional Conduct Committee.

Fulton was the Ernst & Young partner responsible for the company's audit work before it moved its head office to Melbourne.

Because of this, and Feltex's acquisition of United States company Shaw Carpets, Melbourne-based Painter took over the majority of the work and was responsible for maintaining contact with Feltex management.

Because Feltex wanted to reinforce the company as a New Zealand brand, the half-year review was signed by Fulton not Painter, even though the work was conducted in Melbourne.

The firm and Fulton's breaches came to the commission's attention while it was investigating the company's directors who were later charged with alleged breaches of the Securities Act for registering the half-year interim review to December 2005.

The directors, Tim Saunders, John Feeney, John Hagen, Peter Thomas and Peter David Hunter, were acquitted late last month.

The commission said Ernst & Young and Fulton had failed to disclose the company's debt in the review, it had failed to disclose that Feltex had breached its banking covenant and it had failed to understand the status of the banking relationship between the company and ANZ.

The commission alleged the directors also failed to disclose that Feltex was in breach of its A$100 million ($122.2 million) loan deal with ANZ and that it incorrectly classified its debt with the bank as non-current.

The debt should have been classified as current, meaning it was on call.

The directors conceded that those details were not included in the company's interim financial report to December 31, 2005, but say that when they signed the documents they believed the statements complied with the reporting standards and disclosure laws for a listed company.

During the trial the defence argued that it was Feltex's auditors Ernst & Young who failed in their professional duties and not the company's directors.

The directors voluntarily paid Ernst & Young A$113,000 to conduct a review of the statements. The firm did not pick up the disclosure breaches and also assured the directors verbally that the statements were compliant with all the necessary standards.