Financial Reporting Surveillance Programme. Review of Financial Reporting by Issuers Cycle 9 [2009] NZSecCom 5 (1 August 2009)

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EXECUTIVE SUMMARY ..................................................................................................... 2

INTRODUCTION....................................................................................................................3

CYCLE 9 FINDINGS .............................................................................................................. 3

Scope and issuer selection ................................................................................................... 3

Overall comments on Cycle 9.............................................................................................. 3

Outcome of matters raised ................................................................................................... 4

Specific comments on Cycle 9 findings .............................................................................. 5

Financial instrument disclosures........................................................................................ 5

Related party information and key management personnel compensation ....................... 7

Impairment of assets .......................................................................................................... 8

Significant judgements and estimates ................................................................................ 9

Miscellaneous matters...................................................................................................... 10

Market matters................................................................................................................... 11

CONCLUSION ......................................................................................................................12

ONGOING REVIEW AND ENFORCEMENT .................................................................. 12

APPENDIX 1: BACKGROUND TO THE SECURITIES COMMISSION’S FINANCIAL REPORTING SURVEILLANCE PROGRAMME .................................... 13

The Commission’s Financial Reporting Surveillance Programme...................................... 13

New Zealand Generally Accepted Accounting Practice...................................................... 14

Selecting issuers ................................................................................................................... 14

Identifying matters and taking action .................................................................................. 15

The Securities Commission of New Zealand has completed Cycle 9 of its Financial Reporting

The Commission reviewed the annual reports of 24 issuers, with balance dates from 30 June

The overall quality of financial reporting by issuers in Cycle 9 was satisfactory. Notwithstanding that financial reporting was generally good in many areas, in Cycle 9 the Commission continued to find inadequacies in matters that were previously alerted to issuers in our news releases and in previous public reports.

Thirty-two percent of all matters raised with issuers in Cycle 9 were resolved through further information and clarification. In 65% of matters raised issuers agreed to revise or enhance disclosures in their future financial statements (change agreed). In the remaining case subsequent correspondence was entered into with the issuer to close the matter off by reiterating the Commission’s comments (second letter).

The Commission will follow up and review the next annual reports of those issuers who have agreed to make the necessary changes to ensure that those matters raised have been taken into account.

None of the matters identified, and already dealt with, warranted the Commission taking any enforcement action or making any referrals to any other appropriate body.

Comprehensive, transparent and timely financial reporting is essential to restore investor and market confidence in the securities market. In this respect our reviews indicate there is still scope for improvement. In particular the Commission urges issuers to pay specific attention to their disclosures relating to financial instruments, impairment of non financial assets and valuation assumptions ensuring that these disclosures are comprehensive and transparent.

1. The Securities Commission’s Financial Reporting Surveillance Programme (FRSP) is an ongoing surveillance programme. This report sets out findings from Cycle 9 of the FRSP.

2. Appendix 1 sets out the background to the Commission’s FRSP, including how issuers are selected for review and how matters are dealt with when identified.

3. In Cycle 9 the Commission reviewed the annual reports of 24 issuers with balance dates from 30 June 2008 to 31 December 2008.

(a) 13 issuers listed on the equity security market (NZSX) of NZX Limited (NZX); (b) 4 issuers with debt listed on the debt security market (NZDX) of NZX;

(e) 1 issuer listed on both the NZAX and the main board equity security market of the Australian Stock Exchange (ASX);

5. No issuer from Cycle 8 was reselected for review. Three financial institutions were selected for review.

6. Of the financial statements reviewed, 23 were prepared under NZ IFRS and one under

7. The Commission considers that issuers’ overall compliance with NZ IFRS is satisfactory. Notwithstanding that compliance with NZ IFRS was generally good in many areas, in Cycle 9 the Commission continued to find inadequacies in matters that were previously alerted to issuers in our news releases and in previous public reports. These matters include:

(b) related party information, in particular, key management personnel compensation;

¹The number of issuers reviewed in Cycle 9 is less than previous cycles due to the lower number of issuers with a December balance date.

(d) significant judgements, key assumptions and major sources of estimation uncertainty; and

8. Seventeen of the 24 issuers’ annual reports reviewed contained matters that prompted the Commission to write to the issuers. In writing to the issuers on the 31 matters raised, the Commission also drew the attention of those issuers to 26 other matters.

Notes	Table 1: Outcome of matters raised Outcome	Matters raised ²	%
(1)	Resolved	10
(2)	Point taken/change agreed	20
	*Agreement reached*	30	97%
(3)	Second letter sent	1
(4)	Other follow-up action	0
		1	3%
	Total matters raised	31	100%

(1) Resolved: a satisfactory explanation was provided by the issuer on the matters raised.

(2) Point taken/change agreed: the issuer has acknowledged the point made/agreed to make changes in subsequent financial statements.

(3) Second letter sent: a second or subsequent letter closed the matter but reiterated the points made.

(4) Other follow-up action: more action required, e.g. the need for subsequent correspondence to seek answers to follow-up questions.

10. The Commission again notes that the responses from issuers explained and clarified many of the matters raised. The Commission is pleased with the high percentage of agreement reached with issuers based on the initial letter.

11. However, the Commission continues to remind issuers to ensure that all disclosures are sufficiently transparent, complete and coherent to explain matters included in their financial statements.

12. The Commission will follow up and review the next annual reports of the issuers to ensure that matters raised with them previously have been taken into account.

²The matters raised exclude the instances where the Commission had written directly to audit firms and/or directors of issuers.

14. Financial instrument³disclosures continue to be a problem area. In the current environment these disclosures are particularly important to enable users to assess the liquidity, market and credit risks of an entity’s financial instruments. However, some entities fail to make all the disclosures required by NZ IFRS 7 Financial instruments: disclosures. In particular, the Commission wishes to highlight the inadequate disclosures relating to liquidity risk and fair value assumptions.

15. We have observed over recent cycles that some financial institutions are failing to comply with all the liquidity risk disclosures required by NZ IFRS 7.

16. All entities are required to disclose for each type of risk arising from financial instruments, including liquidity risk, summary quantitative data about their exposure to that risk at the end of the reporting period. This disclosure must be based on the information provided internally to key management personnel, for example the entity’s board of directors or chief executive officer (NZ IFRS 7, paragraph 34).

³Financial instruments include financial assets and financial liabilities. Examples of financial assets include cash, shares in other entities, trade receivables and derivatives that are ‘in the money’. Financial liabilities include trade payables, loans received, and derivatives that are ‘out of the money’.

These disclosures are intended to provide a useful insight into how the entity views and manages risk.

17. In addition, financial institutions must comply with Appendix E of NZ IFRS 7.

Appendix E (paragraph 20) requires that in the absence of sufficient information regarding liquidity risk, financial institutions that manage their liquidity risk on the basis of expected maturity dates are required to provide an analysis of financial instruments on this basis.

18. Besides the liquidity risk disclosures in NZ IFRS 7, we also draw issuers’ specific attention to another liquidity-related disclosure requirement. NZ IAS 1 Presentation of financial statements (paragraph 61) requires all entities to disclose, for each line item presented in the statement of financial position, the amount expected to be recovered or settled within and after the twelve months following the end of the reporting period.

19. For some entities the contractual maturity analysis required by NZ IFRS 7 (paragraph 39) may represent similar information to that used by key management personnel to manage their liquidity risk. However, we expect that most financial institutions manage their liquidity risk on the basis of the expected maturities of their financial instruments. For example, where a financial institution has a significant proportion of deposits that are repayable on demand but are not expected to be withdrawn in the near future. Therefore, the quantitative liquidity risk disclosures of financial institutions should, in addition to the contractual maturity analysis, disclose the expected maturities of their financial instruments.

20. The Commission has observed that many financial institutions do not provide any quantitative information other than a contractual maturity analysis. The Commission considers this non-disclosure unacceptable. The issuers we have written to have agreed to make additional disclosures that reflect how they manage their liquidity risk. The Commission will review their next financial statements to ensure these disclosures have been made.

21. An entity we wrote to cited a lack of industry practice of making these disclosures.

We remind issuers that to assert compliance with NZ IFRS requires compliance with all applicable standards and interpretations. Entities should not fail to disclose required information simply because other entities are failing to do so.

22. NZ IFRS 7 (paragraph 25), with limited exceptions, requires entities to disclose the fair value⁴of each class of financial assets and liabilities in a way that permits comparison with its carrying amount.

23. NZ IAS 39 Financial instruments: recognition and measurement contains a hierarchy for determining the fair value of financial instruments. The best evidence of fair value is quoted prices in an active market (paragraph 48). If the market for a financial

⁴Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

instrument is not active entities are required to establish fair value by using valuation techniques.⁵During stressed market conditions the Commission anticipates that entities will need to increase their reliance on valuation techniques to establish the fair value of their financial instruments. This requires more judgement on the part of the issuer.

24. Consistent with this increase in judgement NZ IFRS 7 (paragraph 27(a)) requires entities to disclose:

“the methods and, when a valuation technique is used, the assumptions applied in determining fair values of each class of financial assets or financial liabilities. For example, if applicable, an entity discloses information about the assumptions relating to prepayment rates, rates of estimated credit losses, and interest and discount rates.” [emphasis added]

25. The Commission has observed that several issuers use valuation techniques to measure the fair value of their interest rate swaps. However, the issuers did not disclose the assumptions applied in determining those fair values. The disclosures the issuers made only included the method of valuation and a general reference that market interest rates were used to discount the cash flows relating to the swaps.

26. The Commission considers that the actual assumptions applied in determining the fair values of interest rate swaps should be disclosed. The Commission does not consider that general disclosures such as ‘market rates were applied’ are sufficient to meet the requirements of paragraph 27(a) of NZ IFRS 7.

27. The issuers written to have agreed to make further disclosures to comply with paragraph 27(a) of IFRS 7.

28. The Commission considers that related party disclosure is an area that still needs some improvement.

29. As with Cycle 8, the majority of instances of inadequate disclosure of related party information in Cycle 9 relate to key management personnel compensation disclosures.

30. NZ IAS 24 Related party disclosures (paragraph 16) requires certain information to be disclosed about key management personnel compensation in total and for each of the specified categories. Common errors in disclosures are:

⁵Valuation techniques include using recent arm’s length market transactions between knowledgeable willing parties, reference to the current fair value of another instrument that is substantially the same, discounted cash flow analysis and option pricing models.

31. This matter was discussed in detail in our Cycle 8 public report. However, the Commission wishes to emphasise that key management personnel includes any director of the issuer, whether executive or otherwise (NZ IAS 24, paragraph 9).

32. NZ IAS 24 (paragraph 17) requires disclosure of the nature, amounts and outstanding balances of any transactions between an entity and its related parties. NZ IAS 24 states that two entities are not necessarily related parties by virtue of having common key management personnel. However, the definition of a related party does capture entities that are controlled, jointly controlled or significantly influenced by a member of the reporting entity’s key management personnel (paragraph 9).

33. In Cycle 9 the Commission wrote to a director of an issuer who was also a member of the key management personnel of one of its suppliers. From the entity’s interests register disclosures the Commission determined that it was likely that the role of that director with the entity’s supplier gave that director significant influence within the supplier. However, the entity had not identified its supplier as a related party or provided details of the transactions between the entities.

34. The Commission reminds issuers that ‘significant influence’ only requires that the member of key management personnel has the power to participate in the financial and operating decisions of the other entity (NZ IAS 24, paragraph 9). Therefore entities should carefully consider the external roles of its key management personnel in other entities when identifying its related parties.

35. The Commission urges issuers to ensure any impairment is recognised on a timely basis and details of impairment testing are fully disclosed.

36. In Cycle 9 the Commission wrote to four issuers with regard to their impairment testing and related disclosures. The Commission was pleased to note that in each of these cases, the issuers were able to demonstrate that impairment testing had been performed. However, there is scope for improvement in the disclosures of impairment testing. This is discussed in more detail below.

37. NZ IAS 36 Impairment of assets (paragraph 9) requires that entities assess, at the end of each reporting period, whether there is any indication that any non-financial asset may be impaired. Entities also need to assess assets for impairment at the end of each interim reporting period. If any such indication exists, the entity must estimate the recoverable amount of that asset.

38. In relation to one issuer the Commission noted that events had occurred within its interim reporting period that indicated that the carrying value of one of its cash-

generating units (CGUs) and associated goodwill could be materially impaired. However, there was no disclosure of the results of any impairment testing performed in the issuer’s interim financial statements.

39. The Commission wrote to the issuer to confirm that impairment testing had been performed. We were pleased to note that the issuer had performed impairment testing at a detailed level and used independent advisers to assist in the process.

40. In complying with NZ IAS 34 Interim reporting entities as a minimum must disclose condensed financial statements and selected explanatory notes. While NZ IAS 34 does not specifically require entities to disclose any details of impairment testing performed, entities must disclose any information that is material for an understanding of the interim report.

41. Disclosure of impairment testing provides additional assurance to the users of the financial statements that assets are properly valued. In the current economic climate, the Commission encourages entities to disclose additional information in their interim financial statements of any impairment testing performed.

42. Cash-generating units to which goodwill has been allocated must be tested for impairment at least annually, as well as whenever there is an indication that the unit may be impaired (NZ IAS 36, paragraph 90).

43. NZ IAS 36 (paragraph 134) specifies the disclosures required for each CGU for which the carrying amount of goodwill is significant and impairment testing has been performed using a value-in-use calculation. These disclosures include the growth rate used to extrapolate cash flow projections and the discount rate(s) applied to the cash flow projections.

44. The Commission has observed that some entities are not making these disclosures or simply describing these assumptions generically. Unless the goodwill balance is not significant these disclosures must be provided in quantitative form.

45. In addition the Commission noted that one issuer had disclosed that goodwill was allocated to seven CGUs. However, for disclosure purposes the information required by NZ IAS 36 (paragraph 134) had been aggregated into two of the entity’s business segments. The Commission notes that the disclosures of paragraph 134 must be provided for each CGU to which the carrying amount of goodwill is significant. Aggregation of CGUs for disclosure purposes reduces the usefulness of the disclosures and is not permitted by NZ IAS 36.

46. NZ IAS 1 (paragraph 122) requires entities to disclose the judgments, apart from those involving estimations, that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements.

47. NZ IAS 1 (paragraph 125) also requires entities to disclose information about the assumptions made about the future and other sources of estimation uncertainty at the end of the reporting period, that have a significant risk of resulting in a material adjustment to the carrying amount of the assets and liabilities.

48. The disclosures required by NZ IAS 1 (paragraphs 122 and 125) are designed to draw users’ attention to the most subjective areas of the financial statements and are therefore of great importance. While NZ IAS 1 does not prescribe the format that these disclosures should take, the disclosures should be in a user-friendly format.

49. The Commission notes that these disclosures are generally not well made by issuers.

Issuers should clearly distinguish between judgements management has made in the process of applying the entity’s accounting policies and sources of estimation uncertainty. The Commission also notes that elements of some issuers’ disclosures are unnecessarily dispersed throughout the financial statements. Preferably this information should be disclosed in the same section of the financial statements. When this is not practical clear cross-references to all relevant information should be disclosed.

50. NZ IAS 40 Investment properties (paragraph 75(d)) requires disclosure of the assumptions applied in determining the fair value of investment property. In addition to the five issuers written to in Cycle 8, the Commission wrote to an additional issuer in Cycle 9. The issuer agreed to make additional disclosures in its next financial statements.

51. The value of the New Zealand dollar has fluctuated considerably in recent times. In order for users to assess the impact of changes in foreign exchange rates on financial performance and financial position, entities should clearly disclose translation gains and losses.

52. NZ IAS 21 The effects of changes in foreign exchange rates requires the disclosure of translation gains or losses recognised in the income statement and in other comprehensive income (paragraph 52). The Commission wrote to one issuer that had not disclosed foreign exchange translation gains or losses despite having significant overseas operations. The issuer agreed to make additional disclosures in their next financial statements.

53. The Commission is pleased to note that the proportion of issuers failing to include an unreserved statement of compliance with IFRS in their financial statements as required by NZ IAS 1 (paragraph 16) has decreased. The Commission wrote to 4 of the 24 issuers on this matter compared with 18 of the 40 issuers reviewed in Cycle 8.

54. The Commission discussed this matter in detail in its Cycle 7 report. The Commission’s view is that making this statement is relatively easy but will significantly increase the confidence that overseas investors have that New Zealand issuers have adopted an internationally recognised basis of accounting.

55. In addition to disclosure of external audit fees, NZ IAS 1 Presentation of financial statements requires entities to disclose amounts paid to their external auditors for assurance related services, tax services and other services. Entities are also required to describe the nature of the services provided in each of these categories (NZ IAS 1, paragraph NZ105.1).

56. The Commission has observed that while entities usually disclose fees paid by the required categories, some entities do not describe the nature of those services. The additional requirement to describe the nature of the services was not required under previous NZ GAAP.

(a) 1 issuer about substantial security holder information under section 35F of the

(b) 2 issuers about information on directors’ and relevant interests or directors’ share dealing under sections 148 and 211 of the Companies Act 1993 and/or directors and officers obligations under section 19U of the Securities Markets Act; and

58. No enforcement action was undertaken in relation to market matters raised with issuers or with directors.

59. In a recent speech Robert Herz (Chairman of the US Financial Accounting Standards

“Transparency is not just a buzz word or a cliché. It is 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.”⁶

60. The Commission remains of the view that the priority for issuers, auditors, standard- setters and other market professionals in the current economic environment is to ensure that complete and transparent disclosures are provided in the financial statements of issuers to restore investor and market confidence in the securities market. This requires, where necessary, the inclusion of explanatory disclosures to support the financial information that is presented.

61. New Zealand issuers should pay particular attention to improving their disclosures in relation to financial instruments, related parties, impairment testing as well as management judgements and estimates. Issuers should also carefully consider what information in addition to the minimum requirements should be disclosed in their interim financial statements.

62. The Commission will continue to review issuers’ financial reporting as part of its

63. The Commission appreciates that issuers may face difficulties when reporting in the current market environment. In particular, entities are likely to find valuation of both financial instruments and non-financial assets subject to a higher degree of judgement. Therefore it is very important for these entities to be transparent and disclose clearly their specific underlying assumptions and estimates. When circumstances change users can re-assess the information based on new assumptions.

64. In addition, the Commission will follow up and review the next annual reports of those issuers who have agreed to make the necessary changes to ensure that those matters raised have been taken into account.

65. The Commission will take any appropriate steps to encourage and ensure compliance with NZ IFRS (and other aspects of NZ GAAP) and relevant legislation.

⁶Hertz, R.H. (2009) “History Doesn’t Repeat Itself, People Repeat History – Front-Line Thoughts and

APPENDIX 1: BACKGROUND TO THE SECURITIES COMMISSION’S FINANCIAL REPORTING SURVEILLANCE PROGRAMME

1. The Securities Commission is the main regulator of the New Zealand securities market. Our purpose is to strengthen investor confidence and foster capital investment in New Zealand by promoting the efficiency, integrity and cost-effective regulation of our securities markets.

2. The Commission regards quality financial reporting by issuers⁷to be fundamental to the fairness, efficiency and transparency of New Zealand’s securities markets.

3. The Securities Commission is required, under section 10(c) of the Securities Act

1978, “to keep under review practices relating to securities, and to comment thereon to any appropriate body”.

4. As part of its work to carry out this function the Commission established the Financial Reporting Surveillance Programme (FRSP) in 2004, with its first Cycle review taking place in 2005. The FRSP is an ongoing surveillance programme.

5. The aim of the Commission’s FRSP is to encourage New Zealand issuers to improve the quality of their financial reporting so that:

(b) investors can have confidence in the credibility of financial information provided by issuers; and

6. The FRSP involves reviews of selected issuers’ financial statements. At the end of each cycle the Commission publicly reports on this surveillance work to provide market participants with a summary of its findings. Copies of reports for all cycles are available on the Commission’s website www.seccom.govt.nz.

(a) In relation to an equity security or debt security, or to an advertisement, investment statement, prospectus, or registered prospectus that relates to an equity security or a debt security, or to a trust deed that relates to a debt security, the person on whose behalf any money paid in consideration of the allotment of the security is received:

(b) In relation to a participatory security, or to an advertisement, investment statement, prospectus, or registered prospectus, or to a deed of participation that relates to a participatory security, the manager:

advertisement that relates to such an interest, the contributory mortgage broker:

(d) In relation to a unit in a unit trust, or to an advertisement, investment statement, prospectus or registered prospectus that relates to such a unit, the manager:

(e) In relation to a life insurance policy, or to an advertisement, investment statement, prospectus, or registered

prospectus that relates to a life insurance policy, the life insurance company that is liable under the policy:

(f) In relation to an interest in a superannuation scheme, or to an advertisement, investment statement, prospectus, or registered prospectus that relates to such an interest, the superannuation trustee of the scheme.

7. Under the Financial Reporting Act 1993 issuers are required to prepare financial statements that comply with New Zealand Generally Accepted Accounting Practice (NZ GAAP) and provide a true and fair view of the matters to which they relate⁸.

8. The Commission reviews financial statements of issuers against NZ GAAP. For the purpose of the Financial Reporting Act financial statements and group financial statements comply with NZ GAAP only if those statements comply with:

(b) in relation to matters for which no provision is made in applicable financial reporting standards and that are not subject to any applicable rule of law, accounting policies that:

9. The term “applicable financial reporting standard” is defined in the Financial Reporting Act to mean an approved financial reporting standard that applies to a reporting entity (or group) and to an accounting period (or interim accounting period) in accordance with a determination of the Accounting Standards Review Board (ASRB) for the time being in force or any election made under section 27 of the Financial Reporting Act. All issuers are required to apply NZ IFRS in the preparation of their financial statements for annual accounting periods commencing on or after

(a) the level of compliance with NZ GAAP by issuers in their financial statements prepared under the Financial Reporting Act;

(b) whether any breach of NZ GAAP identified in those financial statements is likely to cause the financial statements to not show a true and fair view or is likely to be materially misleading to users in the context of information disclosed for investment decision-making under the Securities Act and therefore require enforcement action; and

11. The FRSP aims to review all issuers listed on NZX Limited (NZX) at least once over a three to four year period.

⁸Part II of the Financial Reporting Act 1993 (section 11) requires every ‘reporting entity’ to prepare financial statements that comply with generally accepted accounting practice and to provide any additional information required to ensure those statements are a true and fair view of the matters to which they relate.

Part I, Section 2 of the Financial Reporting Act 1993 defines a reporting entity as : (a) An issuer; or

12. In reviewing all listed issuers, dual and overseas listed issuers may also be selected.

Overseas listed issuers are issuers domiciled or incorporated outside New Zealand which have a recognised stock exchange as the home exchange and are also listed on NZX.

13. Dual listed issuers are issuers incorporated in Australia which are on the Australian

14. Where dual and overseas listed issuers are selected the Commission first writes to the regulator in the overseas jurisdiction to determine whether a review of the financial reporting of the issuer has already been undertaken locally. If so, these issuers are not reviewed by the Commission. Where the issuer has not been reviewed by the overseas regulator, the Commission undertakes a review of the annual report, NZX announcements and, if applicable, the current prospectus. Where appropriate, findings are communicated to the overseas regulator. If the Commission communicates a matter about an issuer that it considers to be significant to an applicable overseas regulator and the overseas regulator proposes to take no action, the Commission will write directly to the overseas or dual listed issuer on the matter.

15. Issuers trading on the Unlisted⁹exchange and issuers not listed on any exchange may be also included in the cycle reviews.

16. Issuers may be selected based on particular criteria as determined by the Commission: issuers may be selected based on areas of particular risk affecting the issuer, the sector the issuer is in at the time of selection and/or their balance dates. Issuers can also be reselected for a subsequent review where the nature of issues identified in an earlier cycle raised concerns.

17. The Commission reviews an issuer’s annual report when reviewing its financial statements and, in the case of listed issuers, this includes a review of any NZX announcements for the period and any relevant prospectuses. While the NZX announcements are not comprehensively reviewed, any market matters relating to continuous disclosure, disclosure of relevant interests by directors and officers, and substantial security holder disclosure, are followed up where necessary.

18. Matters identified in the review are referred to as matters raised¹⁰or other matters.

19. Matters raised are matters that are important or where further clarification or information is needed. For example, the Commission is likely to write to an issuer where a matter:

⁹Unlisted is an unregistered securities trading facility; it is not a registered stock exchange or authorised securities exchange under the Securities Markets Act 1988. Unlisted provides a facility for trading previously allotted securities.

¹⁰Prior to Cycle 6, the Commission referred to matters raised as significant matters.

20. Financial reporting requires the exercise of professional judgement. The Commission takes this into account when reviewing the financial statements and determining which matters to follow up.

21. The Commission writes to an issuer requesting additional information and in some cases asks the issuer to revise or enhance disclosures in future financial statements.

22. When writing to an issuer in respect of matters raised the Commission also includes other matters found in the review in relation to that issuer. Other matters are miscellaneous matters that the Commission considers could be better disclosed.

23. The Commission’s policy is not to write to an issuer whose financial statements raised only other matters, unless those matters are so numerous that it is useful to provide feedback to the issuer. In this respect the Commission is mindful of its educative role in the FRSP.

24. In each case where the Commission writes to an issuer, a copy of the letter is also sent to the issuer’s auditor. This practice acknowledges the role of auditors in helping to maintain and improve the standard of financial reporting in New Zealand. It also alerts an auditor to the particular aspects of its client’s financial statements that may be of concern to the Commission.

25. Auditors have an important role in encouraging companies to comply, not only with the statutory requirements, but also with best practice. The Commission encourages auditors to be vigilant in the audit of financial statements. High quality external auditing is critical to the integrity of financial reporting and to the efficiency and integrity of the securities markets.

26. Where a matter is identified that may have a significant market impact the matter is removed from the FRSP and considered separately as an enforcement matter.

27. Referrals are also made to appropriate bodies where matters identified in the FRSP

New Zealand Securities Commission

Financial Reporting Surveillance Programme. Review of Financial Reporting by Issuers Cycle 9 [2009] NZSecCom 5 (1 August 2009)