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April 2014 Edition

We have made a complaint to Australian division of the Accountants Institute. Here is the text:

The Senior Advisor Professional Conduct
Institute of Chartered Accountants Australia
We wish to complain about the behaviour of Greg Pollard Meredith, We believe of the firm Ferrier Hodgson Forensics, who we also believe to be an accountant member of your organisation.

Mr Meredith had a report presented in evidence in the high court hearing of Horton V Saunders in Wellington NZ. He was cross-examined on that report starting on Monday 31 March 2014. I was in court on that day. Mr Horton represents a few thousand of the eight thousand odd Feltex IPO subscribers who lost their funds.

The matter of concern was the fairness of the May 2004 prospectus for an Initial Public Offer in New Zealand of shares in Feltex Carpets Limited.

Mr Meredith’s report considered page 91 of the Feltex prospectus. Under the heading “Industry Conditions” it says it has assumed the market will grow by “approximately 1% which is below the average growth rate over the past ten years”. Mr Meredith confirmed that overall he though the 1% increase was reasonable and it is this statement of his about which weI complain.

Feltex’s Total Operating Revenue for its year to 30 June 2003, the last known year at the time of the prospectus was $314m (on page 96 of the prospectus). Its projection of Total Operating Revenue for the year to 30 June 2005 is shown on page 85 as being $348m. Growing the $314m for 2 years at 5% compounding gives $346m. The prospectus explains that this assumed 5% growth is made up of 3% inflation, 1% due to increasing market share and 1% due to increasing market size. It is Mr Meredith’s endorsement of the latter assumption which we complain about. We claim a decrease of 3% (1.4% p.a.) should have been made to adjust for the likely change in market size if the assumed size was to be no more than what the trend of the sizes of the previous 10 years indicated, as was implied on page 91.

In saying the 1% (p.a.) increase due to increasing market size was reasonable Mr Meredith considered data on page 37 of the prospectus which could be presumed to be what Feltex would have used in deciding what assumption to make.

On page 37 is a graph of the then last 11 years of sizes of the Australian carpet market. In the paragraph above the graph Feltex say that between 1993 a 2003 the market grew by an average of 1.7% p.a. compounding. Feltex only used the sizes of the 1993 and 2003 in making this “calculation”. This can be verified by growing the 1993 size by 1.7% p.a. for 10 years. You get the 2003 size. Mr Meredith observed that what growth one calculated depended a lot on ones starting point but he too must have only been using the size of two individual years in his alternative calculations. He asserted that nevertheless he considered that the 1% adopted was reasonable.

The correct method to objectively forecast a future result based upon the last 10 years of known sizes, as any accountant should know, is to use regression analysis using the sizes of all ten of the last ten known years, and only those sizes, in this case of 1994 to 2003. Using 10 years does not necessarily give the best result but it is the number of years decided upon by Feltex, and using a round figure as standard reduces the ability to pick on a time span that tends to give the result one wants. However by using all the sizes in the chosen time span, and not just two sizes as Feltex did, the result will be less sensitive to the length of time span used. Using the forecast function of Microsoft Excel on the ten latest sizes one gets a forecast for year 2005 which is almost 3% below the 2003 size not 3.4% above it as Feltex has calculated, nor 2% above it as it has adopted.

To explain it without calculations, if you look at the graphs on page 37 they show higglety pigglety sizes. If there is a big year it is almost invariably followed by smaller years or year. 2003 was a big year so the probability is that 2005. will be smaller, if past figures is the only relevant information available. Feltex’s false logic is that based on raw size figures 2005 will probably be more than 2% greater than 2003 because 2003 was greater than 1993 by more than 1% p.a.

As a professional Mr Meredith should be expected to use the recognized best tools for the job. The almost 5% greater revenue which Feltex has assumed over the degree to which it said it did on page 91 makes a huge difference to the company’s profit and justified paying a dividend which the company could not afford and it crashed.

As to why this improper endorsement by Mr Meredith should not come to light via the normal court processes we state the following . This is a very perverse case whereby the robbers who have organized the IPO have also covertly organized a purported recovery action for the generally naive but irate subscribers following the crash, and this eventual hearing is supposed to be the “unfortunate” unsuccessful end to it all, but not if we can help it.

We are not participants in the proceedings other than as some time court attendees and we have never owned Feltex shares or been related to the company other than as observers and protesters.

The prospectus is to be found at A small segment of page 37 of it is to be found at

End of document

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