Promotion of Accounting Reform as the most effective Pathway to a Fairer Safer and more Prosperous Society. Comment and Support from all quarters is Sought to straighten out NZ's problem
|12 months to 30 June||2002||2003||2004||2005|
|Total Operating Revenue||322,506||314,352||335,498||348,147|
(EBITDA = Earnings before Interest, Taxation, Depreciation and Amortisation.)
It can be seen that the "anticipated" improvement in profit is colossal as is the 1% assumption upon which it is based (page 91).
We have had a look at some other audit reports forming part of prospectuses containing forecasts or projections around that time and found that despite a different audit firm in some cases, a similar paragraph appears in them all. We suspect that the practice continues to the present. In some cases however the second sentence refers only to forecasts and projections in general and not to the specific forecasts and projections contained in the prospectus concerned. This possibly makes the paragraph acceptable because readers can see that the paragraph applies to all audits regardless of how suspicious the genuineness of the forecasts and projections in the prospectus concerned might be. But also the deception occurs only where there is cause for concern about the genuineness of any of the forecasts or projections and probably for many offers this is not so. Also such deception is probably only able to be cause for an action where there has been a shareholding loss.
Commentators did profit and dividend yield calculations based upon these forecasts and projections and compare the results with forecasts and projections were reliable enough to make this acceptable. Probably this assumption was fuelled by this paragraph in the audit report which we quote. Potential investor might therefore have been unfairly influenced via this channel as well. The forecasts and projections are not treated as figments of someone's imagination and issues surrounding them are most relevant.
While listed companies which are not making share issues are obliged to keep the public informed of their expectations as to profit and significant related matters it seems to be generally done in such a way that the auditors do not get involved. But for share issues the regulation require that the assumption upon which the predicted profitability is based to be declared and that the derivation of revenue and profit from these assumptions be audited. Auditors are thus involved and it is necessary for extent of the involvement to be made quite clear. We suspect that someone with some authority was insisting that a disclaimer along the lines of the second sentence of the paragraph we quote, minus the word "accordingly", be included in audit reports. But probably companies making share offers were unhappy with such a sentence because it might tend to suggest that the auditors had concerns about the particular forecasts and projections. This could have been overcome with a sentence saying that it was standard practice for auditors to make such a disclaimer. But someone has made up this paragraph which implies that the assumptions have been checked over and it is only the ever present risks of the commercial environment that investors have to worry about. But auditors have to take full responsibility for what they say (which invariably is very little) and that they followed on from what was in previous prospectuses is no excuse. .
The claim by the auditor concerned that the first sentence was a "note of caution" we say is an attempt to confuse the issue by considering the interpretation of the sentence in isolation. The sentence is not presented in isolation. It is presented as being the reason for what is said by way of the second sentence, and this is the only relevance accorded it. The first sentence can be assumed to have a true meaning in its own right and readers are free to examine it in isolation as much as they like for all the information which can possibly be gleaned from it. But in isolation the message is not what the writer is communicating to the reader. It is incidental to that. And most if not all readers are only interested in taking in what a particular writer has got to say. They are not interested in passing away the time of day by examining information which comes their way incidentally for anything of value it might hold. But anyway the first sentence of the paragraph only advises of risks that are always inherent in owning shares and it is necessary override such warnings in order to get the potential benefits of being a shareholder.
We invite solicitors to offer their services for such a joint action.
The Directors are responsible for the preparation and presentation of:
(a) (i) annual financial statements as required by clauses 23 to 38 of the First Schedule to the Securities Regulations 1983 (the First Schedule). The annual financial statements provide information about the past financial performance and cash flows of the Company and its subsidiaries (the Group) for the year ended 30 June 2003 and the Group's financial position as at that date; and (ii) interim financial statements in accordance with the First Schedule for the six months ended 31 December 2003; and
(b) the summary of financial statements of the Group for the periods ended 31 December 2003, 30 June 2003, 30 June 2002, 30 June 2001, 30 June 2000 and 31 July 1999 as required by clauses 8(2) and 8(3) of the First Schedule; and
(c) the forecasts of the Group for the year ending 30 June 2004 and the projections of the Group for the year ending 30 June 2005, including the assumptions on which the forecasts and projections are based, as required by clause 10 of the First Schedule.
We are responsible for:
(a) expressing an independent opinion on the financial statements of the Group as at 30 June 2003 and 31 December 2003 and for the periods ended on those dates, prepared and presented by the directors, and reporting our opinion in accordance with clause 42(1) of the First Schedule;
(b) reporting, in accordance with clause 42(1)(g) of the First Schedule, on the amounts included in the summary of financial statements;
(c) reporting, in accordance with clause 42(2) of the First Schedule, on the forecasts for the year ending 30 June 2004 and the projections for the year ending 30 June 2005.
This report has been prepared for inclusion in the Offer Document for the purpose of meeting the requirements of clause 42 of the First Schedule. We disclaim any assumption of responsibility for reliance on this report or the amounts included in the financial statements, the summary of financial statements, or the forecasts for the year ending 30 June 2004 and projections for the year ending 30 June 2005, or for any other purpose other than that for which they were prepared. In addition, we take no responsibility for, nor do we report on, any part of the Offer Document not mentioned in this report.
Ernst & Young Limited provides taxation advice to the Company and Group.
Basis of opinion
Our audit of financial statements for the year ended 30 June 2003 and six months ended 31 December 2003 included examining, on a test basis, evidence relevant to the amounts and disclosures in the financial statements. It also included assessing:
(a) the significant estimates and judgements made by the directors in the preparation of the financial statements; and
(b) whether the accounting policies are appropriate to the circumstances of the Group, consistently applied and adequately disclosed
. We have conducted our audit in accordance with generally accepted auditing standards in New Zealand. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatements, whether caused by fraud or error. In forming our opinion we also evaluated the overall adequacy of the presentation of the information in the financial statements.
We have also undertaken procedures to provide reasonable assurance that the amounts in the summary of financial statements, pursuant to clauses 8(2) and 8(3) of the First Schedule, have been correctly taken from audited financial statements.
In addition, we have examined the forecasts for the year ending 30 June 2004 and projections for the year ending 30 June 2005 to confirm that, so far as the accounting policies and calculations are concerned, they have been properly compiled on the footing of the assumptions made or adopted by the directors of the Group and are presented on a basis consistent with the accounting policies normally adopted by the Group. The assumptions relate to future events. We are not in a position to, and do not express an opinion on, these assumptions on a stand alone basis.
Unqualified opinion We have obtained all the information and explanations we have required.
In our opinion: (a) proper accounting records have been kept by the Group as far as appears from our examination of those records;
(b) the financial statements on pages 96 to 114 of this Offer Document that are required by clauses 23 to 38 of the First Schedule, and that are required to be audited:
(i) comply with the Securities Regulations 1983; (ii) subject to those regulations, comply with generally accepted accounting practice in New Zealand; and
(iii) give a true and fair view of the state of affairs of the Group as at 30 June 2003 and of the results and cash flows of the Group for the year ended on that date;
(c) the interim financial statements on pages 96 to 114 of this Offer Document:
(i) comply with the Securities Regulations 1983;
(ii) subject to those regulations, comply with generally accepted accounting practice in New Zealand; and
(iii) give a true and fair view of the state of affairs of the Group as at 31 December 2003 and of the results and cash flows of the Group for the period ended on that date;
(d) the amounts in the summary of financial statements, on page 93 of this Offer Document, pursuant to clauses 8(2) and 8(3) of the First Schedule, have been correctly taken from audited financial statements of the Group for the periods ended 31 December 2003, 30 June 2003, 30 June 2002, 30 June 2001, 30 June 2000 and 31 July 1999; and
(e) the forecasts for the year ending 30 June 2004 and projections for the year ending 30 June 2005 on pages 85 to 87 of this Offer Document, so far as the accounting policies and calculations are concerned, have been properly compiled on the footing of the assumptions made or adopted by the directors of the Group set out on pages 88 to 92 of this Offer Document and are presented on a basis consistent with the accounting policies normally adopted by the Group.
Actual results are likely to be different from the forecast and projected financial information since anticipated events frequently do not occur as expected and the variation could be material. Accordingly we express no opinion as to whether the forecasts for the year ending 30 June 2004 and projections for the year ending 30 June 2005 will be achieved.
We completed our work for the purposes of this report on 5 May 2004 and our unqualified opinion is expressed as at that date.
ERNST & YOUNG
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