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October 2008 Edition ----

Well it is all happening out there. It is about time we have given an accounting perspective to the happenings. However our August edition was a well balanced classic and we have been reluctant to take it off the front page. We suggest another look at it.

1 The minority shareholders have lost the Southern Petroleum case. However the latest news is that they are going to appeal. Perhaps the defendants have got to pay for the appeal as well. Nothing too much about accounting in that except their cause was championed by Tony Gavigan who is also leading the case of Feltex shareholders to recover their money. The Feltex case is all about accounting, we believe. We hope that the focus will be near 100% on accounting, particularly accounting matters contained in the IPO prospectus. We have heard claims from the appellant's solicitors that the numerous pictures in the IPO prospectus portray a company producing high priced modern carpet which does not represent the Feltex situation, but we are completely unimpressed by that argument. There are tons of pictures of carpets in the prospectus but the carpets all look uninspiring. There appear to be no fancy patterns by way of colouring or surface cuts. Also what views there are of carpet making equipment look very old fashioned.

The deceit is in that the forecasted and projected carpet sales of the Feltex (Exftx Ltd) for its 2004 and 2005 years being based on a 1% increase in market size and a 1% increase in company sales, for those years, was not realistic. We also think that the company's reported sales and profitability prior to the IPO which the 1% p.a. increase "assumptions" build upon are also suspect. The regulations which specifically govern IPOs, although they are in many ways loose, require forecasts and projections to be realistic so there should be no need to resort to consumer legislation to get recompense.

We reproduce here soon an up-graded table showing the market growth and market share situation at the time of the IPO. We say the prospectus commentary is misleading in that it does not convey that what is really being sold is a secret marketing strategy which the company believes will turn a situation of Feltex's falling market share at a rate of 5% of company sales per annum into a growing market share of 1% per annum. No detail of how this marketing strategy works are given nor are details given of where it has been successfully used. The vendors of Feltex wanted the public to pay for this strategy with no guarantees, which they did, because the prospectus did not adequately tell the public that that is what they were being sold.

The difference between minus five percent and plus one percent of carpet sales (due to changes in market share) is some 13% of 2003 sales in the companies 2005 year. 13% of sales could well be the order of some 60% of profit. This is about the difference between the actual and projected profit for Feltex's 2005 year. We say that the superduper marketing strategy was a myth and never had any basis in reality. The Securities Commission said they were given details of it but commented no further. They need to be able to say that they were fascinated by the obvious effectiveness and reliability of it, that it was worth $200m odd, and they cannot understand why it didn't work. They are not releasing details of it which is most understandable. Nobody noticed any striking marketing strategy when it was presumably used by Feltex in 2004 and early 2005 either. All companies strive to do their best by way of a marketing strategy and presumably Feltex was no exception but knowing that you are coming up with one out of the box is a near impossibility in this competitive day and age.

We also say that Feltex's auditors, Ernst and Young should be on the list of defendants. We say that the reason they give in their IPO audit report for not expressing an opinion as to whether Feltex's specific forecasts and projections would be met; ie "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"; is not in anyway the most relevant reason for them not expressing the opinion and the most relevant reason needed to be given so that prospective investors were not misled. The most relevant reason is that although these auditors have familiarised themselves with the assumptions which foot the forecasts and projections and may incidentally have even formed a negative opinion about them being achieved, they have a policy that they will not express any opinion on the matter regardless. Indeed we believe it quite likely that they had incidentally formed the opinion that the true value of the shares if they were issued was near zero. But we say they cared not about the fate of the shareholders to be, and quoted the above reason for not giving an opinion as they think the securities regulations will allow them to get away with it.

Their reason which we have quoted is what they claim is their reason for having the policy but they do not say in the prospectus that that is what it is. They do not mention the policy as such. Readers are entitled to assume that the reason is the one they use when having fully considered the forecasts and projections (and the assumptions behind them) they have no grounds for concern that the forecasts and projections might not be achieved. Readers would assume that if the auditors did have such grounds for concern they would say what the concerns were in place of that reason.

There is no justification for giving reasons for a policy in an audit report. It is too late to change the policy for that IPO so the merits of of any policy should not be discussed there. Irrelevant material only leads to confusion and should not be allowed. The important thing is to make it abundantly clear that the policy is there and emphasize the effect which it has. In this case they didn't even say that there was a policy and what they claim is their reason for it is readily interpretable as a modification of what would otherwise be a disclaimer. They effectively said that their only reason for not saying that they believed that those Feltex forecasts and projections would not be achieved was a reason which inevitably applies to all forecasts and projections.

2 Winston Peters has been censured by parliament. Well Mr Peters appears to have been instrumental in getting the enquiry into certain arrangements entered into by the Bank of New Zealand in 1988 instigated as well as the long running so-called winebox enquiry which the Court of Appeal eventually seemed to find was as justified as possibly could be without anyone getting into trouble or being punished. He deserves a lot of credit for that. He abruptly stopped his followup to the BNZ matter and later also his criticism of players in the scampi fisheries matter. Well one should not expect too much of this work from one person and there should surly be others who can take hold of the torch. It seems that it is still possible to hide a donation of any amount to a political party or just hide who the donor is by the use of multiple trusts but in either case the co-operation of the donor is probably necessary. We think he might reasonably have expected the co-operation of the donor in that regard but that was not to be. The decision against him was a majority but not by a big majority.

We think that big business and the parties, which support the censure, see Winston Peters as a nuisance and this is a move to get rid of him for once and all. The smaller parties probably hope for a share of NZ First votes.

3 Then we have the American financial situation which automatically becomes a global one. Well house prices got to a ridiculous situation world wide and we have no sympathy for those that bought houses or lent on them at those levels.

4 The Fonterra Corporation has unfortunately got mixed up with widespread milk contamination for profit in China. We are concerned that this co-operative has been rather too keen to become a multinational. Whether it has actually become one we do not know and surmise that that probably depends upon definitions, but that issue is besides the point.

5 We think the right wing body called The New Zealand Institute has unfairly talked up the merits of the America's large institutions and the value of large institutions in general. We understand that the CEO of this institution is leaving to take up a position in Singapore. We would ask that his friends and associates offer all practical help to ensure that there are no hitches with this move. Take him to the airport and wave goodbye except do nothing that could possibly delay the departure.

As a follow on we should also mention the positioning of Roger Douglas at No. 3 on the Act party's list.

There was scope for removing a little bit of red tape when Sir Roger became finance minister in 1984 but the wholesale dismantling of regulation has cost this country tens of billions of dollars, possibly over the 100 billion. The leaky buildings scandal is perhaps the worst example. Then there is the serious fraud office which is allowed to "choose" its cases while the police don't seem to have any obligation to attend to fraud which the SFO chooses to leave alone. The country has been allowed to be milked dry by sharp practices emulating from the USA. We can see no merit at all in a come-back by the knight.

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