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December 2007 Edition ---- to page back through Previous Editions click here

Well our big graph for this month seemed to upset access a little so we shall hive it off to here and re-present the case of the Feltex IPO and the Security Commission's and company liquidators' unjustified support of them.

We will put up a table of various information from the IPO prospectus instead:

Year (to 30 June) 1990 1991 1992 1993 19941995 19961997 19981999 20002001 20022003
Australian Carpet Sales 50.4 46.4 45.444.7 49.952.1 47.949.5 50.050.2 54.049.1 48.953.1
NZ Carpet Sales 7.5 8.2 9.38.9 9.49.0 8.910.0 8.8 9.0 10.4
Australasian Carpet Sales 52.258.1 61.556.8 58.859.0 59.264.0 57.9 57.9 63.5
Feltex Sales Revenue (from p81) 328.8301.9 330.8
Inflation adjustment to Sales Revenue (2%p.a.) 13.26.0
Sales Revenue in appx 2003 dollaqrs 342.0307.9 330.8
Fetex Revenue per sq metre of total market sales 5.90 5.314.93
Indication of fall in market share over previous year. -5% -5.2%

The carpet sales are in billions of square metres. Feltex appear to have only used the Australian sales to determine market growth. They have taken the lowest year of these 14 being 1993 and calculated that 1.7% p.a. compound growth of this figure for 10 years produced the 2003 figure which is the second highest on the table.

Further on at page 91 they say they adopted a 1% market growth rate for the forecasts and projections which they say is less than the average growth for the past 10 years. We say this is not correct, and also reject the idea that even a correct 10 year average growth rate is suitable for this purpose.

We ask the Securities Commission; with everything else held constant how low would 1993 sales have to have been or how high would 2003 sales have to have been before they would express some reservations as to how the growth over the past 10 years had been calculated.

We say that they should have expressed such reservations given 1993 and 2003 sales are what they are. We say that if the sales had been as they except that 1993 had the total sales of 2003 and vice versa then Feltex would have found a far more realistic way of getting market growth figures to adopt for their forecasts and projections in their prospectus.

If one looks at and studies the pattern of these figures one notices that in three of the four years where sales have gone above 5.3b, for the next two years the sales have been at lest five percent but usually 7% or 8% below the preceding high year. The fourth of these high years is 2003, the second highest, and the two years which follow from it are those for which Feltex have produced forecasts and projections of its revenue and profit. It can be noted also that of the other years of higher sales, 1994 and 1999 were both followed by a year of higher sales but the 2nd following year was 4% and 2% lower than 1994 and 1999 respectively. Only 1998 is followed by two higher years. We say that these patterns are not co-incidences and reflect buyer behaviour and are likely to continue in similar fashion. Recarpeting can be deferred or brought forward to coincide with certain events. We say that a fair prediction was that 2004 and 2005 sales would be some 7% less than the 2003 figure.

Let us now consider least square regression analysis. With an even number of years in the sample the figures for all years influence the results, the extreme years being more influential. We think all competent accountants should be acquainted with this method. We say 10 years is an objective number of years to include in the calculation. It does not involve the dubious concept of there being intervals between years. We will discuss the Australian sales figures only. Our calculations are contained here. . The NZ figures we think are a little less objective as they were compiled by Feltex itself using sources which were available to it. Using the figures for both countries gives growth of about 0.43 % as compared with 0.31% for Australian sales. Both are well below the 1% which Feltex says (and the Commission presumably confirms) is below the average growth rate for the past 10 years.

However the growth figure from the least squares analysis is long run growth and the figure the analysis predict for 2003 is 51.2 whereas the actual figure is 53.1.

Feltex would come up with a figure for 2005 of about 53.1+0.53+0.53= 54.2. The long run figure is perhaps 51.2+0.26+0.26= 51.7. However if the adopted growth is supposed to be conservative it should have been taken to 0% pa so the 2005 year estimate would be 51.2. An actual sales decline of 0,9% p.a. needed to have been adopted to bring the projected sales down to the long term average ie from 53.1 to 51.2.

But we say that the reality was that sales were likely to fall well below the long term average in 2005 as discussed above.

We would like to now discuss the 1% increase in market share market share which Feltex anticipated in connection with its projections. This was due to some new sales techniques which it claims it was holding up its sleeve. Well they will have been used by now but nobody seems to have been talking about them. On the table we show an indicative reduction in market share of 5% p.a. over the last three years. To go from that to 1% increase sure is a turnaround.

We present herewith paragraph 61 of the Securities Commissions latest report on the matter:

61. The Commission found that most of FTX's assumptions presented a largely "no change" scenario. Some of the critical assumptions were:

(a) that the carpet market in Australia and New Zealand would continue to grow by 1% (total market sales), which is stated to be below the average growth rate over the past 10 years; and

(b) that new products would increase in line with expectations; and

(c) that FTX would successfully implement the strategies described in the prospectus under "Business Description," which would result "in Feltex's market share increasing by approximately 1% over the projected period."

We say the idea that these critical assumptions were a no change scenario was utterly ridiculous.

The straight line between 1993 and 2003 Australian market size had no bearing on what would happen in 2005. Feltex and the Commission needed to look at the figure to see that a slump of 5% to 9% invariably followed for two years after a year of high sales such as 2003. A 1% increase in market size is completely different.

Market share was also falling, at the rate 5% p.a.. There is nothing "no change" about a 1% increase becoming the norm.

The other big factor is that no attempt has been made to list Feltex Sales to the owner or associates of the owner, or of any marketing or subsidies provided by the owner (vendor) directly. Such assistance invariably occurs and it needed to be accurately documented.

Revenue discrepancies generally have a highly magnified effect on profit. These inaccuracies fully account for the company's financial difficulties during the 2005 year which finished it off, a monstrous dividend having been paid.

This Securities Commission needs to be sacked as soon as possible.

The liquidators of the company have also investigated the IPO. It might be thought that this was an independent appraisal, but not so. They say the opinion of the Securities Commission needs to be respected, presumably to the extent of not saying anything which might conflict with what the Commission has said. We think these investigations by the liquidators were just a waste of time and money. No doubt they have to agree with the "right" people to get these jobs. The ANZ bank seems to have been engaged in time wasting by objecting to handing over records right up until the court hearing day when they seem to have become quite cooperative. That needs to be made an offence.

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Site Index

Accident Compensation Corporation 1
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Nicholas Bagnall 12
Bank of New Zealand 1990 annual report1
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Cliff Cook 1
Credit Suisse First Boston 1
David Cullwick 1
Jane Diplock 1
Brian Easton 1
Dominion Post 1 2
Eion Edgar 12
Ernst & Young 12 3
Feltex ipo 1 2 3
Feltex liquidators 1 2
Kenneth Fergus 1
Gordon Fulton 1 2
Peter Garty12 34
Tony Gavigan 1
John Hagen 1
Elizabeth Hickey 1
Housing Corporation 1
David Jackson 1
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Kerry McDonald 1 23
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NZICA Prof Conduct Com1
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Securities Commission 1 2 3 45
Ian Silver 1
Spacetable 12
Marta Steeman 12
Tranz Rail book build12
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