Companies' lack of transparency concerns

The Securities Commission has found a "widespread lack of transparency" in companies' financial statements through its regular checking process.

Commission chairman Jane Diplock said the commission was particularly concerned about the lack of transparency around underlying assumptions used to value assets, disclosures about transactions with related parties, and the composition of unexplained expenses.

"The assumptions used to value assets have become particularly relevant because of the global recession," she said today.

"In many cases the recession has caused significant revaluation of assets, but too often investors aren't being given enough information to make informed judgments on whether a revaluation is fair."

The underlying assumptions being used to revalue assets were not stated in some financial statements, Ms Diplock said.

For example, for intangible assets, such as goodwill, investors had a right to know what trading projections a company was using to value assets, how much sales growth was being projected, and whether the projections varied in different markets.

"In most cases this level of information is not provided, which means investors cannot make informed judgments about asset valuations," Ms Diplock said.

With party disclosure, the commission was particularly concerned about a lack of transparency where directors and other key management personnel were involved.

The commission had not seen any significant improvement in that area from previous reviews, she said.

In its most recent surveillance cycle of 20 companies' financial statements, the commission had written to six companies asking for explanations.

In this cycle, it also wrote to five companies asking them to provide more detail on unexplained expenses in financial statements, and asked they revise their financial statements to be more transparent in future.

"Company directors should remember that they can be prosecuted under the Financial Reporting Act if their company publishes non-compliant financial statements," Ms Diplock said.

"If misleading financial information is published in a prospectus, directors can also face prosecution under the Securities Act."

- NZPA