Judge astounded by inaction on related-party loans

19:59, May 27 2014

The judge of the South Canterbury Finance (SCF) trial was astounded the former auditor of the company did not go directly to directors about the need for a related-party loan register.

Failure to disclose related-party loans is crucial to the case. The Crown contends the omission of the related-party loans led to the finance company being admitted into the Crown deposit guarantee scheme, which then paid out $1.58 billion, and also enticed investors with an incorrect prospectus.

The trial of former SCF directors Edward Sullivan and Robert White, and former chief executive Lachie McLeod, before Justice Paul Heath in the High Court at Timaru, continued yesterday, finishing the cross-examination of former auditor Byron Pearson, a partner from Woodnorth Myers. His firm audited the SCF books between 2005 and 2009.

Pearson was later censured by the New Zealand Institute of Chartered Accountants' disciplinary tribunal and fined $38,000, after his auditing of the finance company failed to pick up questionable transactions in 2008.

Justice Heath asked him about the process for final sign-off of the prospectuses in relation to admissions of related parties.

"It would have been dealt with by Terry Hutton (SCF accountant) and a Woodnorth Myers staff member. We would not have necessarily talked to a director about that."


In 2006 Pearson advised in a letter a register of related-party loans should be documented. Justice Heath again sought clarification of the involvement of SCF directors, and was told they were not consulted.

"I find it astounding that an auditor wrote a letter giving it a priority of one and not speaking directly to any directors."

Following Pearson, Grant Graham, a partner from Korda Mentha, was called as an expert witness. He has overseen the investigation into 30 financial institutions, worth a combined $5.6b.

Upon its entry into the Crown deposit scheme he was initially asked by Treasury in 2009 to review SCF's governance and operational practices. He was also to review a proposed capital restructure and impairment provisioning.

Following the SCF collapse he was employed by the SFO in November 2010 and investigated prospectus disclosures of six potential related-party loans and compliance with the SCF trust deed.

"Loans to a director, or when a director has a direct or indirect interest, are to be disclosed.

"In my opinion related-party loans are crucial to allow investors to make decisions and would have influenced investors like those in SCF.

"The disclosures were incomplete."

Graham continues on the stand today.

The Timaru Herald