KEY POINTS:
The successful prosecution of two accountants for inadequate audit work on the books of a finance company that later failed will come as very cold comfort to those who lost money when the company went belly-up.
The collapse of National Finance 2000, two years ago last month, sparked
fears of a domino effect throughout the industry, but most thought that the victims would be minor players which, like National, lent mainly on used cars.
But last year some big names started featuring in the financial pages and it became clear that the problems were more deep-seated: as the industry's image took a hammering, firms came under pressure from investors pulling their money out or - more important - not putting it in; greater pressure came on a smaller loan book - the money of investors whose funds were locked in for fixed terms; as the property boom slowed, the developers who constituted the bulk of the big companies' borrowers struggled to keep up payments; nervous banks rationed lending; problems snowballed. Barely a year after National Finance 2000 reported strife, 23 other companies have either failed or announced a moratorium on trading and sought approval for repayment arrangements that are certain to cost investors.
The perfect storm of financial woe was a milder version of the credit crunch typhoon hitting big economies and it was certainly the case that cause and effect became intertwined. Declining investor confidence became a self-fulfilling prophecy and it is likely that some of the failures, particularly in recent months, have been in the nature of collateral damage sustained by companies honestly trying to weather the storm.
But what is equally plain is that some collapses can be ascribed to incompetence or recklessness on the part of company managements or others - such as accountants and auditors - who owed a duty of care far greater than they exercised. The "collateral damage" sustained, on the most part, by small investors, is now reckoned to have reached $2.8 billion. Some will be recovered after receivers and other statutory managers have done their work but the damage to individual lives is incalculable.
This week's successful prosecution means more prosecutions are likely, authorities say. The Ministry of Economic Development, along with other agencies, is ferreting through the records of other failed companies.
Some players in the business have complained that the sudden rush of state vigilance is politically motivated - that the Government wants to be seen to be doing something in election year. That may be true but it does not make the long-overdue investigations any less justified. Investors and the wider public need to see that people will be called to account for their actions; the effect may be more catharsis than cash-recovery, but it is important nonetheless.
A major bank economist remarked this week that the effect of the finance-company collapses was "unlikely to be systemically significant" because the money had not disappeared; it was rather "a transfer of wealth". That anyone in the financial world could describe the loss of private retirement savings in terms so callous and banal underlines the necessity for more robust policing of the investment market. Guardians of people's savings must remember that they are wrecking people's lives when they risk their money. They - along with the loan sharks charging ruinous interest rates on short-term unsecured loans to poor people - need to be called to account before, not after, things go wrong.
That said, investors are not without fault in the present mess. A quarter-century of deregulation has created a law-of-the-jungle environment in which stories of fabulous investment wealth have become the new fairy tales. An imprudence hard to distinguish from greed has lured some into committing immoderate amounts to single funds on the promise of an interest rate only a few points above that offered by banks. The old wisdom about spreading risk seems to have been forgotten. When the smoke clears from the current conflagrations, perhaps everyone at every level of the investment process will calm down and remember that deals that look too good to be true mostly are.
