Feltex five can't blame accountants says Crown

Photo / Hawkes Bay Today

Feltex directors fell below the benchmark when they failed to correctly classify and understand an accounting standard that called for the company's A$100 million ($123 million) debt with ANZ to be categorised as current, a court was told yesterday.

The correct classification of Feltex's core debt was a fundamental issue, prosecutor Brian Dickey told the Auckland District Court yesterday during the closing submissions of the trial.

The Crown alleges that directors Tim Saunders, John Feeney, Peter David Hunter, Peter Thomas, and John Hagen did not disclose that the company was in breach of its loan with ANZ and incorrectly classified its debt with the bank as non-current in its interim financial statements to December 31, 2005.

The directors pleaded not guilty to the charges laid under the Financial Reporting Act.

Dickey said that because of the alleged breaches the market did not have a "clear and fair" view of the company's financial position, as its debt with ANZ was its most dominant liability.

The directors claim they did not know a specific requirement under the International Financial Reporting Standards (IFRS) had been changed, and therefore did not pick up the problems with the accounts.

The company paid accounting firm Ernst & Young A$113,000 to review the statements to ensure they were compliant.

Ernst & Young also did not pick up the problems, the court heard on Monday.

The defence claims that had the directors known at the time that the statements did not meet IFRS they would not have signed and registered them. The defence claims the directors put their trust in Ernst & Young and paid them a significant amount to conduct the voluntary review.

They also received verbal assurance that the statements were compliant.

"A director that does not know a fundamental change to a standard has fallen below the benchmark," Dickey said.

Corporate governance was the directors responsibility, and the directors did not know the standard in question and therefore could not ensure that the statements met the requirements.

"These are not naive individuals.

"They were aware of the public scrutiny [of the company], the alarm bells were ringing. The directors should have crossed all their 't's and dotted all their 'i's."

The legislation was in place to protect investors and encourage economic growth, he said.

Ernst & Young's shortcomings did not reduce or absolve them of their obligations as directors, they choose to rely on the firm instead of reading the standards themselves, Dickey said.

"They did not read the standards. There is no suggestion that they turned their minds to the standards.

"The directors should have known what a current liability was, this classification is basic. A bank debt is so fundamental to a company suffering financial difficulty.

"They [the directors] should have asked for a written waiver, they could have reported the waiver with the breach [in the financial statements]."

They could have done more, Dickey said.

Today the defence will submit its closing submissions.