KEY POINTS:
An expatriate New Zealand accounting academic believes the Securities Commission should revisit its assessment of collapsed carpet manufacturer Feltex.
Sue Newberry, associate professor of accounting at the University of Sydney, representing the Campaign Against Foreign Control of Aotearoa, believes Feltex misled investors at crucial times when reporting its
financial situation.
She also criticises Feltex's auditors Ernst & Young.
The Securities Commission found Feltex's 2005 disclosures were seriously deficient but that its 2004 prospectus was not materially misleading.
It found that Feltex failed to disclose material information to the market regarding its loan facility with the ANZ in October 2005.
It also failed to disclose a breach of its banking covenants in its December 31 2005 half year results and did not property classify its debt.
Prof Newberry says the change in banking arrangements was significant because it meant the ANZ could call on its debt after 30 days' notice.
"This raises questions about Feltex's solvency in 2005, just a year after the share float and a year before it fell.
"Although Feltex's liquidator intends to prosecute the directors for reckless trading in 2005, it is difficult to understand how the 2004 prospectus issued just a year earlier, could be declared 'not misleading'."
Prof Newberry also took aim at Feltex's auditors.
"According to the Securities Commission, the work of Feltex's auditor Ernst & Young on the December 2005 financial reports was substandard."
Ernst & Young also blocked the commission from accessing details about the Australian operations, she said.
But the commission's only reaction was to report the matters to the New Zealand Institute of Chartered Accountants.
"As one commentator noted, this might earn EY a slap on the wrist with a wet bus ticket."
After the Securities Commission released its report, Ernst & Young said in a brief statement it did not agree with the findings "and in particular, the thoroughness of our review procedures.
"We note that a review involves quite different procedures to an audit, which is acknowledged by the commission".
The accounting firm refused further comment.
Prof Newberry criticised the Feltex float in 2004 which raised more than $250 million from mostly New Zealand investors.
"Institutional investors shunned Feltex's share float, regarding it as a dud."
But many brokers and advisers still recommended it to "mum and dad" clients.
"The relative lack of information available to the retail investors and the enthusiasm with which brokers promoted the share float meant that, as one burnt, retail investor put it, 'a whole bunch of suckers in New Zealand got screwed'."
Prof Newberry also questioned whether the commission had looked closely at Feltex's 2003 results, a year before the float.
She said a key to Feltex's demise was the purchase of Australia's Shaw Industries in 2000 for $111.4 million. It was debt-funded, and saw Feltex move from a wool carpet producer to marketer of synthetic carpets competing against Chinese imports.
Feltex reported overall losses in 2001 and 2002, and tariffs on imported carpet in Australia continued to fall.
But in 2003 it recorded a profit of $6.8 million on sales of $303m compared with the previous year's loss of $18.2m on sales worth $312.6m.
"I don't understand the turnaround either," Prof Newberry said.
According to Feltex, it had achieved cost synergies with Shaw and repositioned its product to the high end of the market, but other factors lent themselves towards "creative transfer pricing arrangements", she said.
After the float, the upswing in Australian sales was explained as a change in accounting practices, although the prospectus said there had been no change.
"Figures from Feltex's 2003 financial report are reproduced in the 2004 share float prospectus. If there is doubt about that report, so too should there be doubt about the prospectus."
- NZPA