Public Documents Highlighted New Zealand Finance Firm Risks: Study

More than four in five of the New Zealand finance companies that crashed during the country's financial crisis could have been identified as risky beforehand through public disclosure documents, according to a study came out on Thursday.
Thousands of New Zealanders lost their retirement savings and millions of dollars of public money was spent bailing out failed finance companies, followed by a string of prosecutions against directors on charges of misleading investors.
A parliamentary inquiry later estimated more than 3 billion NZ dollars (2.35 billion U.S. dollars) was lost in the failures.
But academics from the universities of Otago and Auckland said annual reports and other public disclosures contained enough information to predict the failures of more than 80 percent of the companies that crashed.
The findings of the study, which looked at 31 finance companies that failed from 2006 to 2009 and an equal number that did not fail, contradicted the overall media impression that financial reporting was unreliable, said the authors.
"Our result suggests that failures were predictable and so the financial information was more useful than some believed. This is important, as our research suggests that warning signals were available prior to the failure of these companies," University of Otago Professor of Accounting David Lont said in a statement.
"However the adequacy of communication to investors does need further investigation because many investors were clearly unaware of the increasing risks that the financial accounts were indicating."
The researchers found that failed finance companies had lower capital adequacy, inferior asset quality, more loans falling due, and a longer audit lag, a possible indicator of audit disputes.
Trustee monitoring was also a risk factor and the authors suggested further research to better understand why that was the case.
"As many of these differences have been either totally or in part ameliorated by regulatory reform that happened in New Zealand as a result of these losses, this research does suggest that the regulatory reforms may have been broadly appropriate," Dr Tom Scott, of Auckland University, said in the statement.
Regulatory reforms included the creation of a new Financial Markets Authority that monitors auditors and trustees regulations among its other functions, and the Reserve Bank of New Zealand now required risk management policies, credit ratings and set capital and governance requirements. (Cihan/Xinhua)