The Feltex Debacle: New Zealand’s ENRON?

The Feltex Debacle: New Zealand’s ENRON?
- Sue Newberry

Sue Newberry is Associate Professor of Accounting at the University of Sydney, and a member of the New Zealand Institute of Chartered Accountants

The collapse into receivership of Feltex Carpets Ltd continues to produce waves of concern. Shareholders are preparing a case against its directors; there has been another Securities Commission investigation, and we have raised our disquiet at the deals revealed by Overseas Investment Office decisions when Feltex was broken up (see elsewhere this issue). Concerns are well merited. This article gathers evidence that the Securities Commission has not adequately scrutinised the behaviour of Feltex or its auditors; that Feltex was misleading in reporting its financial situation to its current and prospective shareholders at crucial times; and questions the quality of the work of its auditor, Ernst and Young.

Recently, the Securities Commission released its report “Feltex Carpets Limited – IPO (Initial Public Offer) Prospectus, Financial Reporting and Continuous Disclosure” (www.seccom.govt.nz/publications/documents/feltex/print.shtml). The Commission concluded in this report on Feltex (FTX) that:

1. “the prospectus [of 2004] was not misleading in any material particulars;
2. FTX failed to disclose certain material information to the market concerning changes to its facility agreement with ANZ in October 2005;
3. FTX failed to disclose the breach of its banking covenants in its December 31st, 2005 half-year financial statements; and
4. FTX did not properly classify its debt in its December 31st, 2005 half-year financial statements (para 2)”.

In other words, the 2004 prospectus was fine (point 1), but subsequent events in 2005 were not (points 2-4). Even so, the Securities Commission does not intend doing much about them. Action on the market disclosure breaches would need to be action against Feltex, but Feltex is in liquidation so there is nothing to be done about that (points 2 and 3). The Commission intends to act only on the financial reporting failure (point 4). It will refer the matter to the registrar of companies to consider action against Feltex’s directors - but not its auditors - under the Financial Reporting Act. Auditors are not liable under that act.

According to the Securities Commission, the work of Feltex’s auditor Ernst & Young (EY) on the December 2005 financial reports was substandard. Further, the Securities Commission considered it unacceptable that EY refused access to the audit working papers for Feltex’s Australian activities. The Securities Commission will report these matters to the New Zealand Institute of Chartered Accountants (NZICA). As one commentator noted, this might earn EY a slap on the wrist with a wet bus ticket. Indeed, the Securities Commission itself recognises the NZICA “lacks the crucial elements of perceived independence and objectivity.[i]

The Securities Commission’s report is unconvincing. Points 2, 3, and 4 in the Report relate to late 2005, when the terms of the ANZ’s banking arrangements with Feltex were renegotiated, but Feltex did not disclose this to the public either in market disclosures or in its financial reports. This change was significant, because it allowed the “ANZ to call the debt immediately due and payable with 30 days notice”. It meant that Feltex’s “financial stability depended upon the continued support of ANZ”(para 90). 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”.

Feltex’s share float in June 2004 raised more than $250 million from mostly New Zealand investors, many of those individual “mum and dad” retail investors. Retail investors are at a disadvantage in any share float because the larger institutional investors receive information additional to that provided in the prospectus. Representatives of institutional investment houses, for example, taken on a tour of Feltex’s Melbourne manufacturing plant, could see for themselves its shabby condition.[ii] Institutional investors shunned Feltex’s share float, regarding it as a dud.

Shortcomings Of Auditors & Securities Commission

The prospectus, as required, advises those contemplating investment to seek advice from their investment advisors. Many small investors didn’t need to do that though, because the advisors came to them. The joint lead managers to the share offer, First NZ Capital and Forsyth Barr Limited, earned $5.5 million from the share float in commissions and incentive payments.[iii] 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”.[iv]

The Securities Commission has reported that Feltex’s 2005 disclosures were seriously deficient, but the 2004 prospectus was not materially misleading. It “reviewed the [historical] financial statements in the prospectus. This review did not find evidence of any breach of disclosure required under the securities laws and financial reporting standards” (para, 65). It also reported “there was no information available to the directors at the time of the IPO to suggest that the directors of FTX could or should have foreseen that the projections [in the prospective financial information] would not be reasonable” (para 69). I’ve reviewed the prospectus, Feltex’s financial statements from 2000 to 2005, and news reports from around the time of Feltex’s collapse and subsequently. I think the Commission should revisit the matter.

All of the financial statements concerned, including those in the prospectus, are audited. Two points should be made about auditing before explaining why I think the prospectus is misleading. First, when an auditor certifies financial statements, that certification does not relate solely to compliance with financial reporting standards, as the Securities Commission suggests. A clean audit report typically states that “the financial statements on pages _ to _ comply with generally accepted accounting practice in New Zealand; and give a true and fair view of the financial position of the company and group as at [the date] and their financial performance and cash flows for the [time period] ended on that date”.

Generally accepted accounting practice (GAAP) includes compliance with financial reporting standards, but it involves more than that. Financial reporting standards don’t cover every possible transaction or arrangement. GAAP requires application of judgement and consideration of appropriateness of accounting practices adopted. Strict compliance with financial reporting standards does not necessarily result in financial reports giving a true and fair view. Judgement is required to decide whether the financial reports do give a true and fair view. If, having complied with the financial reporting standards, the financial statements do not give a true and fair view, then additional information is required to ensure that they do. The Commission appears to have a very narrow, legalistic view of appropriate accounting. Although it does mention GAAP, it seems focused predominantly on financial reporting standards, thus overlooking both the broader GAAP requirements for financial reporting and the true and fair view claims in an auditor’s certification.

The second point to think about with audited financial statements is what auditors actually do. An embarrassing case in the 1940s led to the United States Securities and Exchange Commission instructing auditors that “facts should be confirmed by physical inspection or independent confirmation”.[v] This instruction gave auditors “a forceful reminder that meticulous figures need not match fact”.[vi] The Securities Commission’s report suggests EY may have forgotten that. The Commission criticised EY for relying on information provided by Feltex about its arrangements with the ANZ in 2005, instead of verifying matters directly with the bank.

Having criticised EY for that failure to ensure the content of the financial report matches fact in the 2005 financial reports, the Securities Commission should consider the possibility that this was not an isolated failure. And in relation to its own review of Feltex’s prospectus, did the Securities Commission consider whether the financial information presented in the prospectus accords with the facts? Maybe it has done this, but the Securities Commission’s report seems to be focused narrowly on compliance with particular financial reporting standards. Did the Commission consider whether the prospectus presented a true and fair view? If not, how can the Commission claim the prospectus was not materially misleading?

Background Information On Feltex And Its Share Float

Information published around the time of Feltex’s demise contributes to an understanding of the environment in which Feltex operated. Having been purchased in 1996 by Credit Suisse First Boston Asian Merchant Partners (CSFBAMP), Feltex purchased Shaw Industries, an Australian-based carpet manufacturer and importer, in 2000. This purchase, for $111.4 million, was totally debt funded – by the ANZ. The purchase “turned Feltex from a New Zealand-based wool carpet producer to a firm making 75% of sales in Australia, with 60% in synthetic carpets, competing against cheap Chinese imports”.[vii]

The Shaw Industries purchase was a disaster, Feltex’s Australian operations incurring losses each year. These losses were only partly offset by Feltex’s smaller but profitable operations in New Zealand, and Feltex reported overall losses in both 2001 and 2002. Australia is committed to reducing tariffs on imported carpet. Imports of synthetic carpets increased by 25% between June 2002 and June 2003. Tariffs on imported carpets were scheduled to drop a further five percentage points, from 15% to 10%, from January 2005; and, in 2004, Australia signed a free trade agreement with the United States that would lower still further barriers to imported carpets. Feltex’s Australian sales fell each year, at least partly because of heavy discounting in that highly competitive market.

In 2003, Feltex issued a prospectus for $60 million of secured bonds, following which it “renegotiated its banking facilities with the Australia and New Zealand Banking Group Limited”.[viii] In other words, the money raised from the secured bonds was used to repay some of Feltex’s debt to the ANZ. According to Feltex, the new financing structure provided “the Group with an improved and stable funding position and significantly lowers the overall cost of the Group’s borrowings”.[ix] The bond issue also gave bond holders preferential rights in a subsequent share float, thus, according to one commentator, signalling “that Feltex was being dressed up for sale”.[x] This suggests the need for increased scepticism about the financial statements to come.

Feltex’s annual report for 2003 was reported as difficult to understand because it showed falling sales and increased profit[xi] (the 2002 financial report shows sales of $312.6 million and a loss of $18.2 million; and the 2003 financial report shows sales of $303 million and a profit of $6.8 million). Having examined the 2003 report, I don’t understand the turnaround either. Feltex appears to have reduced its cost of sales by about five percentage points. In an industry with such high fixed costs, that this could be achieved in conjunction with falling sales seems remarkable. According to Feltex, following the acquisition of Shaw Industries, it had achieved cost synergies and introduced lean manufacturing techniques, repositioned its product mix towards higher value and higher margin carpet, and expanded its relationships with key customers.[xii] Maybe, but it is worth noting that the existence of related party arrangements for the purchase and sale of inventory, and for plant utilisation charges, provides scope for creative transfer pricing arrangements.[xiii] Did the Securities Commission consider taking a closer look at Feltex’s 2003 financial report? 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 doubt about the prospectus.

Just a year later, in May 2004, Feltex launched the Initial Public Offer (IPO) that would allow its shareholder, CSFBAMP, to sell its shares and, at the same time allow Feltex to raise an additional $50 million with which it could redeem the bonds it had issued in 2003. This too seems remarkable because the issue of the bonds and their redemption just a year later cost Feltex around $10 million (approximately $5 million bond issue costs and another $5 million of early redemption costs) on top of the 10.25% interest rate paid on the bonds during the year. That amounts to paying approximately $16 million to borrow $60 million for just one year, and works out at an interest rate of almost 27%. In contrast to Feltex’s claim in 2003 that the issue of the bonds reduced interest cost, the reality is that the finance costs worked out to be very expensive. There was no comment about this.

The bonds had been secured “by way of a second mortgage over land and buildings of the Group and by fixed and floating charges over the assets and undertakings of the Group”.[xiv] Following the share issue, Feltex again renegotiated its banking facilities with the ANZ. This refinancing via the share issue brought New Zealand’s “mum and dad” investors in to carry the risk of Feltex’s demise and, presumably, allowed the ANZ to strengthen its security. As Feltex’s shareholders know to their cost, shares are not secured.

This background information is relevant to the review of parts of Feltex’s prospectus. Three examples are sufficient to illustrate my doubts about the Securities Commission’s view that the prospectus is not materially misleading. These examples relate to the sales trajectory depicted in the prospectus and the allegedly unforeseen drop in sales in 2005; the depiction in the prospectus of Feltex’s anticipated profitability for 2004 and 2005; and the reported value attributed to Feltex’s investment in Australia. Two of these examples also demonstrate that, although the Securities Commission, in its review of the prospectus, did not find evidence of any breach of disclosure required under financial reporting standards, that does not mean there were no breaches.

Feltex’s Sales Trajectory

Feltex’s 2004 prospectus shows historical information apparently taken from the audited figures in its 2002 and 2003 annual reports, plus further results for the six months ended December 31st, 2003. Total sales for the 12 months ended June 2002 and June 2003 are shown in the prospectus as $321,564,000 and $313,412,000 respectively, whereas the total sales in the actual reports published in 2002 and 2003 show sales figures of $312,645,000 and $303,042,000 respectively.[xv] Further analysis of these sales figures may be found in the notes to the financial reports where the total sales are analysed by country.[xvi] There it becomes apparent that the differences relate predominantly to the Australian sales which, between June 2002 and June 2003 the annual reports showed had reduced, whereas the prospectus shows them increasing. The table below shows only a part of the information presented in the notes. The full notes reconcile to the total sales figures mentioned above.

The adjustments do not affect the reported profit figures (net surplus [deficit]), which means an offsetting adjustment must have been made to expenses. Even so, at the detail level, that is, in the segment information, the adjusted figures in the prospectus convert a falling Australian sales pattern into a rising one, and help to support the notion that losses incurred from the Australian operations are reversing.

The prospectus also forecasts results for 2004 and 2005, but it does not give sufficient detail to identify projected sales figures. For this reason, I’ve used the total operating revenue figures in the table below. These figures include sales plus other revenues but in the historical figures, those other revenues are relatively minor.

The prospectus figures for 2004 and 2005 look heroic compared with the figures published in the annual reports for 2002 and 2003. Even after the 2002 and 2003 figures have been adjusted upwards for publication in the prospectus, they still look very optimistic. The prospectus contains no explanation for the upward adjustments made to the 2002 and 2003 figures.

It is not until after the share issue, when the financial reports for 2004 were published that information is provided to explain the upward changes in the sales figures. In that 2004 financial report, Feltex reported a change of accounting policy: “To achieve consistency within the Group, the disclosure of the sales amount has been amended to exclude claims and freight. Previously the Australian sales amount was net of claims and freight. These costs are now shown as part of cost of goods sold”.[xvii] Bearing in mind the heavy discounting reported in the Australian market, and that these adjustments are mostly confined to the Australian sales, it seems possible that the “claims” mentioned represent discounts and, therefore, that the Australian sales figures have been adjusted upwards so they are reported as a before-discount amount.

Change Of Accounting Policy: Not Apparent, Incorrect & Misleading

This is not apparent in the prospectus, which says: “there have been no changes in accounting policies. All policies have been applied on bases consistent with those used in the prior year being the year ended 30 June 2003”.[xviii] This statement in the prospectus is incorrect, and the effect is misleading, especially because sales information is crucial. This failure to disclose a change in accounting policy in the prospectus breaches a financial reporting standard.

The adjustments to the Australian comparative sales figures are small in percentage terms, so it could be argued that the amounts are not material. The accountant’s rule of thumb for materiality in relation to sales is 5% and the difference in June 2003 is 4.7%. If a legalistic interpretation is applied, the amount of the change could be argued to be immaterial. According to such an argument, neither Feltex’s directors nor its auditors should be criticised for failing to disclose the change. But materiality also requires consideration of the information itself and its likely effect on decisions. Surely, the sales patterns projected are very important in a prospectus for a share offer. The adjustments made reversed the direction of the sales trajectory.

The glossy part of Feltex’s prospectus supports the positive trajectory shown in the detailed sales figures. Under the headings of “competitive environment” and “industry conditions” there is little to suggest the existence in Australia of the market conditions outlined above. The forecasts and projections assume that:

• there will be no changes in selling prices (this could imply that reported sales show the sales prices);


• “no material changes in the competitive markets”;


• “no significant changes in the pricing policy of competitors”;


• “no new entrants in the market”;


• “the revenue projection assumes that the market will grow as described”; and that


• “Feltex will increase its market share by about 1% over the projected period”.

The projected period was through to the end of the 2005 financial year. With further tariff reductions in Australia due from 1 January 2005, and the free trade agreement signed, questions must arise as to how realistic those assumptions were. A reader of Feltex’s prospectus would find out about these competitive conditions only by referring to the “What are my risks?” section on pages 125-130 and reading it all. That section notes that, “the floor coverings industry in both Australia and New Zealand is highly competitive”.[xix] Under the heading of “Imports” the reader learns that “the likelihood of a change in the level of imports into Australasia is dependent on a number of factors, including movements in tariffs, exchange rates and the cost of production in exporting countries”.[xx] “In Australia, tariffs are scheduled to decrease from 15% to 10% on January 1st, 2005 and from 10% to 5% on January 1st, 2010. In addition, the Australia US Free Trade Agreement will reduce those tariffs by a further 2% for imported product from the United States. A tariff reduction programme has also been announced by the New Zealand government. Under that programme, tariffs are expected to reduce from 17% to 15% in 2007, to 12.5% in 2008 and to 10% in 2009”.[xxi]

In the event, the total operating revenues for 2004 and 2005 were below Feltex’s projections. 2004 was only slightly below, which should not be surprising given that the financial year was almost over when the prospectus was produced. According to the directors, the “sudden” sales downturn that Feltex encountered in early 2005 was a surprise. The total operating revenues reported are shown below the figures shown in the prospectus:

The Securities Commission assessed the assumptions underlying the prospective financial information Feltex supplied in the prospectus and concluded: “there was no information available to the directors at the time of the IPO to suggest that the directors of [Feltex] could or should have foreseen the projections would not be reasonable”.[xxii] Feltex’s Australian sales had been falling but the undisclosed change in accounting policy concealed those falling Australian sales and gave the impression of increasing sales. Was this purely a coincidental oversight, or did Feltex have something to hide by making that change? Why was the change in accounting policy not disclosed? And, given that EY earned $1.471 million in fees for its clean report on the prospectus, why was this undisclosed change from the 2002 and 2003 annual reports not picked up?

The Depiction In The Prospectus Of Feltex’s Profitability For 2004 And 2005

In Feltex’s prospectus, the consolidated statement of prospective financial performance shows the forecast profit for June 2004 and the projected surplus for June 2005.[xxiii] Financial reporting standards (FRS) specify the presentation of this report and, in particular, specify what the bottom line must be. FRS-29 Prospective Financial Information requires presentation in the same format as for other audited financial statements. Reproduced below is Feltex’s consolidated statement of prospective financial performance, which has two “bottom lines”.[xxiv] The first bottom line, “net surplus attributable to shareholders” is the one that is required in financial reports. The second bottom line, “net surplus attributable to shareholders (before amortisation, write-offs and early redemption amount)” is not allowed.

Note that the figures in the second bottom line (22,307 and 25,873) are larger than those in the first bottom line (10,113 and 23,889), and these are the ones the eye is drawn to. The write-offs, which amount to almost $10 million (341 + 4,881 + 5,014), relate to the cost of issuing the bonds in 2003 and the additional payment required for early redemption. The second bottom line seems designed to divert the reader’s attention away from their effect and to give the impression of greater profitability. This is a blatant breach of a financial reporting standard, and it is surprising that neither EY nor the Securities Commission seems to have noticed it.

The Value Of Feltex’s Investment In Australia

The final point from this limited review relates to the value of Feltex’s investment in Australia as reported in the prospectus. Feltex purchased Shaw Industries in May 2000, borrowing the full purchase price of $114,290,000 from the ANZ. This is what loaded Feltex with debt and is a key contributor to its downfall, especially because as already noted, this operation was unprofitable. In exchange for the $114,290,000 purchase price, Feltex obtained control of net assets of $71,432,000. The difference between the purchase price and the net assets was $42,858,000, an amount that accountants like to call “goodwill”. The logic behind this is that the value of the whole firm is greater than the sum of its parts, and that goodwill is a payment for the super-profits to be earned from the acquisition. When the financial reports of the subsidiary are combined with those of the purchaser, this goodwill shows up as an asset in the consolidated financial report. Of course, it is always possible that the amount paid is simply too much, in which case the goodwill should not be shown as an asset at all. It should be written off as an expense. Because Shaw Industries incurred losses from the beginning, whether goodwill should have been reported as an asset in the prospectus warrants further consideration.

Under the financial reporting standards of the time, Feltex was required to write off the goodwill as an expense gradually over an appropriate period, the maximum time allowed being 20 years. Feltex’s financial reports show that Feltex was writing the goodwill off over 20 years, thus implying that it was indeed earning super-profits from its acquisition, and anticipated earning those super-profits for the full 20 years. But Feltex’s acquisition had incurred losses from the start.

The prospectus shows Feltex’s consolidated statement of financial position for December 2003.[xxv] In that, Feltex reported goodwill at $32,394,000.[xxvi] Given the losses incurred from Shaw Industries, arguably this goodwill should not have been included as an asset in the prospectus. Feltex continued to report goodwill as an asset in 2005. In 2006, Feltex announced its annual results but did not publish them. The announcement stated that Feltex had written the goodwill down to zero. Arguably, it should have done this several years previously and certainly before issuing the prospectus. It is difficult to see how reporting goodwill as an asset in relation to such a subsidiary bears any resemblance to projecting a true and fair view. While the practice adopted did not breach the financial reporting standard of the time, it did not match the reality. Once again, the US Securities and Exchange Commission’s important reminder of the late 1940s requires consideration. The most meticulous figures might be consistent with financial reporting standards, but that does not mean they match fact. The true and fair view statement signed by the auditors means the auditors certified that the figures did match the facts.

Clearly, Feltex directors considered what should be in the financial reports shown in the prospectus, and some changes were made. In addition to the undisclosed change of accounting policy for reporting its sales, Feltex also for the first time revalued its assets upwards by $15.3 million. The “fair value” basis used for the valuations was very likely based on Feltex’s projections of profits to be earned from those assets. It is an irony that Feltex’s collapse precipitated disposal of those assets at “fire sale” prices, thus incurring significant losses. The question of goodwill should also have arisen.

A Tangle Of Conflicts Of Interest

Enron and other companies in the scandalous collapses of 2001 and 2002, drew public attention to the tangle of conflicts of interest among the financial market players. Closer scrutiny of Feltex’s share float reveals similar conflicts affecting Feltex’s auditors, its directors and management, the ANZ, and the brokers who promoted the share float to small investors. All of them stood to gain from releasing misleading financial information.

Feltex’s auditor, EY had a long a fruitful relationship with Feltex. For all of Feltex’s financial reports since 2000, EY had issued clean audit reports. Part of an audit report must state any other relationship the auditor has with the audited company, and notes in the financial reports analyse the fees paid to auditors for their audit and other services. The table below shows the reported fees paid to Feltex’s auditors and the services to which those fees are related, and then shows EY’s audit fees as a percentage of total fees paid.

Over the six years shown above, EY’s audit fees averaged only about 30% of the total fees paid to EY for services to Feltex. In 2004, EY’s fees for other services provided to Feltex were six times the size of the audit fees ($2,027,000/290,000). And yet in the 2004 Annual Report, EY’s statement in its audit report of its relationship with Feltex said: “Other than in its capacity as auditor, we have no relationship with or any interest in the company or any of its subsidiaries”. That statement is inconsistent with the figures shown in the notes and clearly does not match the facts. Who audits the auditor’s audit report?

Enron’s collapse in 2001 highlighted concerns about auditors’ conflicts of interest when they provide other services to their clients, especially when the revenues from those other services are proportionately large. Perhaps some auditors actually do manage to maintain independence of mind when auditing clients who provide major fees from other services. But public perceptions are important too, a point well known in the auditing profession, and acknowledged by the Securities Commission.[xxvii] The relative proportions of EY’s audit and other fees from Feltex look ugly.

In its report on Feltex, the Securities Commission criticised EY for its substandard work in reviewing Feltex’s financial report for the half year ended December 31st, 2005. That audited report neither disclosed Feltex’s breach of its debt covenants with the ANZ, nor reclassified Feltex’s debt from long term to current. Had these been done, Feltex’s solvency would have been in question almost a year before it collapsed. The auditor’s report said nothing. EY also signed off on Feltex’s prospectus. In clearing Feltex’s 2004 prospectus as not materially misleading and complying with all financial reporting standards, the Securities Commission undermines its own credibility. To what extent did the Securities Commission consider whether the report had any basis in fact? Did the Securities Commission not notice the breaches of financial reporting standards? And what grounds does the Securities Commission have for assuming EY’s 2005 audit was the only substandard one?

EY has refused to provide the Securities Commission access to the Australian audit working papers, a move the Securities Commission has criticised as unacceptable. This obstructiveness by EY seems little different from that of auditor Arthur Andersen * in 2001 when it shredded documents relating to Enron. The Securities Commission’s response of reporting EY to the NZICA is weak. Arthur Andersen was the accountancy transnational that collapsed as a result of Enron’s 2001 collapse. It was in it up to its eyeballs. For a succinct account of the rise and fall of the US corporate criminal that was Enron, see Jeremy Agar’s review of the excellent documentary, “Enron: The Smartest Guys In the Room” in Watchdog 111, April 2006, which can be read online at http://www.converge.org.nz/watchdog/11/10.htm. Ed.

The Feltex Debacle Is A Disgrace

Feltex’s directors and management gained personally from the 2004 share float. The higher the share issue price, the more the directors and management stood to gain. Tim Saunders, Sam Magill, Peter Thomas, Michael Feeney, Craig Horrocks and David Hunter “realised combined profits in excess of $14 million from the IPO”.[xxviii] As already noted, brokers, led by First NZ Capital and Forsyth Barr took $5.5 million in fees from off loading the share issue largely onto small investors. In addition, the ANZ’s actions, evidently looking after its own interests at the expense of shareholders, and resistance to investigation makes it a deserving winner of the New Zealand Shareholders’ Association’s annual Golden Glob award. All of these parties seem to have taken advantage of the small shareholders’ relative information disadvantage and their susceptibility to the advice of incentivised investment advisors. The Feltex debacle is a disgrace, exposing a tangle of conflicts of interests. The Securities Commission’s weak response does nothing to rebuild confidence in New Zealand’s financial market.

[i] “Independent audit regulation and oversight in New Zealand”, 23/8/07, www.seccom.govt.nz/publications/documents/letter-audit2.shtml

[ii] “Carpet burns”, by Gareth Vaughan, 19/8/06, Dominion Post.

[iii] “Carpet burns”, by Gareth Vaughan, 19/8/06, Dominion Post.

[iv] “Carpet burns”, by Gareth Vaughan, 19/8/06, Dominion Post.

[v] “McKesson &Robbins: a milestone in auditing”, by WT Baxter, Accounting, Business & Financial History, Volume 9, Issue 2, July 1999, pp157-174 (p172).

[vi] “McKesson &Robbins: a milestone in auditing”, by WT Baxter, Accounting, Business & Financial History, Volume 9, Issue 2, July 1999, pp157-174 (p173).

[vii] “The crash that shocked the share market”, by Gareth Vaughan, 29/12/06, Dominion Post.

[viii] Feltex Carpets Limited, Annual Report 2003, p4.

[ix] Feltex Carpets Limited, Annual Report 2003, p4.

[x] “How Feltex history floored its investors”, New Zealand Herald, 5/8/06.

[xi] “How Feltex history floored its investors”, New Zealand Herald, 5/8/06.

[xii] Feltex prospectus 2004, p. 41

[xiii] Feltex Carpets Limited, Annual Report, 2003, p28, Note 23, Transactions with related parties.

[xiv] Feltex Carpets Limited, Annual Report 2003, p31.

[xv] The sales figures are shown in Note 2 of the relevant financial reports.

[xvi] Feltex Carpets Limited, Annual Report, 2003, p29, Note 24.

[xvii] Feltex Carpets Limited, Annual Report, 2004, p26.

[xviii] Feltex Carpets Limited, prospectus 2004, p101.

[xix] Feltex Carpets Limited, prospectus 2004, p125.

[xx] Feltex Carpets Limited, prospectus 2004, p126.

[xxi] Feltex Carpets Limited, prospectus 2004, p127.

[xxii] Securities Commission, para 69.

[xxiii] Feltex Carpets Limited, prospectus, 2004, p85.

[xxiv] Feltex Carpets Limited, prospectus 2004, p84.

[xxv] Feltex Carpets Limited, prospectus 2004, p99.

[xxvi] Reduced in the records by exchange rate changes as well as the one-twentieth write-offs each year.

[xxvii] “Independent audit regulation and oversight in New Zealand”, 23/8/07, www.seccom.govt.nz/publications/documents/letter-audit2.shtml

[xxviii] “How Feltex history floored its investors”, New Zealand Herald, 5/8/06.

ENDS

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