Top accounting firm Ernst & Young is back in the spotlight for its role in overseeing the financial statements of Feltex and the status of the carpet maker's debt to ANZ Bank.In a key development in the trial of five former Feltex directors, Judge Jan
Top accounting firm Ernst & Young is back in the spotlight for its role in overseeing the financial statements of Feltex and the status of the carpet maker’s debt to ANZ Bank.
In a key development in the trial of five former Feltex directors, Judge Jan Doogue has allowed full disclosure of Ernst & Young files to be included in evidence during the case.
Gordon Fulton, an Ernst & Young partner, was the audit partner in charge of reviewing Feltex’s December 2005 interim financial statements, which are the subject of this week’s court hearing.
While most of the "field work" for the 2005 financial half-year audit was carried out by Ernst & Young’s Melbourne office, Mr Fulton put his name to the audit documents and has been summoned as a witness in the Feltex defended hearing.
At the same time Mr Fulton is facing disciplinary proceedings brought by the NZ Institute of Chartered Accountants (NZICA) following the findings of an October 2007 Securities Commission inquiry into the demise of Feltex.
Feltex collapsed into receivership in September 2006, 21 months after raising $254 million mostly from retail investors in a sharemarket float.
Former chairman Tim Saunders, ex director and chief executive Peter Thomas, and directors John Hagen, Michael Feeney and Peter David Hunter have pleaded not guilty to two charges under the Financial Reporting Act.
The registrar of companies alleges the directors failed to disclose an ANZ Bank debt facility as a “current” liability and did not disclose a breach of financial covenants during the six-month period to December 2005.
Feltex owed more than $150 million to the ANZ Bank leading up to its collapse and a former ANZ risk manager, Peter Holland, yesterday gave evidence that covenants were breached before the release of the half year accounts.
Ernst & Young’s lawyer Sherridan Cook argued that certain correspondence between the firm and NZICA should be excluded from the trial, on the basis of irrelevance, inadmissibility and oppressiveness toward Mr Fulton.
Judge Doogue considered the issues of privacy and confidentiality of a third party before ruling the evidence was of “major consideration” to the case and access should be provided.
An affidavit from former Deloitte chairman and former Feltex director Mr Hagen supporting the inclusion of the evidence, suggested that had Ernst & Young had not "failed" in its obligations, the five directors would not be on trial.
Sec Com inquiry
The Securities Commission's 2007 inquiry into Feltex found a number of failures – although it said the company’s prospectus was not misleading in any “material matters.”
The commission did reprimand Feltex for failing to disclose to the market changes to its banking agreements and a breach of its covenants leading up to its receivership in September 2006. This it referred to the Registrar of Companies to pursue.
It also found Ernst & Young failed to meet the required standards when reviewing the 2005 interim accounts.
This it referred to the NZIFA, which is taking action against Mr Fulton.
Mr Fulton has already told the Securities Commission that classification of Feltex debt was not specifically addressed as part of its audit and that Ernst & Young did not give Feltex any specific advice regarding the classification of debt.
However, in its report the commission said, “Ernst & Young and the responsible partner failed to inquire sufficiently about the status of Feltex’s debt to ANZ and failed to identify that breaches of banking covenants were required to be disclosed.”
Case continued. Comments deactivated.
