Exemptions for insolvent businesses advocated

This article was current at the time of publication.

Insolvent New Zealand companies should not have to provide audited financial statements, a recent submission by CPA Australia advocates.

The submission was made to the Financial Markets Authority (FMA) on proposed financial reporting exemptions for FMC (financial markets conduct) reporting entities in liquidation, receivership or voluntary administration.

As it currently stands, the Financial Markets Conduct Act 2013 requires an FMC reporting entity to produce and audit financial statements in compliance with generally accepted accounting principles. These are necessary despite the parallel reporting obligations of an external administrator.

The FMA is considering a class exemption for certain FMC reporting entities from some reporting obligations.

CPA Australia’s submission makes these points:

• Audited financial statements are unlikely to provide value to company members and stakeholders due to the changing nature of a company subject to external administration.
• This additional obligation is unnecessary as an external administrator provides their financial information to the New Zealand Companies Office.
• Costs associated with the preparation and audit of these financial statements are best utilised in the restructuring of the company and or in obtaining monetary returns to creditors.
• The audit of financial statements may be difficult to obtain should a company be in an insolvent external administration due to problems obtaining audit evidence and possible auditor reluctance to undertake the assignment.

Period of relief

Given the loss of utility in duplicated reporting and to ease the burden on members, CPA Australia supports granting relief to insolvent entities that are not part of a managed investment scheme. This would be for 12 months while the company attempts to restructure or sell.

Should a company wind up, CPA Australia says there should be no requirement for it to produce audited statements because the reporting is not via the Companies Office.

Protections for administrators

Although audited financial statements provide valuable information to shareholders, in its submission CPA Australia argues that external administrators should be provided breathing space while the financial position is ascertained, a strategy formulated and then implemented with regards to the company’s future.

External administrators should also be protected from disclosing confidential financial information during the process to implement a strategy that is in the best interests of creditors.   

After restructure

The submission does not suggest blanket non-reporting. Rather, entities that may be subject to receivership or a deed of company arrangement should prepare audited financial statements after the restructure. 

The upshot from CPA Australia’s recommendations is that the company will provide shareholders and other stakeholders such as creditors and lenders the ability to make informed decisions on their investments.

However, companies will need to continue with the status quo until the FMA announces a decision on the review.

Kristen Beadle CPA is Manager Public Practice and SME at CPA Australia