Financial Reporting Act Review - Cabinet Paper
[ Last Updated 3 February 2006 ]
The Chair
Cabinet Economic Development Committee
Hon Pete Hodgson
Minister of Commerce
3 August 2005
Also available as: Financial Reporting Act Review - Cabinet Paper [34 KB PDF]
Contents
Proposal
1. This paper seeks a decision on one issue arising out of the review of the Financial Reporting Act 1993 (the FRA). The issue relates to the financial reporting obligations of large non-issuer companies.
Background
2. The Ministry of Economic Development has completed a comprehensive review of the FRA. It has been decided that, with the exception of one issue, the set of decisions does not need to be made until after the General Election. The one issue that should be decided on now, in the interests of promoting business certainty, relates to whether large non-issuer companies should become reporting entities. The consequence of adopting this proposal is that large companies which do not raise money from the public would need to start filing audited financial reports with the Registrar of Companies. Those financial statements would, as a result, become available for public scrutiny. I am recommending no change to the current law, which would mean that large non-issuer companies would not become reporting entities.
3. When the Ministry of Economic Development released a discussion document on the Review of the FRA last year one of two alternative proposals made was to require large non-issuer companies to file audited financial reports with the Registrar of Companies, thereby making them available for public scrutiny. The rationale was that companies with significant assets, turnover and full-time equivalent employees are sufficiently important to the economy to justify public scrutiny of their financial performance and position.
4. There was no consensus on this issue in submissions. Many opposed the proposal, with personal privacy of shareholders and commercial confidentiality the most common concerns. On the other hand, a number of submissions were received supporting the proposal, pointing out that the purpose of general purpose financial reports is to provide information to those unable to contract for it. The two camps can essentially be divided into those that consider stakeholders outside the company have a legitimate interest in the financial affairs of that company, and those that consider only shareholders have a legitimate interest.
Comment
5. I have concluded that the discussion document proposal should not be implemented mainly because responses on the discussion document did not indicate that the information would be of any great value to potential users. In particular:
- Banks and other major lenders are able to demand the financial information they need before deciding whether to lend money to a company;
- Submissions did not indicate any significant use of general purpose financial reports by credit agencies or potential creditors; and
- Employers' interests are protected by the Employment Relations Act 2000.
International Practice
6. There is no consensus on this issue. Many jurisdictions, including the European Union, South Africa, Hong Kong and Singapore require all companies to file audited accounts. Australia also requires this but there is a grandfathering provision that exempts companies that did not have to file before this requirement was introduced.
7. The United States and Japan do not require filing of audit financial reports. Canada has a hybrid approach. While public filing is not required, accounts are required to be maintained and available to directors, shareholders, creditors and other interested parties.
Consultation
8. There has been no consultation on this paper. However, there was extensive consultation on the original set of proposals, including this issue, with the Securities Commission, the Companies Office, the Ministry of Justice, the Ministry for the Environment, the Department of the Prime Minister and Cabinet, the Department of Internal Affairs, the Inland Revenue Department, the Treasury, the New Zealand Customs Service, the State Services Commission, the Office of the Auditor-General, the Office for the Community and Voluntary Sector, the Reserve Bank, the Accounting Standards Review Board, the Institute of Chartered Accountants of New Zealand and the Chair of the Financial Reporting Standards Board.
Fiscal Implications
9. There are no fiscal implications.
Human Rights
10. There are no human rights implications.
Legislative Implications
11. There are no legislative implications.
Regulatory Impact and Compliance Cost Statement
12. This paper recommends the retention of the status quo. Therefore there are no regulatory or compliance cost impacts.
Publicity
13. I will make a public announcement following Cabinet decisions.
Recommendations
14. I recommend that the Committee:
1. Agree that there be no changes to the current law in relation to filing requirements of financial reports for non-issuer companies;
2. Note that the Minister of Commerce will report to the Cabinet Economic Development Committee on the full range of Financial Reporting Act review issues at the earliest opportunity after the General Election; and
3. Agree that this paper be placed on the Ministry of Economic Development website.
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