Auditors, trustees concerned about South Canty in 2008

The Reserve Bank document dump has revealed concerned letters about related-party lending were sent from auditors and trustees to South Canterbury Finance as early as 2008.

The disclosures comes in a December 2009 letter from a Securities Commission lawyer to Trustees Executors raising a “number of serious concerns relating to both specific accounting issued as well as broader issues around the corporate governance, management, and record-keeping of SCF."

The Securities Commission goes on to note: "They raise concerns for the Commission about the reliability of the information disclosed by SCF in its prospectus and to the market.”

The Securities Commission appended managers’ letters to South Canterbury from its auditors Woodnorth Meyers who wrote to the finance company, in a letter dated April 8, 2009, saying:

• “The directors have not met or provided minutes of any meeting since a meeting in November 2008 prior to our signing of the audit on 31 March 2009. This is a substantial amount of time and has not allowed for the formal board approval of a number of material transactions.”
• Group policies requiring directors and the CEO to approve loans over $1m were not satisfied at head office: “It is not always apparent that the same criteria are met when considering lending made from Timaru.”
• Inadequate identification of related-party lending and investments: “This area of disclosure is becoming increasingly important and is the subject of numerous reports from the securities commission.”
• Little-known, but substantial loans to Fiji: “There continues to be a substantial exposure to Denerau. Whilst we understand that this is an ongoing project, there has been limited information available to determine the security value that SCF holds.”

And in a letter dated November 20, 2009, the auditors note:

• More problems with board meetings: “The minutes of Board meetings provided to us have been very brief, and it is not always apparent that large transactions have been approved.”
• The continued failure to formalise related-party disclosures called into question South Canterbury’s participation in the Crown Retail Deposits Guarantee Scheme. “It is also of particular importance in respect of the Crown Guarantee, which has related party transaction limits. There would be serious repercussions if these limits were to be breached.”

In response to the Securities Commission letter, Trustee’s Executors replied and said: “The tenor of the items contained in the letters was not unexpected, being consistent with concerns raised and being pursued by us as Trustee for some time.”

In its defence, Trustees Executors shifted the blame south, appending their own letter to Allan Hubbard that it said “reflected our concern at the time that there had
been a significant deterioration in corporate transparency.”

That letter, dated December 12, 2008, said: “We expect with the Reserve Bank being the overall regulator of all deposit takers, increased scrutiny will be placed on all related party transactions and as noted above, limitations on maximum related party exposures will be prescribed in trust deed…

"We believe (in conjunction with the increased regulatory oversight of the Reserve Bank) that the SCF Board ought to review the way it currently manages these transactions.”