John Hagen was the Feltex director most likely to have detected errors in the carpet maker's contentious half-year accounts.A corporate finance partner at Deloitte for most of his professional life, he was also the founding chairman of New Zealand's Accou
John Hagen was the Feltex director most likely to have detected errors in the carpet maker’s contentious half-year accounts.
A corporate finance partner at Deloitte for most of his professional life, he was also the founding chairman of New Zealand’s Accounting Standards Review Board, the organisation responsible for implementing international financial reporting standards (IFRS) in New Zealand.
IFRS standards are crucial in the trial of five former Feltex directors, who have denied charges the company’s interim financial statements to December 31, 2005 failed to disclose a breach of its banking covenants with the ANZ Bank.
It’s on the basis of IFRS that Feltex’s more than $A100 million debt to the ANZ Bank – its largest liability at the time – should have been classified as current – meaning it would need to be repaid within the year
But at the Auckland District Court this morning, where the trial resumed after a two month break - Mr Hagen said he had not read the new accounting standards outlining IFRS requirements, at the time Feltex’s half-year accounts were approved.
He was therefore unaware of the change in debt classifications for current and non-current liabilities.
The directors have accepted the company’s December 2005 interim accounts did not meet the required accounting standards and plead they all took all reasonable and proper steps to ensure compliance.
They said they relied on the advice of Ernst & Young auditors and senior members of Feltex finance team that the December 2005 half-year accountant financial statements complied with NZ IFRS.
This morning, Mr Hagen, who chose to stand during proceedings, said the board had sought assurance from Feltex’s chief financial officer Des Tolan and accounting firm Ernst & Young, paid $113,000 to audit the accounts, whether the accounts complied with IFRS.
Both parties answered with an “unequivocal yes, without hesitation and without qualification” said Mr Hagen.
Any other response would have set alarm bells ringing and the financial statements would not have been approved, he said.
“If we had known the correct way of classifying the debt liability as at 31 December 2005 for Feltex, we wouldn’t be here [today],” he said.
“A mistake was made by management, unfortunately, and not picked up by auditors, unfortunately.”
Prosecuter Brian Dickey asked: “Aren’t you just washing your hands by proposing that?”
Mr Hagen: “Not at all.”
He said directors’ responsibilities were not to prepare financial statements but to ensure those who prepared and reviewed them were qualified and able.
It was up to the directors to ensure the question was asked, and in this case, they had been.
Mr Hagen said he had reviewed the interim financial statements of NZX50 companies between 2005 -2009 to see how many of them conducted an interim review and how many of the accounts had been audited.
He said reviews were the exception, not the norm, and in only one case in the five-year period was an audit conducted – when Contact was required to issue a prospectus for debt raising.
