Valuation Lapses Put NZ Investors, Lenders at Risk
23 November 2009
MEDIA RELEASE
Valuation Lapses Put NZ Investors, Lenders at Risk
Widespread business failure to ensure third-party market valuation is putting New Zealand investors and lenders at risk, and undermining efforts to boost this country’s market capitalisation.
Bancorp Treasury Services Executive Director Earl White says too many companies, private and public, don’t value derivatives properly: “the level of under compliance is not a gap; it’s a yawning chasm”.
This shortcoming is due to a failure to understand that financial instruments must be independently valued, regardless of whether the business uses hedge or fair value accounting.
Independent valuation and robust procedures are crucial for ensuring that the valuation has true market value.
“It’s not enough to use a bank’s valuation because – in all fairness to banks – their assessment does not purport to be for financial reporting purposes. And it’s certainly not appropriate for entities involved in distributing investment products to then be providing market valuations for the end investors,” says Mr White.
“That’s akin to putting the fox in charge of the hen house.”
Failure to enforce correct valuation processes could have profound consequences on individuals, businesses and New Zealand’s entire economy. More than 20 years after the last economic crash, people are still sceptical about investing in the local share market and, unlike Australia, New Zealand has never gained pre-1987 market capitalisation.
The recent credit crisis has further highlighted the need for robust, independent market valuation procedures.
“New Zealand’s valuation compliance must be enforced in line with international standards,” says Mr White.
“Investors and lenders are not unreasonable in assuming that valuations have been prepared independently and in accordance with the rules.
“New Zealand has the potential to create a vibrant equity market but first we have to convince investors that they are being told the truth. History is littered with local investors taking a hammering because they based their decisions on inaccurate information,” says Mr White.
“Investors’ trust is easy to lose, and slow to regain.”
New Zealand needs to take Australia’s lead and take a tougher stance on enforcing compliance in line with international standards.
Regulators such as the Commerce Commission, Securities Commission and NZ Stock Exchange all have roles to play.
Mr White commented that sanctions needed to be meaningful: “significant amounts of people’s money are being put at risk.
“There must be meaningful sanctions for transgressors otherwise there is no incentive to change.”
Bancorp Treasury Services
provides independent and impartial advice on how to identify
and manage risk associated with: funding and liquidity,
markets (interest rates, foreign exchange and commodity
pricing), cash flow, financial instrument valuation, and
cash and fixed interest portfolios.
www.bancorptreasury.com
ENDS