From: Megan L Blenkarne [] Thursday, 10 December 2009 5:08 p.m. To:

From:
Sent:
To:
Cc:
Subject:
Attachments:
Megan L Blenkarne [[email protected]]
Thursday, 10 December 2009 5:08 p.m.
MODY, Yogesh
Toby Fiennes; Kathryn Rogers; Andy Wood
South Canterbury Finance Limíted
ScopKMBT_7509121015450.pdf
Dear Yogesh
Please find a Iettez attached for your attention.
Kind regards
Megan Blenkarne
Lawyer
Securítíes Commíssíon
DDI: 04 495 1676
www.sec-com.qovt.nz
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1
E_eve18
Unisys House
r NEW ZEALAND
P.O. Box 1179
10 December 2009
New 1ealand
Te I 644-472 98' 0
l=ax 64+ 4 472 8076
seccom@seccor
n.govt.nz
Trustees Executors
By email: Yogesh.Mody®trustees.co.nz
Attention: Yogesh Mody
Dear Mr Mody
1.
auditors, Woodnorth Myers, dated 8 Apri1 2009 and 20 November 2009 respectívely. We
understand that Trustees Executors would usually receive copies of these íetl:ers directly
from Woodnorth Myers pu.rsuant to clause 9 of the 5 Schedule of the Securitíes
Regulations 1983.
2.
The Ietters appear to us to raise a number oí seríous concerns relating to both specifzc
accounting issues as we1l as broader issues around the corporate
the reliability of the information disclosed by SCF in íts prospectus and to the market.
3.
In 1igh.t of the matters raised by the auditors, please provide your coirirnents as to whether
you are satisred with the quality of the information that is being provided to you by SCF.
4.
far.
In this regard we note that it is now eight months since the Apri1 management letter.
5.
not be able to provide your response wíthin this timeframe, please 1e# us know in advance.
Yours síncerely
Megan Blenkarne
Lawyer
CC:
Andy Wood / Toby Fiennes
Reserve Bank of New Zealand
2 The Terrace
Wellington 6011
8 April 2009
F'0 Box 125
R
Ro;
Board/Management communication
a) unprepared for the accounting consequences o'f those decisions;
b) unable to provide adequate supporting documentation in a timely manner; and
c) sub,jected to unnecessary and avoidable tíme pressures.
Recomnwndation
explicit guídance to enable them to properly account for these major transactíons as
soon as practicable.
transactions with both related and non-related party entítíes.
Board DecisionslMeetings
November 2008 prior to our signing of the audít on 31 March 2009. This is a
substantial amount of time aud has not allowed for the formal boa.rd approval ofa
number ofmaterial transactions.
nore regular
basis. Material Iendíng and investment decisíons should be approved by the Board
prior to the transaction takíng place.
Lending
Group's overall exposure.
CEO to approve Ioans over $1 m.
tNe recommend that the same critería used for regional lendíng is applied to a1l
Iending out of Tímaru. This wouid a11ow a11 Group lending to be subject the same
scrutíny and reduce the rísk of poor qualíty lending. It would also seem appropriate to
require the CEO and/or CFO to countersign aI1 cheques above the lending críteria
timíts. This wíll obvíously require the Group to amend its current cheque signing
authorítíes.
Inítíai requests for audit informatíon to support some substantíal transactions have
for Øudít purposes. There is clearly a gap between what the Board sees as supportíng
Ø substantial amount oftime and
share transfer documentation.
Recor
nniendc'tion:
n of share transfer
Inter
helpful in understanding the nature of a transactíon, are not sufficient audít evídence.
Related Party Transactions
resØect of lending and investments.
been found to Øe íncor
nplete in a nurnber ofareas. Thís area of dísclosure is
becoming íncreasíngly impor
tant and ís the subject of numerous reports from the
and Companíes Off'ice in their Prospectus approval process
transactions. The system wi1l need to incorporate some or a1l of the following
i} Most ímpartant#y - improved dísclosure at boardroom 1evel wíth minutes
specifically noting the related party status of the materialransactions
t
area oftheir responsibilíties. If there ís any doubt as to whether a
transaction needs to be disclosed as a re(ated party item then thìs needs to
íi)
íntranet) so that related party lending is not accídentally omítted.
iii) al1 personnel need to be aware of the need to dísclose related party
transactions and need to be províded with a mechanism for registering a
potential related party transaction with someone within the accounting
team.
ív} resourcing needs to be adequate within the accountíng team to follow up and
ransactions. The
relevant to the assessment of the transaction,
v)
transactions with borrowers.
sovereign based transactions.
Governance
.
The board wi11 be aware of the requirements of section 157L of the Ià.eserve Bank of
I'dew Zeaiand Amendment Act 2008 for two independent dírectors to be appointed to
That the board consider any appointments [n conjunction with the potentíal for the
board to form an audit committee. Such a conir
nittee could perforr
for the Group and may also be a catalyst for a more formalized approach to inter
nal
and audit process.
The Group is not currently usíng Sovereign to update its asset security values on a
Typically the system is being loaded ax the inception of
e loan 1s
Recomineudation:
of a11 1oans where the underlying security is based on property. The Group should
also determíne a policy for obtaining updated valuations for such property. The Group
may also want to coiifirm the recovery of regular valuation costs ín any of its new
Investments (Tir
nani and Iionichureh)
a. Documentation of acquisitions and disposals
The ínvestments held by the parent company have increased substantially and are now
a significant part ofthe business. As su.ch; details for a11 transactions should be readily
available. This includes fair value calculatíons upon sale or purchase of off-market
evidence to support these transactions.
b. Availability of information on existing investments
Iii order to suppor
t the cØrying value of the investments, we require up-to-date
companies, information should 6e readily avaílabfe. Duríng the audit, this information
was not avaílabie on a. timely basís and caused signíficant delays in finaHzing the
financíal statements.
c.
Issues ha.ve also arisen in relation to the financial statement classification of these
investments. The classification of the investments should be made upon purchase, as
future periods.
tested each period. If there is a significant downturn in the share price ofthese shares
over an extended period, then they are required #o be written back to faír value
through the income statement. Thís has the potential to cause a sígnífícant impact on
Recoinnwndation:
acquisitíon or disposal and detaíls on how the investment shouid be classified in the
receíved on these investments. In additíon, ímpaírr
nent testing should be performed
by management on any investnients held for sa1e, prior to the audii commencing.
Advances reconciliation
T he T naru
ir branch continues to have an unreconciled balance wíthin iis advances
t-econciliation. At 31 Øecember 2008, thís amount was $374,333. Although this is
considered to be a timing issüe, we wouid expect that transactíons making up thís
amount could be identified and cleared in the reconcíliation,
Fixed Asset Øegíster
There is a discrepancy between the total balance of fixed assets showíng on the fíxed
considered imr
naterial for audit purposes, there should be no difference between these
off,
Provisioning
branch, during our 1oan review procedures, These were;
Further provisions:
Future ßevelopments
Rivenidge Uevelopments Ltd
Rallyfanz
$500,000
$200,000
$ 50,000
Write-offs:
Henderson arid Phíllips
$ 7,302
Wcbby
$ 2,555
$ 15,652
provision or write-off prior to our revíew. This indicates that management are relyíng
on provisioning reports directed out of Christchurch, rather than revíewing the entíre
portfo]io of 1oans for any loans that may have been missed oîfthe schedule.
Each branch should review their arrears anØ]ysis report on a regu]ar basis, for Ioans
advance and those that have had lump sum payments made, This would help identiify
loans that do not fa11 into the parameters of the provisíoníng reports, and may also be
problem 1oans.
Property Øased loans and laans with property as securit
y
During thís audít, we have perforr
could we11 be securíty impaired.
We wí1l agaïn be reviewing these loans in detaíl at 30 June, and u'ou1d exØct to see
the current exit strategy for these Ioans.
Majar Y.Øans
We note that there continues to be a substantía[ exposure to ZJenerau. Whilst we
understand that this ís an ongoíng project; there has been límíted information
avaílable to determine the securíty value that 5CF holds.
updated valuatíon for this project.
that the Ioan is in arrears as the lump sum payment already made wíll be treated as a
arrears on these loans needs to be reviewed on a regular basis.
wíll need to be lcept. We wi11 be requesting this information for the 30 June 2009
audit.
ff you have any
Yours faithfully
Byron Pearson
Partner
regarding the above matters
do not hesitate to
20 November 2009
South Canterbury Finance
P0 Box 125
i1MARU 7940
Re:
-
We have cor
npleted the audít for the above group for the year ended 30 lune 2009.
attentíon.
Liquidity
-
paragraph to concerns surrounding the group's iiquidity over the comíng months. Par
tcu4ar
Wh í#st the outcome of negotiations was uncertain at the time of our audit, clearly the goard
needs to revíew íts liquidity position and forecasts on a regular basis.
BØardjManagement Communication
audit proceáures that the CFO and Group accountant are not kept ínformed of some key
a) unprepared forthe accounting consequences ofthose decisions;
bf
e}
i'he dírectors need to provide the CfiO and Group accountant with detailed and explicít
guidance to enab{e them to properly account for these major transactions as soon as
tant when addressíng investment transactions with
related party entrtiess as the Crown Guarantee framework needs to be taken into
consideration for any related party tra nsaction.
The minutes of ßoard meetings provided ta us have been very brief, and it is not always
apparent that large transactians have been approved.
Recommendation
discussions and approvaEs have taken place. Material iendíng and investment decisions
should be documented as being explicitly approved by the Board príar to the transaCtíon
taking place.
Formation of Audit Conimittee
An audit committee could perform a number of roles for the Group and may aíso be a
catatyst for a more formalized approaeh to íntnrnal auclít as we11 as t.ü províde an oversight
ro1e for the financial statements produGtion and audit pracess.
Recommendation
Board structure. Þ,s there have been recent changes to the 6oard, with the appointment of
committee.
Quality caf supporting Documentation for Major Transactions
Inítial requests for audít ínformatíon to suppart some substantial transactions have been
met with a lack of urgency and also a íack af adequate documentation sufficíent far audíi
purposes. There ís clearly a gap between what the Board sees as supporting information
and what our audit requirements are.
applied to obtaining relatively straightforward informatíon such as share transfer
documentation.
Recommendation
For the avoidance af doubt, the dírectors and CFO should be able to províde supporting
contrack notes. Internal merno's and/or letters from the directors, whílst helpful in
understanding the nature of a transaction, are not sufïícïent audit evidence,
The Group does not have a$ystematíc r
of iending and investments. Whilst a register has been provided to us, ít has been found to
be incamplete ín a number of areas. This area of disclosure ís becoming increasingly
ímportant and is the subject of numerous repor
reviews of iinance companies and als4 of the RBiVZ and Car
npaníes DfFice ín theír Rrospectus
approval process. It is also of particular importance in respect of the Crown Guarantee,
whích has reiated party transaction iimíts. There would be seríous repercussions if these
limits were to be breached.
Recommendation
It ís essential that the Group introduces improved systerns ta ídentify its related party
i)
Most importantly - ímproved disclosure at boardroom level with minutes
specíffcally nating the related pariy status of the materíal transactions appraved at
responsíbílities,
disclosed as a related party ítem then thls needs to he referred to a member af the
accountíng team for advìce.
ii) The known related parties of ai1 directors and key personnel needsto be avaílable
for al1 Group employees to ínspect (perhaps vía the Groups íntranet) so that related
party lending ís not accídentally omítted.
iíi) AI( personnel need to be aware ofthe need to disclose related party transactions
and need to be pravided with a mechanísm for regístering a potentiaf related par
ty
transactíon wíth someone within the accounting team.
ív) Resourcing needs to be adequate within the accounting team to folíow up. and
confirm the related party status ofthese identified transactions. 7he directors will
also need to be instrumental in the provision of information relevant to the
assessment of the transaction.
v)
transactions with borrowers. This wauld then be ssapplemented wíth non-Sovereígn
Sove; eigrs Lending
systematíc basis. Typícally the system is being loaded at the ínception of the loan with
securíty vafues but ís not being updated subsequently unless the loan ís assessed as beíng
Recommendatian
3n the shor
loans where the underlying securíty is based on property. The Group should also determíne
a polícy for obtaining updated valuations for such property. The Groupnay
r also want to
confirr
potential for a similar approach to be applied to any other securíty type or category of
lending.
Investments (Parent Company and Horn church)
a.
Documentation of acquisítíØns and díSposals
significant part of the business. As such, detaíls for a1l transactions should be readily
avaHable. Thìs ínciudes fair value calculations upon sale or purchase of aff-market shares
and share transfer documentation.
Whilst the documentation for the "usua(" market transactíons has improved considerably ín
the past six months, the off-market transaetions were sti11 a major issue. `fhe accountìng
team should be provided with a11 of the relevant information as soon as practícable af-t er t he
transaction has occurred, rather than having to waít untíf a request from the audìtors is
received, We would a{so note that Board approvaE of these transactions was not readily
apparent
In order to support the carrying va!ue of the investments, we require up-to-date financial
information on a(( non-Iísted companíes. As SCF is a shareholder ín these companies,
b as is.
c.
Cl a s s i f i c ai to n
We note that the Group wi11 be unabíe to record any new investments in the next two years
as `°Hs1d to Maturity" duQ to the sale of investments prevíously ciassified as such. This has an
imrnedíate impact on the Group's equity, as any movement ín the Iisted price is required to
be accounted for through eØuity rather th an at cost.
!t shouid also be nated that any shares (n iísted eompanies are required to be impaírment
tested each period' If there is a significant downturn in the share price of these shares Ðver
an extended period, then they are required to be written back to fair va(ue thro'Jgh the
profít o# the Group, due to the wrìte-down of the pGC shares.
Recommendation;
We recommend that detaíied files are kept on a11 ínvestments, including copies of share
transfer forms, information re}ating to how the investment was valued on acquisition or
disposal and details on how the investr
nent shoufd be classified in the financial statements.
These files shou{d be uØda#ed wíth any fínancíai information received on these investments.
in addition, impairment testing should be performed by management on any ínvestments
held for sa1e, príor to the audit commencin;. The group should also regular(y review
-ting information.
The majority af ourtime spent on thís auditwas in reiation to the provisioning of doubtful
additiÐnaE specific provisions at the Chargíng Group level were íden#ifíed by Woodnorth
Niyers). Thís índicates that the iending team is either:
. ....shouid
. . be .made;. or .
...
. .
..
a. Not aware that a. provision
b. Not reportíng provísíons through the appropriate channel, so that the provisíons are
actually raísed within the accounts.
concern that some Iaans fe11 ínto category (a) above.
guidelines as to when a specific provision shoulá be raísed. Any shortfall in security is clearly
the fírst indication that a loan is npaíred.
ir
The Iendíng managers should have robust file
Christchurch' This report focuses on a11 ioans that are pas#-due. HØwever, a number of ioans
y and were therefore not on
this report.
Recommendat[on
For smalier loans, each branch should review theír arrears analysis repart on a regular basis,
that do not fa1{ int:o the parameters of the provisioning reports, and may a!so be problem
Ioans.
These types of loans are stí11 a concern ín the current market. The establïshr
nent of an asset
management un3t has been hugely beneficial to the cor
npany and wili ensure that SCF
loans wi11 further deteríorate in the upcomíng year, and it ís therefore essential that
appropriate vafuations and assessments are made for each of these loans in preparatíon for
the next audit
Recommendation
recovery ofthe ioan (and therefore associated provision) shouid also be avaítable at the
beginning of the next audìt.
Collective Provisioning
At 30 .1une 2009r
procedures and the assur
Recommendation
ihe coIlective provision wíll be required to be updated at each month end, We suggest that
the risk profìies are contínually revíewed, as these could change substantially ín a short
space of time, in the current market conditions
A net present va}ue provísíon was brought ín for the first tir
ne at 30 June 2009. Thís
npaíred loans.
®
' The expected amount to be recovered;
The timing of t'ne receipts; and
® 5a1es and commíssion costs.
natería4 laans for whích Lhe
ø
A specific provision had already been raised ín relation to a loan.
RecommencJqtion
receípts wíll have a significant ímpact on thís pravísíon. VUe would recor
with an i.VR of more than 90% have an NPV calcu}atíon performed, in antícipation of the
Derivative Accounting
audit.
However, the foreígn exchange contracts that are in place ín relatíon to the Australian Doliar
exchange rate at baiance date.
Recommendation
cause an ímpact on the pro#it ofthe company, íf the current accounting practíces are kept.
of documentation io be kept ín relation to each FX contract taken out. Also, the group
resourced, This has been particularly notíceable wíth respect to:
days príor to the audít completíon date,
$
companíes. Thís lead to inaccuracies within the financía( statements, and therefore
audít.
Recommendation
The accountíng team requires additíonal personnel, to help in al1 of the above areas. In
statement dísclosures are camplete and accurate, prior to the auditor's review.
Trust Deed
The charging group is requíred to meet certaín key covenants as part of its trust deed
compliance with those trust deed covenants:a)
' the margín of borrowing to weighted assets was slender at only
$J..6m (June 2008 $260m). Also, in our report to the trustee we have identífied a
Ioss" which we beiieve wouid reduce this margin further to $837,734.
b} Fxposures exceedíng 35% of shareholder funds were noted wíth SCF's parent
of the opínion thatthís exposure Ieve1 is exempted fror
n the trust deed covenants by
Recommendation
The chargíng group's ratios and covenants need to be regularly forecast and monitored to
avoid a breaeh of the trust deed,
Crown Guarantee
audEt we have revíewed transactíons in excess of $23m as being Iikely to be caught by thís
Board priorto entering into transactions for (a) a$25m underwrite from Mr Hubbard and (b)
a$67m purchase of preference shares ín companíes owned by Mr Hubbard.
Recommendation
.
. .
We recommend that the Board considers the Crown deed obligations prior to alE
transactions approach íng the 1%of asset vaiue threshold and mínutes the approval of such
transactíons accordingiy.
Yours faìthfuHy
Byron Øearson
Partner
[email protected]