'Better research could have helped advisers avoid collapses'
University of Otago Professor in accounting David Lott, Dr Tom Scott from the University of Auckland and Otago honours student Ella Douglas have completed a study which shows annual reports and other public disclosures contained enough information to predict more than 80% of New Zealand’s finance company failures.
They looked at 31 finance companies that failed between 2006 and 2009 and an equal number that did not fail.
“Our result suggests that failures were predictable and so the financial information was more useful than some believed. This is important, as our research suggests that warning signals were available prior to the failure of these companies, thus contradicting the overall media impression in the wake of finance company collapses, which often focused on CEO fraud and that financial reporting was unreliable,” Lont said.
The researchers found that failed finance companies had lower capital adequacy, inferior asset quality, more loans falling due, and a longer audit lag - a possible indicator of audit/client disputes.
Trustee monitoring was also a risk factor and the authors have suggested further research to better understand why that was the case.
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