Feltex Carpets Limited
 IPO Prospectus, Financial Reporting and Continuous Disclosure
TABLE OF CONTENTS
Glossary of Abbreviations and Terms
Part I   Executive Summary
Part II The Commission's Review Procedure
Part III Chronology
Part IVThe IPO
Financial Information
Assumptions
Risk Disclosures
Historical Financial Statements
Directors' Interests
Conclusions
Part V Changes to the Banking Facility Agreement Conclusions
Part VIFinancial Reporting of the Breach of Banking Covenants in the December 2005 Half-Year Financial Statements Conclusions
Part     Classification of Debt in the 31 December 2005 Half-Year Financial
VII	Statements
Conclusions
Part     Board Issues
VIII	Conclusions
Part IX Auditor Conduct
IFRS Impact Assessment December 2005 Review Conclusions
PartX Other Issues
Responsibility For Audit Working Papers Other Matters Considered
Part XI Conclusions and Referrals
GLOSSARY OF ABBREVIATIONS AND TERMS
ANZ	Australia and New Zealand Banking Group Limited
ASRB        Accounting Standards Review Board

CFO	FIX Chief Financial Officer
CPM	Corporate Portfolio Management ANZ
CSFB         Credit Suisse First Boston
CSFBAMP Credit Suisse First Boston Asian Merchant Partners, L.P.
EBIT	Earnings Before Interest and Tax
EBITDA     Earnings Before Interest, Tax, Depreciation, and Amortisation
Facility       Loan agreement among ANZ, FTX, and certain affiliated companies Agreement
Fourth        Fourth Deed of Amendment and Restatement of Facility Agreement 27 Restatement October 2005
FRA	Financial Reporting Act 1993
FTX	Feltex Carpets Limited
IPO	Initial Public Offering
NZIAS	New Zealand Equivalents to International Accounting Standards
NZIFRS	New Zealand Equivalents to International Financial Reporting Standards
NZICA	Institute of Chartered Accountants of New Zealand
NZX	New Zealand Exchange Limited
NZSX	New Zealand Stock Exchange
NZ RS	New Zealand Statement of Review Engagement Standards
Prospectus	2004 FTX IPO Prospectus
Shaw	Shaw Industries Australia Pty Limited
Part I EXECUTIVE SUMMARY
1.	The Commission has inquired into the 2004 IPO Prospectus of Feltex
Carpets Limited (in Liquidation) ("FTX"), and FTX's compliance with
financial reporting and continuous disclosure obligations in the period
between its listing in 2004 and the appointment of liquidators to the
company in late-2006.
2.	The Commission's inquiry has concluded that:

•	the prospectus was not misleading in any material particulars;
•	FTX failed to disclose certain material information to the market
concerning changes to its facility agreement with ANZ in October
2005;
•	FTX failed to disclose the breach of its banking covenants in its 31
December 2005 half-year financial statements; and
•	FTX did not properly classify its debt in its 31 December 2005 half-
year financial statements.
3.	The Commission has determined that it should report on the findings of its
inquiry. It has found a failure to disclose material changes to the banking
facility in October 2005, a failure to disclose the breach of banking
covenants, and a failure to properly classify the company's debt in the

December 2005 half-year financial statements. These matters variously raise issues about the governance of the company by the FTX Board and about the conduct of FTX's auditors, Ernst & Young.
4.	FTX is now in liquidation and its shares are no longer trading on the NZSX.
As liability for continuous disclosure breaches lies only against the issuer
concerned, there is no realistic chance of taking enforcement action in these
circumstances. Under the law in force in 2005 directors and officers of
companies could not be held liable for continuous disclosure breaches.
Therefore, no question arises of action against any individuals.
5.	In late 2005 it was widely known that FTX was in difficulty. At that time
FTX was dependent upon the continued support of its bank, ANZ. It appears
that the FTX directors failed to comprehend the significance of changes
made to the debt facility agreement that were designed to protect the
position of the bank, and so failed to adequately inform the market of these.
6.	The FTX board's failure to disclose the breach of FTX's banking covenants
in its 31 December 2005 half-year financial statements raises questions of
compliance with the Financial Reporting Act 1993. Certain defences may be
available to the directors, including that they "took all reasonable and proper
steps to ensure that the applicable requirement of this Act would be
complied with." The Commission found that the directors did take certain
steps, as described herein. Nevertheless, the Commission is of the view that
the FTX board failed to pay sufficient attention to the breach and failed to
consider whether there were financial reporting obligations arising from the
breach. The Commission refers this matter to the Registrar of Companies.
7.	Questions of liability under the Financial Reporting Act arise only in regard
to the conduct of the directors of a company. Therefore, the Commission is
not able to refer this matter to the Registrar of Companies in regard to the
conduct of FTX's auditors, Ernst & Young.
8.	FTX's failure to properly classify the debt in its 31 December 2005 half-year
financial statements has highlighted that the classification of debt in interim
financial statements is not expressly addressed by an applicable financial
reporting standard. The Commission refers this matter to the ASRB to
consider whether any guidance or other action is necessary.
9.	The improper classification of debt was a breach of New Zealand Generally
Accepted Accounting Practice ("NZ GAAP"), but it was not a breach of an
applicable financial reporting standard. Questions of liability under FRA
arise only where there is a breach of an applicable financial reporting
standard. Therefore, the Commission will not refer this matter to the
Registrar of Companies in regard to the debt classification issue.
10.	The Commission is of the view that the work undertaken by Ernst & Young
New Zealand in relation to the review of the December 2005 financial
statements failed to meet the standards required for such an engagement.
The Commission refers this matter to NZICA.
11.	While the issues referred to above raise questions about the performance of
the FTX Board and its auditors, the Commission is not suggesting that these
issues are the reason that FTX failed. The Commission has heard from
witnesses that the collapse of FTX was due to a combination of factors. Such
factors included the high fixed costs inherent in the carpet manufacturing
industry and those particular to FTX, the need for restructuring, the decline
in the Australian housing market, and the competition from Asian carpet

manufacturers. It is the Commission's view that the FTX collapse was not caused by securities or financial reporting matters, and accordingly, the Commission will not comment on the FTX collapse.
Part H THE COMMISSION'S REVIEW
12.	The Commission conducted a review of the prospectus dated 5 May 2004
and FTX's compliance with financial reporting and continuous disclosure
obligations in the period between its listing in 2004 and the appointment of
liquidators to the company in late-2006. This review has been carried out
under section 10(c) of the Securities Act 1978, which provides that it is a
function of the Commission "ftjo keep under review practices relating to
securities, and to comment thereon to any appropriate body."
13.	The Commission considers that the matters under review raise issues of
securities law and practice upon which it is appropriate for the Commission
to comment. The Commission has decided to comment by way of this
report.
Procedure
14.	The Commission determined the procedures for this review.
15.	In a formal inquiry, the Commission heard evidence from the following:

(a)	Mr Timothy Saunders, former Chairman of the Board of
FTX;
(b)	Mr Peter Thomas, former Chief Executive Officer and
Director of the Board of FTX;
(c)	Mr David Hunter, former Director of the Board of FTX;
(d)	Mr John Hagen, former Director of the Board of FTX;
(e)	Former Chief Financial Officer FTX;
(f)	Head of Corporate Portfolio Management ANZ "CPM";
(g)	Chief Risk Officer ANZ;
(h)      Head of Diversified Industrials ANZ;
(i)       Mr Gordon Fulton, Partner, Ernst & Young, New Zealand;
(j)       Mr Stuart Painter, Partner, Ernst & Young, Australia;
(k)       Mr Kevin Simpkins, Kevin Simpkins Advisory Services Limited (Commission's retained accounting expert); and
(1)       Mr Charles Cable, Deloitte, Auckland (FTX Directors' retained expert).
16.	The Commission reviewed documents received from:
(a)	FTX, FTX receivers, and FTX liquidators, which included
board papers, reports provided to ANZ; and financial
documents;
(b)	ANZ which included loan agreements, memoranda,

correspondence, and reports; and
(c)       FIX auditors which included reports; memoranda; correspondence; and working papers.
17.	The Commission retained a market analysis expert; an accounting expert;
and analysts to examine various financial matters.
18.	Confidentiality and privacy orders were in place throughout the inquiry.
19.	All parties to the inquiry were afforded an opportunity to be represented by
counsel. Oral evidence was recorded and transcripts were provided to the
witnesses.
20.	After receiving evidence, the Commission prepared a confidential
consultative report and invited comment from affected parties. These parties
were given a full opportunity to respond with submissions and to provide
further evidence to the Commission.
21.	The Commission has carefully considered all evidence and submissions
before publishing this report.
Part HI CHRONOLOGY
22.	FTX had been operating in Australia and New Zealand since the 1920's.
FTX produced a full range of woven and tufted carpets and wool and man-
made fibre carpets, under a range of well recognised name brands.
23.	Originally manufacturing footwear, FTX expanded into manufacturing
industrial felts, floor coverings, and then carpets in the 1940's. Since that
time FTX had acquired several entities including rubber companies and
other carpet manufacturers and in 1988 was ultimately sold to an Australian
company named BTR Nylex.
24.	In 1996, Credit Suisse First Boston Asian Merchant Partners, L.P.
"CSFBAMP", purchased FTX from BTR Nylex. CSFBAMP was a member
of a group of companies which operated the private equity business of Credit
Suisse Group, a Switzerland-based international financial institution.
25.	In May 2000, FTX acquired Shaw to become one of the two largest
Australasian carpet manufacturers. As a result of the Shaw acquisition, FTX
significantly increased in size and gained a stronger position in Australia.
26.	In 2003, FTX issued $60 million of bonds.
27.	In 2004 FTX offered $50 million of new shares to members of the public in
New Zealand and institutions in New Zealand and Australia. FTX intended
to use the proceeds from the issue of the $50 million in new shares along
with additional drawings under the bank facility to redeem the bonds issued
in 2003. There was a secondary sale by CSFBAMP of 113,523,100 shares
($193 million) to members of the public in New Zealand, bondholders with
New Zealand addresses, and institutional investors in New Zealand and
Australia. First NZ Capital and Forsyth Barr Limited were the joint-lead
managers in the IPO. The offer closed on 21 May 2004 and on 4 June 2004,
FTX shares began trading on the NZSX at $1.70 per share, which was the
subscription price for members of the public in the IPO.
28.	The offer of shares to the public was made by FTX in a combined
investment statement and registered prospectus dated 5 May 2004. In the

same offer document FTX presented the company's prospective financial information consisting of forecast financial information for the year ending June 2004 and projected financial information for the year ending June 2005.
29.	In October 2004, FTX engaged Ernst & Young to conduct an impact
assessment of the NZ IFRS requirements on FTX to assist FTX in its
conversion of financial reporting to NZ IFRS.
30.	For the six months ending 31 December 2004 the company's interim report
made reference to the fact that "EBITDA was $24.6 million, up 6.9%,
supported by an increased EBITDA margin, -which improved to 15.4% from
13.4%. Revenue of $160 million was down 7.4% as the company maintained
its focus on the higher margin segments of the market."
31.	The company also mentioned that "despite the Group not meeting the
projected sales and the likelihood of a continuing strong New Zealand
dollar, EBITDA and net profit projections for the year remain achievable."
32.	Up until late February 2005 the company had maintained the above position
saying that it was on track to meet prospectus earning projections. The
projected net profit after tax for the full year was $23.9 million.
33.	However, on 1 April 2005, FTX announced to the market that it expected its
net profit after tax for the financial year ending 30 June 2005 to fall
significantly below the previous projections. FTX downgraded its earnings
projection to $15 - 16 million. FTX announced that its sales for the full year
were projected to be $295 million to $305 million which was below the
previous guidance provided in the interim report of between $310 million to
$315 million. Net profit after tax was projected to be between $15 to $16
million for the year ending 30 June 2005 which was between $8 million and
$9 million less than the previous projection.
34.	FTX announced that the key reasons for their revised projections were that
the market environment in Australia and New Zealand was more difficult
than expected in the first quarter of the calendar year; their commercial
retailers and contractors experienced a delay in projects due to a shortage of
laying contractors; there was continued low store traffic in the first quarter
of the calendar year, which reduced the retailers' confidence for the
remainder of the financial year; increased price competition in the market
primarily due to synthetic imports being higher than projected; and the
decline in the Australian residential market. FTX also announced that the
price competition had impacted FTX's ability to fully pass on additional first
quarter synthetic raw material cost increases; the declining Australian
market was frustrating FTX's ability to reach its projected market share
increases; and the ongoing strength of the New Zealand dollar continued to
adversely affect FTX's performance.
35.	NZX Regulation investigated whether the 1 April 2005 announcement was
made in a timely manner in compliance with NZX Listing Rules.
36.	NZX Regulation considered that FTX management had material information
that should have been disclosed to the market prior to the actual
announcement of 1 April 2005.
37.	FTX disputed this view, but settled this matter with NZX and paid a sum of
$150,000 consisting of $85,000 for NZX Regulation's and NZX Discipline's
costs arising from the inquiry and a $65,000 contribution to the NZX
Discipline Fund.

38.	On 20 June 2005, FTX further revised its earnings guidance to announce
that the net profit after tax for the 2005 financial year would be between
$11.5 million and $12 million (as compared with the projection of between
$15 million to $16 million announced on 1 April), prior to restructuring
costs associated with the review of management and operations. FTX also
projected the fourth quarter earnings to be between $200,000 and $700,000
prior to restructuring costs, compared to the third quarter loss of $880,000,
noting that this was a small turnaround which fell below expectations in
April. FTX also announced that in response to unsatisfactory financial
performance, the FTX Board of Directors was making senior management
changes, undertaking a review of FTX's operations, and Chief Executive
Sam Magill was to step down. Further, FTX explained that there were
external factors impeding its ability to maintain and improve average selling
prices and margins, such as the increasing competitive conditions in
Australia, less favourable market conditions in New Zealand, and the
increasing competition by imported carpet against locally manufactured
carpet.
39.	During the period from prior to the 1 April 2005 announcement to after the
20 June 2005 announcement, the FTX share price fell approximately 68%.
40.	Also, in June 2005, Godfrey Hirst, a rival carpet manufacturer, acquired a
5.83% shareholding in FTX.
41.	In July 2005, Godfrey Hirst made a proposal to FTX to merge the two
businesses.
42.	In October 2005, FTX rejected Godfrey Hirst's offer to combine their
businesses.
43.	FTX had a number of loans from ANZ bank dating back to the early 1990's.
In October 2005, ANZ reduced one of FTX's loans by A$5,000,000 and
loaned FTX A$ 10,000,000 as a short-term facility. FTX and ANZ also
amended the terms of their loan facility agreement. The revised agreement
was reflected in the Fourth Deed of Amendment and Restatement of Facility
Agreement ("Fourth Restatement").
44.	In December 2005, FTX engaged Ernst & Young to conduct a review of
FTX's 31 December 2005 half-year financial statements.
45.	As at the 31 December 2005 calculation date, FTX had breached certain of
its banking covenants. In August or September 2005, the FTX directors
apprised ANZ that FTX anticipated breaching certain of its banking
covenants.
46.	In February 2006, the FTX Board approved the 31 December 2005 interim
half-year financial statements in which FTX classified most of its debt with
ANZ bank as "non-current."
47.	In March 2006, FTX notified ANZ that FTX had breached certain of its
banking covenants.
48.	In May 2006, ANZ formally notified FTX that ANZ had waived its rights in
regard to FTX's breach and ANZ imposed certain reporting obligations upon
FTX.
49.	In June 2006, ANZ formally notified FTX that ANZ had withdrawn its
waiver of rights in regard to FTX's breach.
50.	In June 2006, FTX announced to the market that it was seeking a
cornerstone stakeholder.
51.	FTX considered offers to purchase from several companies prior to the ANZ
placing FTX in receivership on 22 Sept 2006. ANZ appointed the firm of
McGrath Nicol as receiver.
Part IV THE IPO
52.	Offers of securities to the public must be made in compliance with the
Securities Act 1978. The Act requires issuers to register a prospectus which
must contain all of the material information in regard to an offer of
securities.
53.	The Commission reviewed the prospectus for compliance with the Securities
Act and to consider whether the prospectus was misleading in any material
particulars.
Financial Information
54.	The Commission assessed prospective financial information in the
prospectus to determine whether the prospective financial information was
consistent with the assumptions presented and whether the assumptions were
consistent with the requirements of FRS 29.
55.	The methodology underlying FTX's preparation of the detailed sales
forecasts and projections was similar to the process followed for the
preparation of the annual budget.
56.	Financial Reporting Standard No. 29 ("FRS-29"): Prospective Financial
Information was the applicable financial reporting standard for the FTX
prospectus. FRS-29 states that prospective financial information can be
presented either as a forecast or as a projection.
57.
FRS-29 defines the terms as follows:
(a)	'"A forecast' means prospective financial information
prepared on the basis of assumptions as to future events that
the governing body reasonably expects to occur associated
with the actions the governing body reasonably expects to
take as at the date that the information is prepared (best-
estimate assumptions).
(b)	'A projection' means prospective financial information
prepared on the basis of one or more hypothetical but
realistic assumptions, (or 'what-if scenarios), that reflect
possible courses of action for the reporting periods concerned
as at the date that the information is prepared."
Assumptions
58.      FRS-29 requires that the assumptions used in preparing forecasts "shall be reasonable, supportable, consistent among themselves and \vith the strategic plans of the entity, and be applied consistently." FRS-29 also states that a forecast is based on assumptions which the governing body reasonably expects to occur while a projection is based on one or more hypothetical but realistic assumptions.
59.	FRS-29 does not require projection assumptions to be supportable, although
they must be reasonable.
60.	FRS-29, paragraph. 5.21, states:
"To be reasonable, best-estimate assumptions are to be consistent with the strategic plans of the entity. Assumptions are consistent with the plans of the entity if they reflect the expected economic effects of anticipated strategies, programmes and actions, including those being planned in response to expected future economic conditions,"
61.
The Commission found that most of FTX's assumptions presented a largely "no change" scenario. Some of the critical assumptions were:
(a)	that the carpet market in Australia and New Zealand would
continue to grow by 1% (total market sales), which is stated
to be below the average growth rate over the past 10 years;
and
(b)	that new products would increase in line with expectations;
and
(c)	that FTX would successfully implement the strategies
described in the prospectus under "Business Description,"
which would result "in Feltex's market share increasing by
approximately 1% over the projected period."

62.	The Commission received information and explanations supporting the 1%
growth assumption regarding FTX's market share.
63.	Due to the process involved, FTX's assumptions were consistent with the
strategic plans of the entity.
Risk Disclosures
64.      The Commission notes that the prospectus outlined the risks specifically related to the carpet industry and to the business of FTX, such as competition in the floor coverings industry; changes in the building industry; exchange rate fluctuations; effect of imports on the market; and performance-related risks. The prospectus also specifically outlined the risks associated with forward-looking statements and with choosing an investment advisor.
Historical Financial Statements
65.      The prospectus contained summary financial statements and audited
financial statements for June 2003 and December 2003. The Commission reviewed the financial statements in the prospectus. This review did not find evidence of any breach of disclosure required under the securities laws and financial reporting standards.
Directors' Interests
66.      The Commission also notes that the prospectus contained disclosures
concerning the risks associated with investing in FTX, the directors' and

vendor's interests; shares held by directors and senior managers outside of the offer and the shares they would obtain from the executive share option plans, Peter Thomas's relationship with CSFBAMP, and annual fees.
Conclusions
67.	The Commission concluded that the underlying management process around
the preparation of the PFI in the prospectus appears to have been robust, that
FTX undertook a rigorous process to decide how the PFI should be labelled,
and that FTX made reasonable assumptions upon which it based its
projection figures.
68.	The reasonableness of the assumptions and the projection figures were
supported by FTX's actual performance for the six month period ended 31
December 2004.
69.	The Commission concluded that there was no information available to the
directors at the time of the IPO to suggest that the directors of FTX could or
should have foreseen that the projections would not be reasonable.
70.	The Commission concluded that the assumptions met the standard of
reasonableness required in respect of projections by FRS-29.
71.	The Commission concluded that the risk disclosures, historical financial
statements, and disclosure of directors' and vendor's interests were adequate
in terms of securities law.
72.	The Commission concluded that the prospectus did not breach securities law
and was not misleading in any material particulars.
73.	The Commission will take no further action with regard to the prospectus.
Part V CHANGES TO THE BANKING FACILITY
74.	FTX had a loan facility agreement with the ANZ bank which reflected the
terms and conditions of FTX's obligations to ANZ arising from FTX's debt.
75.	There were four relevant changes to this agreement which were finalised on
27 October 2005.

•	ANZ loaned FTX A$10 million to support FTX's plans for corporate
restructuring;
•	ANZ and FTX agreed to amendments which, in relevant part, widened
the scope of the annual facility reviews to include a review of all
facilities;
•	ANZ increased the facility margin interest rates; and
•	ANZ gained the ability to declare all sums owed by FTX immediately
due and payable with at least 30 days notice, upon a review of the
facilities.

76.	The amendment regarding the annual review process specifically articulated
that ANZ would conduct a review of each facility on or about 30 November
2005 and thereafter on or about 1 September of each year. If ANZ did not
conduct the review on or about 30 November, ANZ could conduct the
review at any time thereafter.
77.	Previously, the loan agreement allowed for ANZ to call the debt
immediately due and payable only if an event of default occurred. The

amendments gave ANZ the enhanced power to call the debt immediately due and payable without the previous requirement that FIX default upon its loan. The ANZ was able to call the debt, upon review and with at least thirty (30) days notice.
78.	The annual margin interest rates for the various loans increased as follows:
(i)       0.77% to 1.95% - Money Market,
(ii)	0.70% to 1.95% - Cash Advance,
(iii)	0.85% to 1.95% - Term Loan,
(iv)	1.05% to 1.95% - Leasing, and
(v)	0.65% to 1.95% - Supplier Finance
(vi)	2.75% - Short -Term Loan
79.	The Commission saw a report prepared by Feltex management at the time of
the changes to the facility agreement reflecting a projected annual cost of the
increase in the margin interest rates of $1,746,890. The Commission also
heard that the FTX directors believed that correct calculation of the costs of
the inquiries in the margin interest rate was $1,155,105. The directors
believed that the figure of $1,746,890 included increases in interest margin
that occured prior to the changes to the facility agreement and is based on
the assumption that all of the facilities were fully drawn, which they were
not. The Commission also heard that the directors expected FTX's actual
interest costs to decrease because the anticipated restructuring would result
in asset sales and repayments of debt.
80.	The Commission is of the view that to appropriately fulfil its continuous
disclosure obligation FTX should have disclosed the increase in the margin
interest rates, the projected costs of this increase, and the board's broader
expectations in relation to these costs and any anticipated savings.
81.	No disclosure was made to the market at the time the facility agreement was
renegotiated.
82.	Section 19 of the Securities Markets Act 1988 and the NZX Listing Rules
govern the question of what information must be disclosed to the public by a
public issuer. Specifically, Section 19B requires a public issuer, such as FTX
to disclose material information to the public that is not generally available
to the market. Also a public issuer must disclose such information in
accordance with the listing rules of the exchange on which it is registered.
83.	Material information is information that a reasonable person would expect to
affect the price or value of listed securities if the information were generally
available to the market and relates to particular securities or a particular
public issuer(s) rather than to securities generally or public issuers generally.
Information would have a material effect on the price or value of listed
securities of a public issuer if the information would, or would be likely to,
influence investors in their decision to buy or sell those securities.
84.	In the Commission's view, both the projected increased interest costs and the
changes to ANZ's review and cancellation rights under the facility
agreement were likely to have been material to the market in terms of the
Securities Markets Act and section 10 of the NZSX Listing Rules.
85.	The Commission considered the information available to the market about

FTX's financial condition at the time of these changes in the Fourth Restatement. The April and June 2005 earnings downgrades would have created uncertainty for FTX's potential earnings. The projected increased interest costs were material to FTX's expected earnings. While some savings might have been expected from the restructuring that could occur as a result of the increase to the facility, it seems unlikely that any such cost savings would have been apparent in the short term. The interest cost increases, by contrast, were effective immediately. In the Commission's view these increased costs would have been expected to have a material and negative effect on the company's profit forecasts, and should have been disclosed to the market.
86.	The other material effect of the Fourth Restatement was to tighten the
review requirements under the facility agreement. The renegotiated
agreement gave ANZ the right to review all facilities on 30 November 2005,
or at any time thereafter if not done at that time, and to call all amounts due
and payable on 30 days notice following such a review. The bank could take
this step even if FTX was not in breach of any of its loan covenants. These
additional rights were added to the agreement by ANZ in order to provide
extra protection for its own position.
87.	In the Commission's view these changes to the facility materially changed
the terms of FTX's debt funding arrangements. They reduced the company's
expectation concerning the longer-term outlook for its debt facility. This
would, in the Commission's view, have been likely to be viewed by the
market as a sign of significant concern on the part of the bank about the
company's prospects, and would have been likely to affect market
confidence in the company, leading to a fall in the share price.
88.	The FTX directors, as reflected in the opinion of their retained expert, stated
that the amendments to the facility agreement would not have materially
impacted the FTX share price because at the time:

•	the market already understood that FTX's restructuring costs would be
funded by further borrowing, the increased debt would make a
covenant breach more likely, the bank was supporting the
restructuring despite the upcoming breach, and the debt interest
margins would increase;
•	the market was discounting the FTX share price to reflect risks; and
•	disclosure of the changes would not have materially impacted the
share price.

89.	Further, the directors' expert stated that ANZ's right to call the facilities due
and payable after the review date of 30 November only advanced the bank's
right to call the facilities by one month, because the bank would have been
able to call the facilities at the covenant breach on 31 December 2005.
90.	The Commission has considered the expert's opinion. Notwithstanding that
there may have been market discounting, the Commission considers that the
facility amendment which allowed ANZ to call the debt immediately due
and payable with 30 days notice was a significant change in the relationship
between FTX and its banker. Since FTX's financial stability depended upon
the continued support of ANZ, the information about the change in that
relationship was material and should have been disclosed to the market.
Conclusions
91.	The Commission finds that these changes were material information that a
reasonable person would expect to affect the price or value of listed
securities, if the information were generally available to the market, and
would have been likely to influence investors in their decision to buy or sell
FTX shares.
92.	Therefore, FTX should have disclosed the changes to the market on 27
October 2005. Under the Securities Markets Act any failure to comply with
the continuous disclosure provisions of the NZX Listing Rules incurs civil
liability for a company. The changes had not been disclosed to the market at
22 September 2006, the date that FTX was placed into receivership. The
company's business assets were subsequently sold, and the company was
placed in liquidation by order of the High Court. FTX shares are not trading
on the NZX, and the company currently has no material assets. Since there is
essentially no company against which to take an action, the Commission will
not pursue an action against FTX for its failure to disclose the changes to the
facility agreement.
93.	The Commission makes no criticism of ANZ for its actions. As a significant
creditor, ANZ was concerned about the position of FTX and was taking
steps to protect ANZ's position.
94.	At the time of the FTX directors' conduct in failing to disclose the changes
to the facility agreement, the securities laws did not attach liability to
directors for continuous disclosure violations. Since the time of this conduct,
the securities laws have been changed to include liability against the
directors of a company for failing to disclose material information. In the
near future, these changes will take effect. However, the Commission must
deal with the state of the securities laws as they were at the time of this
conduct. Therefore, no further action will be taken as to this matter.
Part VI FINANCIAL REPORTING OF THE BREACH OF BANKING COVENANTS IN THE 31 DECEMBER 2005 HALF-YEAR FINANCIAL STATEMENTS
95.	The Commission addressed the financial reporting matter of whether FTX
should have disclosed that it breached its banking covenants in its 31
December 2005 half-year financial statements.
96.	As at the calculation date of 31 December 2005, FTX breached the interest
cover and debt cover ratios of its banking covenants. In August or
September 2005, the FTX directors apprised ANZ that FTX anticipated
breaching its banking covenants at 31 December 2005.
97.	FTX did not disclose this breach of covenants in its 31 December 2005 half-
year financial statements.
98.	New Zealand entities which are required to comply with New Zealand
Generally Accepted Accounting Practice (NZ GAAP) under the Financial
Reporting Act 1993 are required to apply New Zealand Equivalents to the
International Financial Reporting Standards and Interpretations (NZ IFRS)
issued by the International Accounting Standards Board (IASB) for financial
reports that cover the annual reporting period of 1 January 2007. Early
adoption of these standards was allowed beginning 1 January 2005.
99.	FTX chose to adopt NZ IFRS for the financial year ending June 2006 which
therefore required FTX to file its half-year financial statements for 31
December 2005 under the NZ IFRS standards.
100.	FTX further chose to have their auditors, Ernst & Young, conduct a review
of the 31 December 2005 half-year financial statements for compliance with
NZIFRS.
101.	The applicable financial reporting standard is New Zealand Equivalent to
International Accounting Standard 34 (NZ IAS 34), paragraphs 16 & 17.
This standard requires an entity, in the notes of its interim financial
statements, if material and if not disclosed elsewhere in the interim financial
report, to disclose any loan default or breach of a loan agreement that has
not been remedied on or before the balance sheet date.
102.	IFRS defines material in the context of omissions and misstatements, which
are material if they could influence the economic decisions of users taken on
the basis of the financial statements.
103.	The Commission's view is that information about FTX's breach of banking
covenants was material information that should have been disclosed in the
interim financial statements as required by NZ IFRS.
104.	The breach was an event of default, as a result of which ANZ had a right to
declare the debt immediately due and payable.
105.	Section 36A of the Financial Reporting Act 1993 requires that interim
accounts comply with any applicable financial reporting standards. The FRA
imposes criminal liability for offences under section 36A. Every director
who commits an offence under FRA section 36A is liable on summary
conviction to a fine not exceeding $100,000. This raises the issue of possible
criminal liability of the directors.
106.	Under section 40 of the FRA, there are certain defences available to the
directors, if the directors prove that they "took all reasonable and proper
steps to ensure that the applicable requirement of this Act would be
complied with."
107.	The directors took the following actions in their preparation of the 31
December 2005 financial statements:

•	organized in 2004 an in-house staff team to address FTX's transition
to IFRS;
•	commissioned Ernst & Young in October 2004 to conduct a specific
project to address FTX's transition to NZ IFRS by providing an
assessment of the significant impacts of NZ IFRS for FTX;
•	engaged Ernst & Young to carry out a review of its 31 December
2005 interim financial statements;
•	engaged Ernst & Young to audit the FTX opening balance sheet as at
1 July 2004 and the restatement of the 30 June 2005 results in
accordance with NZ IFRS; and
•	the FTX Audit Committee (which included a director with significant
accounting experience) invited Stuart Painter to the Audit Committee
Meeting wherein the directors asked Mr Painter for assurance that the
31 December 2005 financial statements were compliant with IFRS
and according to the directors, Mr Painter indicated that the financial
statements were in compliance with IFRS.
108.	Nevertheless, the Commission is of the view that the FTX board failed to
pay sufficient attention to the breach. They further failed to appreciate FTX's
financial reporting obligations arising from the breach, which required FTX
to disclose its breach in its 31 December 2005 financial statements.

109.	Directors of a company are primarily responsible for the company's financial
reporting. However, they are entitled, in terms of fulfilling their more
general duties under the Companies Act 1993 section 138, to rely to a degree
on professional advisers such as auditors. The role of the auditors in
providing assurance about a company complying with its financial reporting
obligations is crucial.
110.	The FTX directors submitted that they relied on the advice of Ernst &
Young that the 31 December 2005 interim financial statements complied
with NZIFRS. Ernst & Young takes the view that an accounting firm
(whether conducting an audit or a review engagement) does not provide
advice to the to the directors of a company.
111.	At the hearings Stuart Painter, Ernst & Young Australian partner, testified
that during the course of the review, he was aware that FTX would breach
its banking covenants and the process for a review would be to make
inquiries as to whether the bank was taking action. He stated that if FTX had
breached its covenants and the bank wrote a no action letter, then the breach
would not need to be disclosed. The Commission asked Mr Painter, in
relation to the disclosure requirements of NZ IAS 34 paragraphs 16 and 17,
why FTX did not disclose the breach of covenants in its 31 December 2005
half-year financial statements even though Ernst & Young was aware that
such breach existed. Mr Painter testified that FTX had failed to make the
disclosure and that Ernst & Young did not pick it up.
112.	There was no waiver letter from the bank on or before balance date. It does
not appear that Ernst & Young sought evidence of a formal waiver of the
breach. Rather, they seem to have relied on information provided by the
company about FTX's banking relationship. In this regard, the failure of the
company's directors to give sufficient weight to the legal effects of the
breach of covenants and the changes to the facility agreement appears to
have been compounded by the auditors' failure to identify financial reporting
errors. Regardless of the opinions held by the directors, the auditors should
have, upon learning that there had been a breach of banking covenants,
sought verification that the breach had been formally waived, otherwise the
breach should have been disclosed.
113.	In its submission, Ernst & Young took the position that a formal waiver of
the breaches was not required from the ANZ, because ANZ was fully aware
of the breach and was prepared to lend FTX additional funds without
exercising any rights of enforcement. Ernst & Young asserted that ANZ's
conduct must have varied the covenant ratios which were breached, or at the
very least waived the breaches of those ratios, by advancing additional funds
which would have themselves created breaches.
114.	According to the Fourth Restatement, "[n]o failure to exercise and no delay
in exercising any right, power or remedy under any Financing Document
operates as a waiver."
Conclusions
115.	FTX should have disclosed the breach of the banking covenants in its 31
December 2005 half-year financial statements, because the breach was
material and could have influenced the economic decisions of the users of
the financial statements. The Commission has determined that if the
directors were confident of the bank's continuing support, it would have
been appropriate for the company to seek a waiver of the 31 December covenant breach on or before the balance date of 31 December 2005. Since there was no waiver on or before 31 December 2005, the breach was not remedied and under NZ IAS 34, paragraphs 16 & 17, the breach should have been disclosed.
116.	The failure to disclose the breach of banking covenants was a breach of NZ
IAS 34, an applicable financial reporting standard.
117.	As outlined above, the Commission is of the view that the FTX directors
failed to pay sufficient attention to the breach and failed to consider whether
there were financial reporting obligations arising from the breach. The
Commission notes that the directors, in their preparation of FTX's 31
December 2005 financial statements took certain steps to ensure compliance
with NZ IFRS. These steps may provide defences for the directors.
118.	It is not the Commission's role to assess criminal liability and defences to
such liability. Therefore, the Commission refers this matter to the Registrar
of Companies for that Office to determine whether to pursue criminal
prosecution of the FTX directors.
119.	Questions of liability under the Financial Reporting Act arise only in regard
to the conduct of the directors of a company. Therefore, the Commission is
not able to refer this matter to the Registrar of Companies in regard to the
conduct of FTX's auditors, Ernst & Young.
120.	The Commission views the failure of the FTX directors to disclose to the
markets the changes to the banking facility agreement as a significant and
ongoing continuous disclosure breach. Had these changes to the facility
agreement been disclosed, this would have informed the market of the
breach of the banking covenants. Therefore, the Commission has not
specifically considered the breach of banking covenants as at 31 December
2005 as a continuous disclosure issue.
Part VH CLASSIFICATION OF DEBT IN THE 31 DECEMBER 2005 HALF-YEAR FINANCIAL STATEMENTS
121.	The changes to the ANZ facility agreement and the 31 December 2005
breaches of banking covenants also raised a question of whether FTX
properly classified its debt in its 31 December 2005 half-year financial
statements.
122.	In its 31 December 2005 half-year financial statements, FTX classified
$116,842 million of its debt to ANZ as "non-current."
123.	NZ IAS 1 paragraph 60 changed, from prior requirements under NZ GAAP,
to require that a liability be classified as "current" in the balance sheet when
the entity does not have an unconditional right to defer settlement of the
liability for at least twelve months after the balance sheet date.
124.	NZ IAS 1, paragraph 3, which refers to the scope of the standard, states that
certain parts of NZ IAS 1 do not apply to the structure and content of interim
financial statements as they do to annual financial statements.
125.	Ernst & Young put forward an argument as FTX's auditors that FTX did not
need to classify its debt in the 31 December 2005 half-year financial
statements as it would have to under NZ IAS 1, because the principles for
classification of debt contained in NZ IAS 1 did not apply to interim
financial statements.
126.	However, NZIAS 34, paragraph 28, requires an entity to apply the same
accounting policies in its interim financial statements as are applied in its
annual financial statements.
127.	When NZ IAS 1 paragraphs 60 and 3 are read together, there appears to be
no applicable reporting standard regarding the classification of debt for
interim financial statements as there is for full-year financial statements. For
matters where there is no provision made in an applicable financial reporting
standard, a reporting entity must look to accounting policies that are
appropriate to the circumstances of the reporting entity and that have
authoritative support within the New Zealand accounting profession. NZ
IAS 1, paragraph 60 provides appropriate authoritative support for the
choice of an accounting policy for classification of debt in interim financial
statements.
128.	In the Commission's view, it would be inconceivable to accept that different
accounting treatments can apply for interim and full-year financial
statements, because such an interpretation would allow for two different
classifications for the same debt.
129.	The fact that FTX did not have an unconditional right arises from the
changes in the terms of the Fourth Restatement and that ANZ did not give
FTX a formal waiver of the breach until May 2006. Prior to May, FTX may
have inferred from ANZ's conduct that no action would be taken in
consequence of the bank's right. However, after 27 October 2005, ANZ had
the power, based on the terms in the Fourth Restatement, to conduct a
review and to call the loan due and payable. This meant that FTX did not
have an unconditional right to defer settlements of its loans for the twelve
months.
130.	The enhanced power given to ANZ in the Fourth Restatement regarding the
bank's ability to call the loan due and payable meant that FTX did not have
an unconditional right to defer settlement of its debt for twelve months.
Without this unconditional right, FTX should have classified its debt as
current.
131.	In addition, the breach of banking covenants as at 31 December 2005, as
discussed in the previous section, was an event of default. This gave ANZ an
additional ground on which it could call the loan immediately due and
payable. Under NZ IAS 1, this right on the part of the bank required FTX to
classify its debt as current, unless a formal waiver had been delivered by
ANZ to FTX no later than 31 December 2005.
Conclusions
132.	The Commission concludes that FTX incorrectly classified its debt as non-
current in the 31 December 2005 half-year financial statements, because
FTX did not have an unconditional right to defer settlement of its debt for
twelve months at 31 December 2005 and FTX was in breach of its banking
covenants. We view FTX's incorrect classification of debt as a breach of NZ
GAAP, not a breach of an applicable financial reporting standard. Since the
debt was not properly classified, the market was uninformed about the status
of FTX's debt.
133.	Questions of liability under FRA arise only where there is a breach of an
applicable financial reporting standard. Therefore, the Commission will not
refer this report to the Registrar of Companies in regard to the debt

classification issue.
134.	The Commission is strongly of the view that the classification of debt
adopted by FTX in the December 2005 financial statements was incorrect
and misleading. The changes brought about by NZIFRS, required that
FTX's debt should have been classified as current. However, it appears that
the classification of debt in interim financial statements may not be
expressly addressed by an applicable financial reporting standard. As such,
the Commission refers this question to the ASRB to consider whether any
guidance or other action is necessary.
Part VHI BOARD ISSUES
135.	Company directors are responsible for corporate governance. High standards
of corporate governance provide accountability to shareholders and enhance
corporate performance.
136.	The Commission's inquiry has identified several failures in FTX's financial
reporting and continuous disclosure compliance in 2005 and 2006. These are
described above.
137.	The Commission has considered the circumstances of the breaches identified
in this report in terms of their implications for the governance of FTX. In the
Commission's view these breaches highlight corporate governance failures
on the part of the Board of this company.
138.	The matters discussed in this report have a common feature - all concern
FTX's debt facility agreement with ANZ, changes to this facility, and
breaches by FTX of covenants under the facility, and an apparent failure on
the part of FTX's board and advisers to fully understand the implications of
these matters.
139.
The Commission considered what steps the FTX directors took to inform themselves of the changes to the facility agreement required by ANZ as a condition of the further funding. The evidence provided to the Commission showed the following:
(a)	in early October 2005, the board members had access to the
ANZ Credit Approved Term Sheet which outlined the
increase in margin rates, the facility review date of 30
November 2005, and ANZ's ability to require repayment of
the facilities; and
(b)	prior to the 25 October 2005 board meeting during which the
board discussed entering into the Fourth Restatement, board
members were sent a summary of amendments prepared by
the CFO, a solvency representation letter prepared by the
CFO, and a letter prepared by FTX's external lawyers
explaining the key changes to the facility.

140.	The summary of amendments prepared by the CFO showed the increase in
margin rates for the facilities, the proposed facility review date of 30
November 2005, and the ability of ANZ, upon review, to declare all sums
immediately due and payable.
141.	The solvency document prepared by the CFO advised that FTX could pay its
debts as they fell due in the ordinary course of business.
142.
The letter from FTX's counsel advised the following changes to the facility agreement:
" 1.       the reduction of the Working Capital Facility commitment by A$5 million to A$35 million;
2.	incorporating an additional facility to be provided by ANZ
for A$10 million being a Short Term Facility to assist
funding the implementation of Project Blue [a restructuring
project]; and
3.	a requirement that all Facilities are to be reviewable as of 30
November 2005. The effect of this means that the Facilities
may be cancelled, amended or continued.
In relation to Item 3, if the facilities are to be cancelled, no less than 30 days notice must be given at which time the Facilities are to be repaid. If the Borrowers do not agree to the terms of any proposal to amend or continue the Facilities within 15 days of receiving the revised terms the Facilities can be cancelled."
143.	It appears to the Commission that the Board members were given sufficient
information advising them of the changes to the facility agreement. They
sought and obtained legal advice, which also highlighted the key changes.
144.	Notwithstanding this, it appears that the directors failed to recognize the
significance of these changes, and failed to consider the changes in the
context of the company's continuous disclosure obligations.
145.	The Commission recognises that at the time the FTX directors would have
been most focussed on the immediate need to obtain further funding to carry
out restructuring needed to reduce costs for the company. The Commission
has learned that consideration of continuous disclosure was a standing
agenda item at every board meeting. The directors of public issuers must
recognise that at all times they have an obligation to the market, and to
investors, to maintain appropriate standards of continuous disclosure.
146.	The Commission notes that the legal advice obtained by the FTX Board
concerning the Fourth Restatement did not address continuous disclosure
obligations. The Commission has seen no evidence that the FTX Board
sought advice on whether the changes to the restatement and the resultant
increases in interest costs for the company raised continuous disclosure
issues. The Commission has not seen any evidence that the directors turned
their minds to this question.
147.	The Commission heard from ANZ representatives that the bank considered
FTX to be a valuable customer, and that the bank sought to maintain a
positive relationship. Notwithstanding this, the directors should have been
alert to the changes to the facility agreement obtained in exchange for the
further restructuring advance, the effect these had in strengthening ANZ's
rights under the agreement, and the effects of this for FTX and its disclosure
obligations.
148.	From the evidence it has seen, the Commission is of the view that the FTX
directors failed to give sufficient emphasis to the changes to the terms of the
facility agreement largely because of the strong belief, shared by all
directors from whom the Commission heard, that the company's relationship
with ANZ was strong and supportive.

149.	This continuing belief, shared by the entire Board, that the bank's attitude to
FTX was entirely supportive, appears also to underlie the disclosure failures
in the December 2005 interim financial statements. As described earlier in
this report the Commission has found that FTX should have disclosed the
breach of its banking covenants in its interim financial statements. It should
also have classified debt owed to ANZ under the facility agreement as
current debt. The Commission questioned the FTX directors about these
matters. Their evidence demonstrated that the focus of the Board was on the
apparent strength of the banking relationship. None of the company's
directors appear to have contemplated that ANZ might act on the 31
December 2005 covenant breaches. This belief was based on ongoing
discussions with ANZ personnel, and the fact that in August or September
2005, the FTX directors apprised ANZ that FTX anticipated breaching
certain of its banking covenants.
150.	It can be appropriate for a company's directors, when considering issues
such as whether a company is able to pay its debts as they fall due, to take
into account the commercial substance of its arrangements, including the
attitude of creditors. However, the starting point of any assessment of a
company's debt position must be the legal rights of creditors. This is even
more important where a company is in a difficult financial position, or has
significant vulnerability to the actions of a single creditor.
151.	In the Commission's view the FTX directors failed to give due weight to the
legal effects of the changes to the facility agreement and the 31 December
covenant breach. When FTX breached its facility covenants this gave ANZ a
further ability to call debts due and payable. The FTX directors clearly had
no expectation that this would be done in the short term, but their belief did
not change the rights held by ANZ, and the effects of this on the status of
FTX's debt for the purpose of New Zealand equivalents to the International
Financial Reporting Standards. Had FTX's directors given sufficient weight
to the legal position of ANZ this may have led them to ask more pressing
questions about the impact of the covenant breach and the restated review
and call-in rights of the bank on the company's financial reporting
obligations.
152.	If the debt had been properly classified as current in FTX's 31 December
2005 half-year financial statements, the Commission believes that there
would have been significant market focus on ANZ's ability to declare the
debt immediately due and payable, resulting in negative consequences for
FTX.
153.	The FTX directors at this time placed a great deal of weight on the
continuing support of ANZ. This in itself may have been a reasonable
judgement at the time. However, in so doing the directors failed to
sufficiently consider the changes that were taking place to the bank's legal
rights as a creditor of FTX. The 31 December 2005 covenant breach should
have been disclosed in the interim financial statements. The debt should
have been classified as current. Neither of these things was done, largely it
appears because the directors failed to appreciate the legal rights of the bank
which determined the company's financial reporting obligations. Instead, the
directors relied on an expectation that in practice the bank would continue to
support the company, whatever the legal position.
Conclusions
154.     On the evidence it has heard, the Commission concludes that the FIX
directors were, generally, sufficiently aware of the financial position of the company in late 2005 and early 2006. They were aware that the company was in difficulty, and took steps to attempt to address this. Notwithstanding this, the directors gave insufficient attention to the continuous disclosure ramifications of the October 2005 facility restatement. They failed to seek specific advice on the continuous disclosure implications of the restated agreement. They gave insufficient attention to the enhanced powers of the bank, despite clear legal advice on the point.
PART IX AUDITOR CONDUCT
155.     The Commission has assessed Ernst & Young's conduct in regard to their advice regarding the transition to NZ IFRS and their review engagement of the FTX 31 December 2005 financial statements.
156.
In the period leading up to the preparation of its first NZ IFRS accounts, FTX engaged Ernst & Young for the following services, and paid fees for such services:
a.	Impact assessment of FTX's NZ IFRS transition;
b.	Review of the 31 December 2005 FTX financial statements;
and
c.	Audit of the FTX opening balance sheet as at 1 July 2004
and the restatement of the 30 June 2005 results in accordance
with NZ IFRS.
IFRS Impact Assessment
157.	FTX appropriately commissioned Ernst & Young to conduct a specific
project to address its transition to NZ IFRS. This project was intended to
provide an assessment of the significant impacts of NZ IFRS for FTX.
158.	This work done by Ernst & Young in October 2004 did not identify for
FTX, the different basis upon which debt is classified under NZ IFRS, in
contrast to previous NZ GAAP. It did not highlight the requirement for non-
current debt that there be an unconditional right to defer payment for twelve
months.
159.	The Commission recognises that in October 2004 FTX did not have a
precarious debt position and therefore the classification of debt issue was not
as significant for FTX as it was in 2005.
December 2005 Review
160.	FTX engaged Ernst & Young to carry out a review of its 31 December 2005
interim financial statements. A review is not an audit. It provides a lesser
degree of assurance, and is based primarily on information given to the
reviewer by the client, rather than an independent verification of information
provided.
161.	NZ RS-1 Statement of Review Engagement Standards sets out review
standards applicable to a review engagement.
162.	In accordance with Review Standard 3 of New Zealand RS-1: Statement of
Review Engagement Standards: a review engagement should be performed
and its report prepared with due care by persons who have adequate training,
experience and competence in the review of financial information.
163.	The reviewer is required to obtain sufficient and appropriate evidence,
primarily through inquiry and analytical procedures, to be able to express a
negative assurance opinion in the review report.
164.	Furthermore, the New Zealand Review Engagement Guideline (RG-1)
paragraph 3 requires that if, based on enquiry and analytical review
procedures, the auditor has reason to believe that the financial statements
being reviewed may not give a true and fair view, then the auditor has a duty
to carry out additional and more extensive procedures to enable a negative
opinion to be expressed on the report or to conclude that that such an
opinion cannot be given.
165.	The 31 December 2005 review failed to pick up the non-disclosure of the
covenant breaches, and failed to pick up the incorrect classification of debt
by the company. In the Commission's opinion an adequate review would
have identified both of these issues. The Commission believes that Ernst &
Young, had it carried out the review engagement appropriately, would have
enquired further into the company's debt arrangements, and read the Fourth
Restatement. Even without doing this Ernst & Young should have
considered the impact of a known breach of banking covenants on the
company's financial statements. The breach of banking covenants should
also have prompted Ernst & Young to enquire further about proper debt
classification in terms of NZIAS 1.
166.	Gordon Fulton, an Ernst & Young partner, was the audit partner in charge of
the review engagement for FTX's 31 December 2005 interim financial
statements, although most of the field work was carried out by Ernst &
Young Australia in Melbourne. He told the Commission that classification
of debt was not specifically addressed as part of the review engagement by
Ernst & Young and that Ernst & Young did not give FTX any specific
advice regarding the classification of debt.
167.	Stuart Painter, the partner of Ernst & Young Australia who led the work
done by Ernst & Young Australia on the review engagement of FTX's 31
December 2005 interim financial statements, also gave evidence to the
Commission. He testified that there was no specific guidance given to FTX
by Ernst & Young and that FTX did not seek advice from Ernst & Young in
regard to classification of debt in the 31 December 2005 financial
statements. He stated that Ernst & Young expressed a negative assurance
opinion to FTX regarding those financial statements; the classification of
debt as a non-current liability was part of the financial statements; and
nothing came to Ernst & Young's attention during the course of the review
which suggested that the classification should be changed.
168.	Mr Painter stated that FTX had failed to make the disclosure and that Ernst
& Young, although aware of the covenant breaches, did not pick it up.
169.	In accordance with Review Standard 7 of New Zealand RS-1: Statement of
Review Engagement Standards, where the reviewer has cause to doubt the
assertions provided to it by management, the reviewer should seek evidence
to substantiate the assertions of management.
170.	From its history as FTX's auditor, Ernst & Young had a thorough knowledge of FTX's business given that FTX was a long term audit and business client of Ernst & Young.
171.	With such an in-depth knowledge of FTX, events such as the breach of
banking covenants, changes to the Fourth Restatement and the new
disclosure requirements arising from changes from NZ GAAP to NZIFRS,
should have prompted Ernst & Young to enquire further. It should have been
apparent to Ernst & Young, as an accounting expert, to see the relationship
between these matters and therefore conduct their review to ensure FTX's
financial statements complied with NZ IFRS.
172.	In its submission to the Commission, Ernst & Young, New Zealand asserts
there was not a significant change in the requirements for classification of
debt from previous NZ GAAP to NZ IFRS.
173.	The Commission believes that Ernst & Young should have appreciated the
significance of the change in requirements as a result of the change to NZ
IFRS in terms of how this affected disclosure of the breach of banking
covenants and the classification of FTX's debt.
174.	Ernst & Young should have, upon learning that there had been a breach of
banking covenants, sought confirmation that the breach had been formally
waived, regardless of the opinion held by the directors about the banking
relationship.
175.	Ernst & Young relied on information provided by the company about FTX's
banking relationship. In this regard, the failure of the company's directors to
give sufficient weight to the legal effects of the breach of covenants and the
changes to the facility agreement appears to have been compounded by
Ernst & Young's failure to identify financial reporting errors.
176.	The failures of the FTX board and Ernst & Young to appreciate the NZ
IFRS requirement regarding the debt resulted from a lack of understanding
of the NZ IFRS requirements by all parties. The directors assessed the
company's debt primarily by reference to the bank's continuing, but
informal, support for the company, not by reference to the rights of the bank
under the Fourth Restatement. Ernst & Young relied, in the context of a
review engagement, on FTX's views about the banking relationship. This
reliance was misplaced, in view of the information available to the auditors
concerning the fragility of the company's financial position, its dependence
on the ANZ facility, the restatement of that facility in October 2005, and the
breach of covenants in December 2005.
177.	Review Standard 6 Documentation of NZ RS-1 requires the reviewer to
document matters which are important in providing evidence that the review
was carried out in accordance with the Review Engagement Standards and
support the level of assurance provided.
178.
The Commission would have expected Ernst & Young's working papers to discuss the basis for their conclusions; e.g.:
(a)	details of discussions with FTX staff and the questions they
asked;
(b)	reasons as to why they believed that the breach had been
remedied as at 31 December 2005; and
(c)	the basis on which they believed that the debt was
unconditional as at 31 December 2005.

179.	In reviewing Ernst & Young's working papers, the Commission has
concerns that Ernst & Young did not ask the right questions.
180.	Ernst & Young's main working paper on loans payable that addressed
compliance with loan agreement provisions does not mention the 31
December 2005 breach, how the breach had been remedied, or whether the
loans classified as non-current were unconditional. This is surprising given
the known existence of a breach and the requirements of both NZ IAS 1 and
NZIAS 34.
181.	A checklist completed in the course of the review included an item for
noting whether there had been any loan default or breach of a loan
agreement, not remedied on or before the reporting date. Ernst & Young
marked this item "not applicable". There is nothing recorded on the checklist
or otherwise in the review working papers that explains how this conclusion
was reached.
182.
In a separate going concern checklist that Ernst & Young completed for the review they responded as follows:
(a)	"ANZ facilities have been renegotiated and there is no
indication from the bank that they will not support Feltex".
(b)	For the question "[a]re the entity's borrowing and bank
facilities approaching maturity with uncertainty as to the
prospects of renewal or repayment?" they responded "[n]o"
then went on to say "[n]o indication of no bank support."
(c)	For the question "[i]s the entity having difficulty in
complying with the terms of loan agreements or the need to
restructure debt?" they responded "[y]es. Company has
renegotiated ANZ loan facilities."

183.	The Commission cannot see how negotiation of the Fourth Restatement in
October meant that no issue remained in respect of the breach given that the
breach occurred some months later on 31 December 2005.
184.	It is difficult, if not impossible, in the context of a review engagement for
the reviewer to rely simply on a "no indication of no bank support" when
seeking to gain sufficient evidence that a breach has been remedied and that
an unconditional right existed as at 31 December 2005. The nature of the
assertions being made, i.e. the breach has been remedied and the facility is
unconditional, should have prompted a reviewer to ask more questions, and
in all likelihood seek access to relevant documentation or else seek
independent assurances.
185.     The Commission notes that there is differing evidence in regard to whether FTX provided a copy of the Fourth Restatement to Ernst & Young. Ernst & Young personnel indicated that FTX failed to provide to Ernst & Young a copy of the Fourth Restatement and a member of FTX's management team asserted that he did provide such a copy.
186     The Commission's conclusions regarding Ernst & Young's responsibilities do not turn on whether or not Ernst & Young was provided a copy of the Fourth Restatement.
Conclusions
187.	It is particularly important for both companies and auditors to understand the
terms of any review engagement which they enter into. The Commission
takes the view that notwithstanding the particulars of a review engagement,
auditors are reasonably viewed as advisers. It is reasonable under section
138 of the Companies Act for the directors of a company to rely on the
accounting firm (whether their advice is given pursuant to an audit or a
review engagement). The Commission believes that this view is widely
shared by company directors in New Zealand.
188.	In its submission to the Commission, Ernst & Young New Zealand asserts
that an accounting firm (whether conducting an audit or a review
engagement) is not an adviser to the directors of a company.
189.	Ernst & Young, New Zealand takes the position that it is not appropriate for
them to comment on whether directors might be able to assert a legitimate
defence that they were relying on the advice of auditors.
190.	The Commission considers that Ernst & Young failed in its professional
responsibility by not recognising the change in the classification of debt
from NZ GAAP to NZIFRS and how this change affected FTX in
December 2005.
191.	The Commission does not consider that work done by Ernst & Young and
the responsible partner Gordon Fulton, in their review of FTX's 31
December 2005 financial statements, met the required standards of a review
engagement. Ernst & Young and the responsible partner failed to inquire
sufficiently about the status of FTX's debt to ANZ, failed to identify that
breaches of banking covenants were required to be disclosed, and failed to
review the Fourth Restatement in order to understand the status of the
banking relationship. The Commission believes that the work of Ernst &
Young New Zealand and the responsible partner Gordon Fulton fell below
the standards required by NZ RS-1 Statement of Review Engagement
Standards. The Commission will refer Ernst & Young New Zealand and the
responsible partner Gordon Fulton to the NZICA.
192.	Since questions of liability under FRA do not arise in regard to the conduct
of auditors of a company, the Commission is not able to refer Ernst &
Young to the Registrar of Companies in regard to FTX's failure to disclose
. the breach of its banking covenants in its 31 December 2005 interim financial statements.
PART X OTHER ISSUES
Responsibility For Audit Working Papers
193.	From 2003 to 2006, Ernst & Young provided audit and review engagement
services to FTX. Ernst & Young New Zealand was the contracting party
with FTX for these services. However, Ernst & Young New Zealand had
Ernst & Young Australia conduct some of the work because FTX had its
headquarters in Australia. When the Commission requested working papers
prepared by Ernst & Young Australia, Ernst & Young New Zealand took the
position that it was a separate entity from Ernst & Young Australia and that
Ernst & Young New Zealand did not have control over any working papers
produced by Ernst & Young Australia.
194.	Ernst & Young New Zealand told the Commission that the work carried out
by Ernst & Young Australia was carried out pursuant to a subcontracting
relationship in accordance with Ernst & Young's standard terms and
conditions which reflect current market practice.
195.	The Standard Terms and Conditions of Business as articulated by Ernst &
Young New Zealand's contract with FTX for the review engagement of the
31 December 2005 FTX financial statements state that, at times, Ernst &
Young New Zealand may use the partners or staff of other member firms of
Ernst & Young Global Limited and Ernst & Young International Limited,
wherein the other members are deemed to be acting as servants or agents of
Ernst & Young New Zealand and Ernst & Young New Zealand is liable for
the activities of partners or staff of other members as if they were the
partners or staff of Ernst & Young New Zealand.
196.	Ernst & Young New Zealand submitted to the Commission that it is a
separate legal entity from Ernst & Young Australia and that, pursuant to
New Zealand Auditing Standard 602, Ernst & Young New Zealand does not
have control over the working papers of Ernst & Young Australia in regard
to the FTX review engagement.
197.	New Zealand Auditing Standard 602, Using the Work of An Other Auditor,
states that "[ujnless otherwise agreed, the working papers of the other
auditor shall remain the property of the other auditor."
198.	The Commission concludes that under Ernst & Young New Zealand's
Standard Terms and Conditions of Business, the work undertaken by Ernst
& Young Australia was done on an agency basis for Ernst & Young New
Zealand.
199.	Notwithstanding that the working papers are the property of Ernst & Young
Australia under New Zealand Auditing Standard 602, the Commission
considers it is unacceptable for the auditor of a New Zealand issuer not to
retain control of the full records of its audit (or review), which would
include the records of the work done by any agent, even though considered
the property of such agent under New Zealand Auditing Standard 602.
200.	We refer this matter to NZICA to consider whether the New Zealand
Auditing Standards should be reviewed in this regard.
Other Matters Considered
201.	The Commission reviewed the IPO allocations of the joint-lead IPO
managers, Forsyth Barr Limited and First New Zealand Capital and the
institutional and investor participation in the IPO. The Commission found no
unusual activity.
202.	The Commission reviewed trading in the FTX shares of two companies,

Forsyth Barr Limited and First New Zealand Capital, including their employees, officers, and directors during time periods surrounding certain of their market announcements. The Commission found no unusual trading activity.
203.	The Commission considered the trading activity of FTX directors and
officers. The Commission found that the executive officers of FTX properly
disclosed their transactions to the NZX.
204.	The Commission also considered the disclosure of information by FTX to
analysts relating to the breach of banking covenants around the time of
FTX's second profit downgrade on 20 June 2005. Three analysts who
forecast in research reports the possible breach by FTX of its banking
covenants were interviewed. The Commission found that there was no
indication that the analysts had access to non-public information from FTX
when they forecast the possible breach of banking covenants.
Part XI CONCLUSIONS AND REFERRALS
205.	The Commission has concluded that:
•	the 2004 IPO Prospectus was not misleading in any material
particulars;
•	FTX failed to disclose certain material information to the market
concerning changes to its facility agreement with ANZ in October
2005;
•	FTX failed to disclose the breach of its banking covenants in its 31
December 2005 half-year financial statements; and
•	FTX did not properly classify its debt in its 31 December 2005 half-
year financial statements.

206.	The Commission has concluded that the disclosure breaches show that the
FTX Board failed to pay sufficient attention to the continuous disclosure and
financial reporting compliance issues arising from changes to the facility
agreement and the breach of banking covenants.
207.	Since FTX is in liquidation and liability for continuous disclosure breaches
lies only against the issuer concerned, there is no realistic chance of taking
enforcement action in these circumstances. The Commission will take no
further action in regard to FTX's failure to disclose to the market the changes
to the facility agreement.
208.	The Commission refers this report to the Registrar of Companies to consider
whether any action should be taken against the FTX directors under FRA.
209.	The Commission has concluded that the work undertaken by Ernst & Young
New Zealand and the responsible partner Gordon Fulton in their review of
the 31 December 2005 half-year financial statements failed to meet the
standards required for such an engagement.
210.	The Commission refers this report to NZICA to consider whether any action
should be taken against Ernst & Young New Zealand and the responsible
partner Gordon Fulton.
211.	FTX's failure to properly classify the debt in its 31 December 2005 half-year
financial statements has highlighted that the classification of debt in interim
financial statements may not be expressly addressed by an applicable
financial reporting standard. The Commission refers this matter to the ASRB