More than 80% of the finance company collapses which cost New Zealanders billions of dollars in lost investments were predictable, according to a University of Otago study.
The study looked at 31 finance companies which failed in New Zealand during the global financial crisis of 2006-09, and an equal number which did not fail.
Co-authors University of Otago professor in accounting David Lont, Dr Tom Scott at the University of Auckland and Otago honours student Ella Douglas, said despite ongoing attention in New Zealand, including criminal and civil lawsuits, few people had considered whether the failures were predictable.
''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 [chief executive] fraud and that financial reporting was unreliable,'' Prof Lont said.
While some estimates of total losses range from $5 billion to $6 billion, Prof Lont said losses of more than $3 billion were estimated by a parliamentary inquiry into the collapses.
He said the study found annual reports and other public information successfully predicted whether a finance company would fail in the following year, for 88.7% of the failed companies.
The the failed finance companies had lower capital adequacy, inferior asset quality, more loans falling due and a longer audit lag - a possible indicator the auditor and the client were in dispute.
Prof Lont said the ''adequacy of communication to investors'' needed further investigation because many investors were ''clearly unaware'' of the increasing risks the financial accounts of the companies were indicating.
The study also noted trustee monitoring of the companies' respective performances was also a risk factor and the authors suggested further research to better understand why that was.
''We hope our model is an useful example to help auditors, trustees, regulators and investors better use financial reports to identify at-risk finance companies,'' Prof Lont said.
Recent regulatory reforms ''have been broadly appropriate'' to mitigate the problems raised in the study, including creation of the relatively new Financial Markets Authority (FMA)The FMA monitors auditors and trustees regulations among its other functions, while the Reserve Bank now requires risk management policies, credit ratings and set capital and governance requirements.
The study will be published in full in December's Journal of Contemporary Accounting and Economics.
