NO ALARM:  Corporate governance expert Mervyn King. Picture: MARTIN RHODES
NO ALARM: Corporate governance expert Mervyn King. Picture: MARTIN RHODES

THE JSE has rejected more than 40% of listed companies’ annual financial statements and returned them for correction since the introduction of new accounting rules and the bourse’s adoption of a risk-based approach to reviews.

It involved 41.6% of listed companies the JSE reviewed over the period to June last year — an increase on the previous year’s non-compliance of 27.4%.

The European Securities and Markets Authority, which averages data across 20 countries, found noncompliance of 21.4%, an improvement on the previous year’s 26%.

André Visser, general manager of issuer regulation at the JSE, said a sample of 72 annual financial statements with years ending between February 2014 and June last year had been reviewed.

Corporate governance expert Mervyn King said there was no cause for alarm about the high level of noncompliance.

"The financial statements are recognised today as only being part of a company’s corporate reporting and usually representing only about 30% of the market capitalisation of companies," he said. "Hence the international movement to integrated reporting."

Mr Visser attributed the increase to the bourse’s adoption of a risk-based approach to reviews and the introduction of new accounting standards.

It examined the composition of audit committees and other features that indicated a company may be risky for investors.

"When new standards are introduced, there is confusion on how to apply (them)," Mr Visser said.

Companies struggled with international financial reporting standards on disclosure of interest in other entities and the fair-value measurements, which were present in 46% of cases in which the JSE compelled companies to restate financial statements.

Very few — only 9% — of the corrections were made public immediately. Mr Visser said an immediate announcement was required only when the information was price sensitive.

Determining whether information was price sensitive was subjective, he said. "It’s not an exact science. As a rule of thumb, earnings, for instance, are going to decrease by more than 10%."

This was discussed by the JSE and the issuer, and in most cases the issuer agreed that it needed to inform its shareholders of the error or misstatement immediately.

If the information was not price sensitive, it could be corrected in the issuer’s next results to avoid prejudice to investors.

Shareholder activist Theo Botha said that the JSE should shoulder some blame.

"Surely when they come across these material infringements they should make disclosure to the shareholders of the company concerned, who are, after all, the owners of the company?"