'Something very wrong with investment policies’

Press, 13 February 1981, Page 8

'Something very wrong with investment policies’

An analysis of the Reserve Bank’s Share Price Index showed “something very wrong with the policies that control and influence investments,” said the chairman of the Securities Commission (Mr C. I. Patterson) last night. Mr Patterson was speaking to the 1981 Summer School of the New Zealand Society of Accountants at Lincoln College. The market capitalisation of the 60 leading companies

! included in- the Share Price : Index at the balance date ' nearest to January 5, 1980, : amounted to 78 per cent of shareholders’ funds, Mr Pat- ’ terson said. These figures were “pro- : foundly disturbing,” he said. “We need to study and ana- , lyse the reasons why the market values of equity securi- • ties are substantially less ; than the amount of corporate investments attributable to i them.” ; He was satisfied the figures

were not an idiosyncrasy affecting only particular' areas of equity investment, “A study of the figures could show that we are under-utilising our assets and that. the corporate sector had developed an . unhealthy dependence upon short-term debt financing,” he said.

That the investments of the 60 leading companies on the Share Price Index were only valued at three-quarters of shareholders’ funds is the most important question, that will affect securities legislation in the next decade, Mr Patterson said. The commission believed the present historic cost accounting method used by companies should be replaced by current cost accounting. A commission study of the collapsed Mosgiel company’s finances for the year ended June 30, 1979, using current cost accounting, showed that a historic cost “profit” was a substantial current loss. Me was fed up with spurious reports of record profits and the reported growth of share prices when the aggregates of such prices were substantially less than the amounts of past investments. - When would the accounting profession produce for society statements of the facts that are necessary for wise decisions and constructive plans, Mr Patterson asked.