Causes of New Zealand Finance Company Collapses: A Brief Review

Purpose – During the period 2006-2010, 49 finance companies collapsed or entered moratoriums, owing investors in excess of $8 billion, and the fingers of blame continue to point in circles. The blame for this tremendous financial crisis is extensive and a consolidation of arguments is essential for the wider understanding of the topic and to put responsibilities into perspective. A part of this paper is to recognise who can and is being held legally responsible for investors’ sake, and also identify parties who have failed their responsibilities. We believe in some way these findings will help avoid a similar crisis in the future and resolve a still commonly blurred line in public opinion. Methodology/Approach – This paper is based on a review of prior studies, publicly available information, media and government reports on the topics contributory to the financial companies collapse. We question the degrees of responsibility of a number of variables including but not limited to: Financial Advisors, The Securities Commission, the effectiveness of bond covenants (and trustee companies), Auditors, GAAP and of course corporate governance. Findings – Discussed the main contributors to the collapse from authorities in the field and with applicable examples. We have highlight the major issues created by corporate governance being the most direct cause of company failure, while defining to what degree more secondary responsibility to failures contributed to the actual company collapse as opposed to simply failing their responsibilities to individuals or the public. Implications – Create a better understanding for readers through consolidated ideas of causes of the finance company collapses in New Zealand. Value – This paper highlight the differences between: how specific factors directly caused companies to collapse, and where these factors failed to protect individuals and the public from the financial crisis. Therefore our results have interest for accounting standard setters, auditors, policy makers and regulatory bodies. Further, it is argued that these factors are not unique to New Zealand but have relevance globally.