The Role of Related Party Transactions in the Failure of New Zealand Finance Companies

Rebecca Wu, Nelson Marlborough Institute of Technology
Sue Malthus, Nelson Marlborough Institute of Technology

Abstract: This paper reviews 13 of the New Zealand finance companies that failed between 2006 and 2012, in part due to excessive related-party lending. The related party transactions of the finance companies examined had four common characteristics, namely excessive lending without satisfactory securities, management fraud, deliberate non-disclosure of significant lending and breaches of statutory requirements and agreements. In a number of these cases, the auditors failed to identify undisclosed related party transactions due to a lack of planning or performed auditing work with insufficient professional skepticism. Significant changes have occurred partly as a result of the collapse of so many finance companies. These changes include the introduction of new regulations and legislation in respect of licensing requirements for auditors, financial advisors, and trustees; more rigorous governance and disclosure requirements for finance companies and financial advisors; and harsher penalties for financial market misconduct.