Ann: WAV/RULE: DIL: DIL - Application for Waiver

• Release Date: 30/08/13 11:24
• Summary: WAV/RULE: DIL: DIL - Application for Waiver from NZSX Listing Rules
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DIL
30/08/2013 09:24
WAV/RULE

REL: 0924 HRS Diligent Board Member Services INC (NS)

WAV/RULE: DIL: DIL - Application for Waiver from NZSX Listing Rules

NZX Regulation Decision
Diligent Board Member Services Inc (DIL)
Application for waiver from Listing Rules
10.4.1(b), 10.5.1, 10.5.3 and 10.6.1

30 August 2013

Background

1. Diligent Board Member Services Inc ("DIL") is a Delaware incorporated
company governed by US law, and is listed on the NZX Main Board.

2. DIL, as a US company, must prepare its accounts in accordance with US law.
DIL applies US Generally Accepted Accounted Principles ("US GAAP"), as
permitted by New Zealand law.

3. On 20 June 2013, DIL announced that senior management had identified and
communicated to DIL's Audit Committee an error in a revenue recognition
practice.  The error identified was that DIL incorrectly recognised revenue
from new customer agreements and upgrades from the beginning of the month in
which an agreement or upgrade was entered into, rather than from the date
that the services were made available to the customer for new customer
agreements, and pro rata based on the number of days in the month for which
an upgrade was in effect ("Revenue Recognition Error").

4. On 6 August 2013, DIL announced that:

a. DIL will restate its financial statements for the fiscal years ending 31
December 2010, 2011 and 2012 and the fiscal quarter ended 31 March 2013 and
that its previously reported results for such fiscal periods, including
interim periods within such fiscal periods, should no longer be relied upon;

b. DIL does not anticipate filing its Quarterly Report on Form 10-Q with the
SEC for the quarter ended 30 June 2013 by the due date of 9 August 2013 in
the U.S;

c. The Revenue Recognition Error and additional errors relating to
recognition of installation fees and the capitalisation of software costs
(together, the "Accounting Errors") "do not affect the total revenues
ultimately earned or to be earned, the amount or timing of cash received or
to be received from individual customer agreements, or the company's
liquidity or overall cashflow".

5. DIL has noted to NZX that until the restatement and reaudit process is
completed the exact impact of the Revenue Recognition Error and Accounting
Errors cannot be determined. For example, income stated in a period may
change to a different period. This would impact the net income and tax
payable in that period and subsequent periods. The impact of the Revenue
Recognition Errors and Accounting Errors set out in paragraph 4c above
together with the potential impact described in this paragraph is referred to
in this decision as the "Restatement Effect".

6. DIL has determined that a restatement of its historical financial
statements is required because the Accounting Errors identified had a
material impact on such historical financial statements, based on accounting
literature applicable to companies reporting using US GAAP, including SEC
Staff Accounting Bulletin No. 99.

7. DIL is proceeding with having the financial statements for the fiscal
years ending 31 December 2010, 2011 and 2012 restated and re-audited, and the
fiscal quarter ended 31 March 2013 restated and reviewed, by its current
independent registered public accountant, Deloitte & Touche LLP ("Deloitte").

8. Financial statements for the interim period ended 30 June 2013 cannot be
completed until all prior period financial statements have been restated, as
certain items, such as deferred revenue, are affected by the prior period
financial statements.  The restatement and audit work will run in parallel.

9. Under NZSX Listing Rule ("Rule") 10.4.1(b), DIL's preliminary half-year
announcement is due to be released to the market on 29 August 2013.  Under
Rule 10.5.3, DIL's half-year report is due to be released to the market on 30
September 2013.  DIL will not be able to complete the required restatement
and re-audit process in time to meet these deadlines. Therefore, DIL is
unable to provide its preliminary half year announcement and half year report
when due.

10. Under section 15(2) of the New Zealand Financial Reporting Act 1993
("FRA"), DIL, as an Issuer, must have its financial statements audited by a
licensed auditor or a registered audit firm (as defined in the Auditor
Regulations Act 2011 (the "ARA")). Deloitte have been engaged to complete the
re-audit of DIL's historical financial statements for the 2010, 2011 and 2012
fiscal years and as DIL's auditor with respect to the 2013 financial
statements. As with DIL's previous auditors, Holtz Rubenstein Reminick
("HRR"), Deloitte cannot be registered under the ARA because it is a limited
liability partnership.

11. Rule 10.5.1 requires that an Issuer's financial statements must be
audited and be accompanied by an audit report in accordance with the
requirements of the FRA.

12. Rule 10.6.1 requires the financial statements of each Issuer to comply
with the provisions of the FRA.

Application 1 - Rules 10.4.1(b) and 10.5.3

13. DIL has applied to NZX Regulation ("NZXR") for a waiver from:

a. The requirement in Rule 10.4.1(b) to release its Preliminary Announcement
within 60 days of the end of its financial half year, being 29 August 2013,
so that it may make that announcement on or before 28 October 2013; and

b. The requirement in Rule 10.5.3 to release its half-year report within
three months of the end of its financial half year, being 30 September 2013,
so that it may release its half-year report on or before 29 December 2013.

14. In support of its application DIL makes the following submissions:

a. DIL's ability to comply with Rules 10.4.1(b) and 10.5.3 has been
frustrated by circumstances which, although not wholly outside its control,
are such that they make providing the preliminary announcement and half-year
report within the stipulated timeframes impossible.  The fact of possible
non-compliance with US GAAP and accounting guidance was discovered by DIL's
new Chief Financial Officer.  It took until 6 August 2013 to complete the
necessary work to conclude that a restatement of DIL's historical financial
statements was required.  This reflects the complexity of the work required
to complete a restatement of DIL's financial statements for multiple fiscal
periods;

b. The presentation of financial statements before the restatement process
has been completed could result in the release of inaccurate and therefore
potentially misleading information.  DIL is required to provide shareholders
and the market with financial information that will accurately reflect the
financial performance of DIL.  In DIL's announcement of 6 August 2013, it
stated that the financial statements for the previous three financial years
should not be relied upon.  It would be potentially misleading to continue to
report on the same basis on which those financial statements were prepared.
This is contrary to the purpose of these Rules, being the presentation of
necessary and timely information to shareholders for them to assess and value
an issuer's securities;

c. The benefit of shareholders receiving information that accurately reflects
the financial performance of DIL outweighs the detriment of a delay in
receiving this information.  In the event that a waiver is not granted, DIL
will be required to provide information which may mislead investors because
it has not been fully considered by it and its advisers.  This leaves DIL's
board in the untenable position of being required to authorise the release of
financial statements which they know do not comply with US GAAP.  This
exposes the board and DIL to potential enforcement action in New Zealand and
the United States;

d. The restatement and re-auditing process covers three separate financial
years and related interim periods, including 2013, and is not a simple
exercise.  The exercise must be completed sequentially. As Deloitte was only
appointed as DIL's auditor with respect to the 2013 financial statements its
work will not merely involve revisiting their work.  Instead, they will have
to complete a new audit for each year, whilst comparing their work to that
completed by DIL's previous auditor, HRR.

e. The restatement and re-audit process was triggered by technical accounting
issues which do not change the underlying business performance of DIL. The
Accounting Errors and related adjustments will have the Restatement Effect
announced to the market on 6 August 2013;

f. The market is aware of the Accounting Errors and the Restatement Effect.
DIL has made ongoing disclosures to the market about the revenue recognition
review process and the possibility that its historical financial statements
may need to be restated;

g. DIL has sought to keep the market as informed as possible in relation to
its performance and position so far for 2013. The market is currently trading
DIL's ordinary shares on a more informed basis than it is for Issuers who do
not provide more frequent periodic reporting than is required by the Rules.
DIL has already provided the market with a significant amount of financial
information regarding its performance during the first six months of 2013.
Specifically, DIL:

(i) announced the presentations given by the Chairman and Chief Executive
Officer at the annual meeting on 25 June 2013. Those presentations included
information about DIL's performance during the first quarter, which included
details of the percentage of companies on certain overseas stock exchange
indices who used DIL's board books;

(ii) described the impact of the Accounting Errors on 6 August 2013;

(iii) voluntarily announced the second quarter performance information on 6
August 2013, including details of net new client agreements, total client
numbers, details of the number or percentages of companies on certain
overseas stock exchange indices who use DIL's boardbooks product, and the
change in the cash balance;

h. DIL has continued to receive research analyst coverage following its
second quarter announcement and investors are equally able to interpret and
apply information available regarding DIL to make updated informed trading
decisions;

i. There is precedent for granting waivers in circumstances where the release
of information does not provide the market with an accurate assessment of the
condition of an Issuer, for example:

(i) Fidelity Capital Guaranteed Bond Limited on 29 August 2011 and Allied
Farmers Limited on 27 August 2010.  Although both decisions relate to Rule
10.4.1(a), the policy rationale justifying these waivers is equally
applicable to preliminary half-year announcements; and

(ii) declined in respect of Cynotech Holdings Limited on 4 August 2010 and
Windflow Technology Limited on 9 November 2009.  Although both decisions
relate to Rule 10.5.1, the policy rationale is equally applicable to
half-year reports.  These decisions are distinguishable from the present case
for the reasons given above.

Rules

15. Rule 10.4.1(b) provides that:

"10.4.1 Each Issuer shall make an announcement pursuant to Rule 10.4.2
through NZX for public release, in the manner prescribed by Rule 10.2 as soon
as the Material Information is available, and in any event;
...

(b)  before the release of each half-yearly report and not later than 60 days
after the end of the financial half-year to which that report relates; and"

16. Rule 10.5.3 provides that:

"10.5.3 Each Issuer shall within three months after the end of the first six
months of each financial year of the Issuer:

(a) deliver to NZX electronically, in the format specified by NZX from time
to time; and

(b) make available to each Quoted Security holder in accordance with Rule
10.5.4,

(i) a half-year report.  That half-year report shall be delivered to NZX
before, or at the same time as, it is made available to Quoted Security
holders in accordance with Rule 10.5.4 that half-yearly report shall include
the information and otherwise address the matters prescribed by the relevant
section of Appendix 1."

17. Footnote 2 to Rule 5.4.3 provides that:

" In relation to an Issuer who fails to issue its preliminary full year or
half year announcement reports, annual and half yearly reports or quarterly
reports of consolidated cash flows, by their respective due dates, NZX will
observe the following policy:

(a)  NZX will immediately publish their names; and

(b)  if after five Business Days following the relevant due date, that Issuer
has not complied, Quotation of all or any Class of that Issuer's Securities
will be suspended, until such time as the Issuer has complied; and

(c)  in appropriate cases, either in addition to or in substitution for the
steps taken under paragraphs (a) or (b), NZX may pursuant to Listing Rule
2.3, and at the expense of the Issuer, use its power of inspection to
ascertain and inform the market of the state of that Issuer."

Decision - Application 1

18. On the basis that the information provided to NZXR is full and accurate
in all material respects, NZXR declines to grant DIL the waivers sought from
Rules 10.4.1(b) and 10.5.3.

Reasons - Application 1

19. In coming to this decision NZXR has considered the following matters:

a. An Issuer's periodic reporting obligations serve to ensure that security
holders are provided with necessary information to assess and value an
issuer's securities, as well as providing comfort to the wider market by
aiding transparency and removing opportunities for insider trading; and

b. The Accounting Errors were not wholly outside of DIL's control, which
means the circumstances in DIL's case differ from the precedents noted in
paragraph 14.

Comment

20. NZXR has decided that it is inappropriate to grant the waivers sought in
this case for the reasons outlined in paragraph 19 above.

21. NZXR has also considered what enforcement action may be required in
respect of the delay in release of the preliminary announcement and half-year
report and has determined that, on the basis that the impact of the
Accounting Errors on DIL is limited to the Restatement Effect, NZXR will not
take any enforcement action in respect of any delay in release of the
preliminary announcement or half-year report in respect of the six month
period ended 30 June 2013, as required under Rule 10.4.1(b) and 10.5.3,
however, NZXR may refer to these matters when considering DIL's compliance
history in respect of any other matters arising in the future. NZXR may also
consider taking further action if the preliminary announcement or half-year
report in respect of the six month period ended 30 June 2013 are not released
within the dates specified in paragraph 13 above, or if the impact of the
Accounting Errors is not limited to the Restatement effect.

22. NZXR has also considered whether it is appropriate for it to observe the
policy expressed in Footnote 2 to Rule 5.4.3 which provides that where an
Issuer fails to comply with the periodic reporting requirements and has
failed to remedy such failure within five Business Days, NZX will suspend the
Quotation of that Issuer's securities until such time as the Issuer has
complied.   NZX has determined that it will not suspend trading in DIL shares
in accordance with that policy because of the delay in release of the
preliminary announcement or half-year report in respect of the six months
ended 30 June 2013 on the basis that the impact of the Accounting Errors is
limited to the Restatement Effect and on the basis that DIL has provided some
performance information to the market. However NZX may consider whether it
is appropriate to observe the policy expressed in Footnote 2 to Rule 5.4.3 if
the release is not provided by the dates specified in paragraph 13 above.

23. NZXR has considered that:

a. DIL has proactively engaged with NZXR and informed the market in relation
to the Accounting Errors. In particular, DIL has stated that the potential
impact of the Accounting Errors on DIL will be limited to the Restatement
Effect, and will not change the underlying business performance of DIL; and

b. DIL has voluntarily provided certain performance information in relation
to the first six months of 2013, which provides investors with information
concerning DIL's performance during the first six months of 2013.

Application 2 - Rules 10.5.1 and 10.6.1

24. DIL has applied to NZXR for a waiver from the requirement in Rules 10.5.1
and 10.6.1 to have its financial statements audited and accompanied by an
audit report in accordance with the FRA, so that its financial statements for
the year ended 31 December 2012 may be audited by Deloitte.

25. In support of its application DIL makes the following submissions:

a. It is not possible for Deloitte to be registered under the ARA as it does
not permit registration of limited liability partnerships (i.e. bodies
corporate);

b. It is not practicable to appoint an auditor that is licensed or registered
under the ARA. Given that DIL prepares its accounts in accordance with US
GAAP, which is permitted under the FRA, DIL is not aware of an alternative
New Zealand based and registered audit firm with the requisite expertise to
audit its financial statements and believes that the retention of Deloitte is
in the best interest of shareholders. Shareholders appreciating this issue,
resolved to ratify Deloitte as DIL's auditor at the annual meeting by a
resolution supported by 99.90% of votes cast;

c. Deloitte is a member of recognised international accounting bodies, namely
the Public Company Accounting Oversight Board (PCAOB) and the American
Institute of Certified Public Accountants (AICPA);

d. The objective of Rule 10.5.1 is to have financial statements audited.
That objective is met. The financial statements are audited, just not by an
auditor licensed or registered under the ARA; and

e. The Financial Markets Authority ("FMA") recognises the practical
difficulty the ARA creates for DIL. In this regard, the FMA has granted a
no-action letter to DIL in relation to the appointment of Deloitte to audit
DIL's restated financial statements for 2012.

Rules 10.5.1 and 10.6.1

26. Rule 10.5.1 provides that:

"10.5.1 Subject to Rule 10.5.2 each Issuer shall within three months of the
end of each Issuer's financial years:

(a) Deliver to NZX electronically, in the format specified by NZX from time
to time; and

(b) Make available to each Quoted Security holder in accordance with Rule
10.5.3,

an annual report.  That annual report shall be delivered to NZX before or at
the same time as it is made available to Quoted Security holders in
accordance with Rule 10.5.3, and shall contain all information:

(c) required by law;

(d) required in a preliminary announcement by Rule 10.4.2; and

(e) required by Rules 10.5.4 and 10.5.7.

the financial statements in that annual report shall be audited and shall be
accompanied by an audit report in accordance with the requirements of the
Financial Reporting Act 1993."

27. Rule 10.6.1 provides that:

"10.6.1 The financial statements of each Issuer shall comply with the
provisions of the Financial Reporting Act 1993."

Decision - Application 2

28. On the basis that the information provided to NZXR is full and accurate
in all material respects, NZXR declines to grant DIL the waiver sought from
Rules 10.5.1 and 10.6.1.

Reasons - Application 2

29. In coming to its decision NZXR has considered the following matters:

a. The policy behind Rules 10.5.1 and 10.6.1 is to ensure that financial
statements of Issuers released to the market comply with the FRA, and have
been audited according to the standards set out in the FRA. Those Rules
regarding FRA compliance are accordingly of fundamental importance, and are
in place to ensure there is a properly informed market; and

b. As a matter of policy, NZXR should not waive compliance with a Rule that
requires compliance with a statutory requirement applicable to an Issuer and,
in particular, where the relevant regulator has not granted an exemption from
that statutory requirement, irrespective of the severity or impact of
non-compliance with the statutory requirement.

Comment

30. The FMA is responsible for enforcement of the FRA and ARA. The FMA has
recognised the practical difficulty that the ARA creates for DIL by providing
DIL with a no action letter in relation to the appointment of Deloitte to
audit DIL's restated financial statements for 2012.

31. NZXR does not intend to take any action in respect of the audit of DIL's
restated financial statements by an auditor that is not registered or
licensed under the ARA, as these Rules 10.5.1 and 10.6.1 import legislative
requirements in respect of which the FMA is the front-line regulator.
However, NZXR may take these breaches into account when considering DIL's
compliance history in the event of future non-compliance by DIL.

ENDS
End CA:00240448 For:DIL    Type:WAV/RULE   Time:2013-08-30 09:24:34