ASIC gets real with forecasters

TheAustralian Securities and Investments Commission(ASIC) is cracking down on the practice of tenuous financial forecasting, with the release of a draft policy statement on the use of prospective financial information in prospectuses, disclosure documents and product disclosure documents.

Open for comment until FridayJanuary 18, 2002, the draft policy statement reflects ASIC’s commitment to improve the level and quality of disclosure in both prospectuses and other fund raising documents.

According to ASIC director of corporate finance Richard Cockburn, ASIC’s own research has been confirmed by external studies that show financial forecasting is often unreliable.

“The inclusion of financial forecasts that lack reasonable grounds is one of the most common reasons ASIC will put a stop order on a prospectus or other disclosure documents,” Cockburn says.

He says while the more established companies tend not to optimistically forecast, initial floats, biotech companies and hi-tech companies are prone to the practice and find it very difficult to substantiate such claims.

“It has really been a growing concern since the early 90s but has crystallized over the last two years,” Cockburn says.

He says the collapse of the hi-tech boom has heightened both industry and consumer awareness of start-up companies making forecasts without any real track record.

“In general, the smaller the company in terms of dollar value, the more likely it is to overvalue,” Cockburn says.

However, it does raise the issue of how start-up ventures in the future will raise money if they are unable to make optimistic statements. Cockburn says the solution is in achieving a balance between protection and supporting these sunrise industries.

ASIC plans to use the draft policy as its guideline in assessing prospectuses and other fund raising documents until all industry comment has been received and a final policy statement has been issued.