Overview
Quality financial information is crucial for strong and vibrant markets. More than ever, investors, suppliers, financial institutions, customers, company directors, corporate executives and many more are asking for reliable and timely financial statements in order to obtain a more accurate picture of the business, whether in terms of generating value or understanding the risks involved.
Over the past decade, businesses have also become more challenging and business models more complex. To cope with them, financial reporting standards have become increasingly complex and require more professional judgement on the part of the preparers of financial statements. Examples include fair value of financial instruments, the fair value measurement of assets and revenue recognition of multi-element transactions.
It is essential that to protect the public interest and remains confident in the level of transparency, integrity and quality of financial reporting. In response to this, AABE has commenced a Financial Reporting Review to enforce against poor financial reporting that leads to unreliable information and/or non-compliance with the prescribed financial reporting standards.
Directors, whether executive or non-executive, should exercise care, competence and diligence in the review of the financial statements that are presented to shareholders and subsequently filed with AABE. Directors should read, understand and enquire into the form and content of the financial statements to ensure that the financial information presented is clear, complete and consistent with their understanding. Even if they are not accounting experts, directors should question the accounting treatments applied when the treatment does not reflect their understanding of the substance of arrangement. They should also apply professional skepticism when assessing management views on areas of significant judgement and estimates.
Directors are not expected to be accounting experts, but should have sufficient and up-to-date knowledge of the accounting principles and practices to perform an effective high-level review of the financial statements. Otherwise, directors should seek help and/or attend training.
Directors should ensure that senior management of the company, such as the Chief Executive Officer (CEO) and the Finance Manager, have relevant knowledge, competence, experience and integrity to undertake their roles.
Directors should ensure that management maintains competent and adequately resourced finance function who can prepare high quality financial statements. Qualified accountants should be recruited and provided with relevant and continuous training to keep them abreast of the financial reporting developments.
Directors could seek professional accounting advice and/or outsource to professional accounting service providers the keeping of accounting and other records and the preparation of financial statements. However, they remain responsible and should ensure any such advice and/or service(s) are provided by suitably qualified persons with an appropriate level of expertise and knowledge of the accounting standards, and that such advice is unbiased and objective.
The independent auditors are required to communicate with those charged with governance on significant audit findings, including why they consider a significant accounting practice is not appropriate to the particular circumstances of the company, prior to issuance of the audit reports. Directors should resolve these issues amicably and seek help when necessary. Directors should not rely on the independent auditor in forming their own opinion on the financial statements. Doing so will undermine the objective of an independent audit.
Directors should ensure that management adopts appropriate accounting policies, designs and implements appropriate internal controls and processes, and maintains complete and accurate accounting and other records. This obligation exists regardless of whether books and records are maintained in-house or outsourced to a third party.
The above is meant to guide reporting entities in complying with certain significant duties in relation to financial reporting. They do not exhaustively define the duties applicable to directors under the proclamation and/or related legislation. When in doubt, legal advice should be sought by directors to clarify the scope of their duties.
AABE provides Reporting entities and preparers with the help resource such as:
