06 Jan 2023
RAISING COMPETENCY OF AUDIT COMMITTEE AND FINANCE TEAM CRUCIAL TO HIGH QUALITY FINANCIAL REPORTING
Singapore, 6 Jan 2023 – The Accounting and Corporate Regulatory Authority (ACRA) has issued its fourth Financial Reporting Surveillance Programme (FRSP) report, which noted that knowledge gap and insufficient due diligence remain the main root causes contributing to material non-compliances with accounting standards. Another root cause was the lack of action taken on issues raised by auditors.
2 ACRA reviews the financial statements (FS) of Singapore-incorporated companies for compliance with the accounting standards in Singapore and publishes the findings to help companies avoid the common pitfalls and improve their financial reporting. This latest FRSP report covers the FS reviewed between 1 April 2020 to 31 March 2022. Of the 33 sets of FS (comprising 27 listed companies and 6 non-listed companies) reviewed, ACRA found a total of 23 material non-compliance with accounting standards in 12 FS.
Key Findings from the FRSP review
3 The 23 material non-compliances were in areas such as business valuations, impairment assessments, presentation in cash flow statement, consolidation, and equity accounting. Through engagements with the companies, ACRA observed that the material non-compliances were due to the following factors:
a. Knowledge gap within the finance teams, Chief Financial Officers (CFOs) and Audit Committees (ACs), resulting in incorrect application of accounting standards;
b. Insufficient due diligence by the finance teams, CFOs and ACs, on transactions that were neither complex nor required judgement; and
c. Lack of action taken on issues raised by auditors. This includes failure to act upon the areas qualified or disclaimed by the statutory auditors and accepting modified audit reports in consecutive years, instead of taking the appropriate steps to rectify the issues and resolve non-compliances with the accounting standards.
4 The reviews resulted in the following regulatory outcomes:
a. One director was ordered to pay a composition sum and four directors were issued warnings for offences under section 201(5) of the Companies Act on non-compliance with accounting standards;
b. Five listed companies had their past years’ FS re-stated and re-audited; and
c. Three listed companies made additional disclosures or re-stated the comparatives in their subsequent FS.
5 Most of the material non-compliances affected the company’s bottom line or key financial measure(s). The adjustments to consolidated pre-tax profits or losses and net assets of the companies ranged from 13% to 576%, and 3% to 32% respectively; some operating cash flows changed from positive to negative, or vice versa. Such misstatements could impact the decision-making of users of these FS.
Strengthening Financial Reporting Competency
6 Apart from the efforts made to recruit qualified persons, more can be done to strengthen the competency of the financial reporting team. With evolving business models and more complex transactions, it is critical for preparers to understand the substance of the transactions and the principles behind the accounting standards in order to correctly apply the relevant accounting standards to the transactions. The companies should invest in training to equip and upskill the finance teams, including CFOs and ACs to bridge any competency gaps. Where necessary, the Board can support them by providing access to experts and consultants for advice on more complex matters.
7 Statutory auditors play an important role in financial reporting - they can assist the ACs, CFOs and finance teams by highlighting accounting and auditing issues early. In such situations, the ACs should guide the CFOs and finance teams to resolve the statutory auditor’s concerns, so as to avoid the issuance of modified audit reports. The Board should also apply rigour in reviewing and approving the FS, to ensure that the FS provides a true and fair view of the financial position and performance of the company.
8 As companies ramp up their sustainability efforts, attention should also be placed on the accounting implications of climate change. ACs should consider the key accounting and auditing considerations in their review of the FS and engagement with the statutory auditor.
9 The reliability of financial information is crucial to the credibility and stability of our business environment. Through the FRSP, ACRA will continue to focus its efforts on strengthening the financial reporting value chain so that investors and other stakeholders are provided with reliable and meaningful financial information.
10 The FRSP Fourth Report 2022 is available at https://www.acra.gov.sg/.