Quality financial information is imperative for the creation of strong markets. In response to the essential need for transparency, integrity and quality financial reporting, ACRA has commenced a Financial Reporting Surveillance Programme that enforces against poor financial reporting which often results in unreliable information and/or non-compliance with the prescribed standard of accounting.
Companies Act requirements
Under sections 201(2) and 201(5) of the Companies Act (the “Act”), directors are deemed responsible for the presentation of the financial statements to the company at its Annual General Meeting (the “AGM”). The financial statements must:
- comply with Accounting Standards issued by the Accounting Standards Council; and
- give a true and fair view of the financial position and performance of the company.
Further, the directors of a company are also responsible for the maintenance of an internal accounting controls system and keeping proper accounting and other relevant records that contribute to the preparation of true and fair financial statements under sections 199(2A) and 199(1) of the Act, respectively.
Guidance to directors in carrying out these financial reporting duties
- Review of financial statements – Directors must exercise care, competence and diligence in the review of the financial statements presented to shareholders that are thereafter filed with ACRA. Directors are advised to read, understand and enquire into the form and content of the financial statements so as to ensure that the information presented in the financial statements is accurate and consistent with their understanding. If directors do not have knowledge in accounting, they are still required to question the accounting treatments applied when it fails to reflect their understanding of the substance of arrangement. They ought to also apply professional scepticism when evaluating management views and areas of significant judgment and estimates.
- Financial literacy – Directors are not expected to be experts at accounting, but they are expected to have sufficient and up-to-date knowledge of the principles of accounting and practices that enable them to perform an effective high-level review of the financial statements. Despite this, if they fail to gain a clear and accurate understanding of the financial statements, they should seek help and/or attend the relevant training required.
- Appointment of management – Directors are advised to ensure that management of the company, such as the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), possess adequate knowledge, competence, experience and integrity to perform their roles.
Under the Code of Corporate Governance 2018, directors of listed companies should comment in the Annual report as to whether they have received assurance from the CEO and CFO:
- That the financial records have been correctly maintained and the financial statements provide a true and fair view of the operations and finances of the company; and
- With regard to the adequacy and effectiveness of the company’s risk management and internal control systems.
Although assurance provided by the CEO and CFO does not diminish the responsibility of the directors in these areas, it may provide directors with the assurance that management has exercised due care in the financial reporting process.
Competent and adequately resourced finance function – Directors ought to ensure that management is consistent with maintaining a competent and adequately resourced finance function which has the capacity to prepare high quality financial statements. Qualified accountants are advised to be recruited and provided with relevant and continuous training to keep them up-to-date with developments in financial reporting.
- Using external help – Directors ought to seek professional accounting advice or outsource to professional accounting service providers the keeping of accounting and other records as well as the preparation of financial statements. Directors, however, must remain responsible and should ensure any such advice and/or service(s) are provided by suitably qualified persons who possess an appropriate level of expertise and knowledge of the latest accounting standards, and that the advice provided by the qualified person(s) is unbiased and objective.
- Working with the independent auditors – The independent auditors must communicate with persons who are charged with governance on significant audit findings, inclusive of the reason why a significant accounting practice is not appropriate to the particular circumstances of the company, prior to issuing the audit reports. Directors ought to resolve such issues amicably and seek help when needed. Directors are advised not to rely on an independent auditor in forming an opinion on the financial statements. Doing so may undermine the very objective of an independent audit.
- Internal control system and accounting and other records – Directors are advised to ensure that management adopts appropriate accounting policies, designs and implements appropriate internal controls and processes, and maintains complete and accurate accounting and other relevant records. This obligation exists regardless of whether books and records are maintained in-house or outsourced to a third-party service provider.
The above is meant to guide directors in complying with specific duties in regard to financial reporting. The list does not exhaustively define the duties applicable to Directors under the Act and/or legislation. When in doubt, legal advice should be sought by directors to clarify the scope of their duties.
Please note that this article does not constitute express or implied legal advice, whether in whole or in part. If you require legal advice, please contact me at firstname.lastname@example.org.