News
Financial Reporting - Raising The Bar For Directors
5 December 2007
Financial reporting matters. It is important yet certain directors and companies have not got it right. Financial reports provide a basis for informed judgement and decision making about the stewardship of the directors and management’s performance. Directors and companies must rely on financial reporting as a means to assure the public at large and shareholders in particular of their accountability.
In law, the duties of directors are owed to the company and its shareholders. Directors have duties also to other stakeholders. Company law rests on the notion of separate entity between ownership and accountability to owners of the company. Financial reports are a recognized form of this accountability and transparency, not only for investor confidence but also that of the public at large.
In the wake of the recent irregular accounting scandals, it is timely for shareholders and investors to impress upon directors their obligations to discharge their responsibilities and with propriety. The objective of the audited accounts is to provide a true and fair view of the company’s affairs and its changing fortune. Best practices usually reflect the essential principles for appropriate accounting underlying this objective. As to what accounts are to be made out to be true and fair is left to the directors and management. No accounting standard will be black and white in every situation. In fact, it is impossible to perceive all the possible situations.
At times, directors and shareholders are often locked in the delicate balance between management’s desire to report effective stewardship on the one hand and in other instances, to create profits or results in accord with law and sound practices. Management’s influence as to what is true and fair, and what is not, can be overwhelming. However, the onus is on management’s integrity and transparency. Yet, there are always certain directors who will stretch credibility across the fine dividing line.
So, what then is a profit? For that matter, what an income statement or a balance sheet represents? Is profit a nebulous figure? Is it more objective by management’s influence? Is it more reliable in auditors’ opinion? Are the accounts relying on directors too much? Or should management report what it wants profit to be? All these questions are valid with a wide range of answers that are legal or at times, controversial. Then, why should there be management’s influence? Can directors assure shareholders the transparency of the information they provide? Has financial reporting become an integral part of the company’s overall business management? Rightly, directors must not allow irregular accounting to dent shareholders’ faith. Skeptics may then suggest that since directors and companies are quite incapable of self regulation, the regulators would have to step in with both feet amidst more public scrutiny.
On what grounds, are directors independent to state that the financial statements do give a true and fair view? Do they have to disclose all things and report them in the accounts as the law prescribes. Are directors duty-bound to just do all that?
For statutory reporting, directors and management are deemed to be duty-bound. They are not to regard financial reporting as something to manipulate or even to arm-twist auditors. In this respect, the quality, character and integrity of directors, management, and auditors really matter.
There are times where the management’s influence may override due regard to the multitude interests of different shareholders and investors to whom directors are responsible. In any event, the auditors are still obliged to audit and report. Auditors should call directors and management to account if they are found to collude in dubious accounting to bolster reported profits or pep up exaggerated results when faced with external pressure, risk and competition for performance.
Uncomprehending auditors may find themselves misled and deceived as directors run the risk to collude with management. It is unfair to innocent directors while law may take time to catch up with the guilty ones. For the auditors, their obligation is not only to shareholders but also to the capital market generally, effectively to the stakeholders and/or parties who may place reliance upon them.
No offence may be committed unless wrongdoings are fraudulent. Beware and above all, be honest and truthful. Irregular accounting and false accounts can only be committed by the perpetrators who act dishonestly.
Financial reporting is not a hit-and-miss process with consistency for accounting ranked low in the order of priorities. All accounting treatments and/or classifications are usually determined afresh each year. Accounting policies as such are formulated and published. Satisfying compliance requirements that accounts give a true and fair view, depends on interpretation. No management’s influence is allowed on going concern basis to report company’s performance and stability. If auditors have some doubts as to the truth and fairness of the accounts, directors owe it to them to provide clarifications on the departure and the reasons for non-compliance, and its financial effects on the accounts. Audited accounts can only become true and fair if directors concede the accounts to be prepared to comply with approved accounting standards or auditors’ recommendations.
Misleading information is worse than no information. Misrepresentation is akin to fraud or duplicity to deceive. Hence, fraudulent misrepresentations can give rise to an action for criminal lawsuits. On the other hand, an innocent misrepresentation may be as bad to give the injured party or parties a possible right to claim damages.
How active will the Public Companies Accounting Oversight Board (the Oversight Board) be to review, either to accept or reject erroneous accounts or to take audit committees to task for irregular reporting remains to be seen. It will certainly be the case that the Oversight Board may have to look at not only auditors but also all involved in company accounts preparation.
If the Oversight Board is to be effective as we are constantly being assured, we must, let it be one which encourages the reporting and prosecution of those directors and other gatekeepers whose actions run counter to the law or regulation of business. They are, for instances, those who misuse the company’s funds, falsify company’s books and reports, and who violate the trust of shareholders and other stakeholders. The idea behind setting up the Oversight Board could basically be to weed out the culprits among those who are more deserving, better quality directors and auditors.
Non-executive directors and audit committee members have to be financially literate. They need to develop a working understanding of the implications of financial reporting. If they do not understand the numbers, they will not be able to ask the right questions nor will they understand the answers. They can no longer admit that they cannot understand the figures. The recent episodes of irregular accounting have demonstrated poignantly the need for quality non-executive directors and competent audit committees whom shareholders and investors can rely upon. They have to ensure stricter compliance of various regulations, have a greater role to play both within and outside the regulatory regimes by promoting and ensuring constructive compliance and good corporate governance practices.
Dated: 5 December 2007
MSWG will organize a one-day workshop on annual report and financial statements analysis and interpretation for retail shareholders and investors. Please call tel. no. 603-20709090; fax. no. 603-20709107 or e-mail: watchdog@mswg.org.my for information.
5 December 2007
Financial reporting matters. It is important yet certain directors and companies have not got it right. Financial reports provide a basis for informed judgement and decision making about the stewardship of the directors and management’s performance. Directors and companies must rely on financial reporting as a means to assure the public at large and shareholders in particular of their accountability.
In law, the duties of directors are owed to the company and its shareholders. Directors have duties also to other stakeholders. Company law rests on the notion of separate entity between ownership and accountability to owners of the company. Financial reports are a recognized form of this accountability and transparency, not only for investor confidence but also that of the public at large.
In the wake of the recent irregular accounting scandals, it is timely for shareholders and investors to impress upon directors their obligations to discharge their responsibilities and with propriety. The objective of the audited accounts is to provide a true and fair view of the company’s affairs and its changing fortune. Best practices usually reflect the essential principles for appropriate accounting underlying this objective. As to what accounts are to be made out to be true and fair is left to the directors and management. No accounting standard will be black and white in every situation. In fact, it is impossible to perceive all the possible situations.
At times, directors and shareholders are often locked in the delicate balance between management’s desire to report effective stewardship on the one hand and in other instances, to create profits or results in accord with law and sound practices. Management’s influence as to what is true and fair, and what is not, can be overwhelming. However, the onus is on management’s integrity and transparency. Yet, there are always certain directors who will stretch credibility across the fine dividing line.
So, what then is a profit? For that matter, what an income statement or a balance sheet represents? Is profit a nebulous figure? Is it more objective by management’s influence? Is it more reliable in auditors’ opinion? Are the accounts relying on directors too much? Or should management report what it wants profit to be? All these questions are valid with a wide range of answers that are legal or at times, controversial. Then, why should there be management’s influence? Can directors assure shareholders the transparency of the information they provide? Has financial reporting become an integral part of the company’s overall business management? Rightly, directors must not allow irregular accounting to dent shareholders’ faith. Skeptics may then suggest that since directors and companies are quite incapable of self regulation, the regulators would have to step in with both feet amidst more public scrutiny.
On what grounds, are directors independent to state that the financial statements do give a true and fair view? Do they have to disclose all things and report them in the accounts as the law prescribes. Are directors duty-bound to just do all that?
For statutory reporting, directors and management are deemed to be duty-bound. They are not to regard financial reporting as something to manipulate or even to arm-twist auditors. In this respect, the quality, character and integrity of directors, management, and auditors really matter.
There are times where the management’s influence may override due regard to the multitude interests of different shareholders and investors to whom directors are responsible. In any event, the auditors are still obliged to audit and report. Auditors should call directors and management to account if they are found to collude in dubious accounting to bolster reported profits or pep up exaggerated results when faced with external pressure, risk and competition for performance.
Uncomprehending auditors may find themselves misled and deceived as directors run the risk to collude with management. It is unfair to innocent directors while law may take time to catch up with the guilty ones. For the auditors, their obligation is not only to shareholders but also to the capital market generally, effectively to the stakeholders and/or parties who may place reliance upon them.
No offence may be committed unless wrongdoings are fraudulent. Beware and above all, be honest and truthful. Irregular accounting and false accounts can only be committed by the perpetrators who act dishonestly.
Financial reporting is not a hit-and-miss process with consistency for accounting ranked low in the order of priorities. All accounting treatments and/or classifications are usually determined afresh each year. Accounting policies as such are formulated and published. Satisfying compliance requirements that accounts give a true and fair view, depends on interpretation. No management’s influence is allowed on going concern basis to report company’s performance and stability. If auditors have some doubts as to the truth and fairness of the accounts, directors owe it to them to provide clarifications on the departure and the reasons for non-compliance, and its financial effects on the accounts. Audited accounts can only become true and fair if directors concede the accounts to be prepared to comply with approved accounting standards or auditors’ recommendations.
Misleading information is worse than no information. Misrepresentation is akin to fraud or duplicity to deceive. Hence, fraudulent misrepresentations can give rise to an action for criminal lawsuits. On the other hand, an innocent misrepresentation may be as bad to give the injured party or parties a possible right to claim damages.
How active will the Public Companies Accounting Oversight Board (the Oversight Board) be to review, either to accept or reject erroneous accounts or to take audit committees to task for irregular reporting remains to be seen. It will certainly be the case that the Oversight Board may have to look at not only auditors but also all involved in company accounts preparation.
If the Oversight Board is to be effective as we are constantly being assured, we must, let it be one which encourages the reporting and prosecution of those directors and other gatekeepers whose actions run counter to the law or regulation of business. They are, for instances, those who misuse the company’s funds, falsify company’s books and reports, and who violate the trust of shareholders and other stakeholders. The idea behind setting up the Oversight Board could basically be to weed out the culprits among those who are more deserving, better quality directors and auditors.
Non-executive directors and audit committee members have to be financially literate. They need to develop a working understanding of the implications of financial reporting. If they do not understand the numbers, they will not be able to ask the right questions nor will they understand the answers. They can no longer admit that they cannot understand the figures. The recent episodes of irregular accounting have demonstrated poignantly the need for quality non-executive directors and competent audit committees whom shareholders and investors can rely upon. They have to ensure stricter compliance of various regulations, have a greater role to play both within and outside the regulatory regimes by promoting and ensuring constructive compliance and good corporate governance practices.
Dated: 5 December 2007
MSWG will organize a one-day workshop on annual report and financial statements analysis and interpretation for retail shareholders and investors. Please call tel. no. 603-20709090; fax. no. 603-20709107 or e-mail: watchdog@mswg.org.my for information.
