On 6 January 2023, the Accounting and Corporate Regulatory Authority (“ACRA”) issued its fourth Financial Reporting Surveillance Programme Report (“Report”) which noted that knowledge gap, insufficient due diligence and the lack of action taken on issues raised by auditors remain the root causes contributing to material non-compliances with accounting standards.
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 to improve their financial reporting. The Report covers 33 sets of FS reviewed (comprising 27 listed companies and six non-listed companies) between 1 April 2020 and 31 March 2022 where ACRA found a total of 23 material non-compliances with accounting standards in 12 FS.
The 23 material non-compliances were identified 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:
- knowledge gap within the finance teams, chief financial officers (“CFOs”) and audit committees (“ACs”), resulting in incorrect application of accounting standards;
- insufficient due diligence by the finance teams, CFOs and ACs on transactions that were neither complex nor required judgement; and
- lack of action taken on issues raised by auditors, including failing to act on areas qualified or disclaimed by statutory auditors and accepting modified audit reports in consecutive years, instead of taking appropriate steps to rectify the issues and resolve non-compliances with the accounting standards.
Most of the material non-compliances affected the company’s bottom line or key financial measures. Such misstatements could impact the decision-making of users of these FS.
Strengthening financial reporting competency
In its press release, ACRA advised that 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.
Statutory auditors, who play an important role in financial reporting, can assist the ACs, CFOs and finance teams by highlighting accounting and auditing issues early. The ACs should guide the CFOs and finance teams to resolve the statutory auditor’s concerns in order 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.
ACRA added that 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.
Through the Report, 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.