Inadequate knowledge and due care are root causes for material accounting non-compliances – Singaporean Accounting Regulator

The Accounting and Corporate Regulatory Authority (Acra) has found that there is room for improvement in the quality of financial statements issued by companies incorporated in Singapore.

Also, the authority has noted that the lack of deep knowledge and due care by preparers and directors were the root causes contributing to material non-compliances with accounting standards identified in the review, said Acra in a media statement issued on Tuesday.

In its latest assessment of the general state of financial reporting, Acra analysed the 2016 financial statements filed by 584 listed companies. Of these, 35 had been given modified audit opinions, with a total of 95 areas qualified or disclaimed by the statutory auditors. A majority were related to impairment of assets (34 occurrences, or 36 per cent), going concern assumption (19 occurrences, or 20 per cent) and limitations imposed on the scope of audit (13 occurrences, or 14 per cent).

Apart from analysing the 2016 statements, the authority also zoomed in on potential material non-compliances with accounting standards identified in selected sets of 2016, 2017 and 2018 financial statements. Scrutiny of the financial statements of 20 companies in the selected set, with 19 being listed companies, has been completed and 31 non-compliances were found.

Of these, 11 companies were found to contain a total of 31 material non-compliances with accounting standards, of which one third resulted in adjustments to the reported financial results and/or positions by the companies.

The material non-compliances arose from accounting areas such as accounting treatment for major complex transactions, and business valuations or impairment assessments.

Four listed companies rectified the material non-compliances by restating and re-auditing their past years’ financial statements. As a result, the consolidated pre-tax profits or losses for the four companies were adjusted by one to eight times collectively, and the consolidated net assets by 15 per cent to 68 per cent. The adjustments have either reduced or improved the companies’ bottom lines and assets.

Two other listed companies rectified by making additional disclosures or restating comparatives in their subsequent 2018 and 2019 financial statements. The rectifications by these companies have provided stakeholders with more reliable financial information to make decisions, added Acra.

Of the six companies that had rectified the material non-compliances, four had chief financial officers and audit committee (AC) chairmen with either accounting qualifications or were members of accounting professional bodies, or both. The AC members for the remaining two companies did not have any accounting qualification or relevant accounting experience.

Acra said: “This highlighted the need for audit committees to invest more time and exercise due care to review the financial statements before issuance… When appointing the audit committee, the board should ensure there is a right mix of members possessing the appropriate skills and expertise in the areas of accounting and auditing. The board should also provide guidance and support to the AC, including allowing access to experts and consultants for advice on more complex areas.”

In addition, directors should also emphasise raising competency in financial reporting, starting with a competent and suitably qualified finance team.

With rising economic uncertainties and the pandemic going on, companies are under pressure to continue their operations and deliver financial sustainability. It is crucial for directors to put in place a strong culture of corporate governance, and to apply rigour when reviewing and approving the financial statement, to ensure that the financial statement provides an accurate picture of the financial standing of the company, said Acra.

Acra’s report is available at its website.