Lax scrutiny, over-reliant directors behind improper financial statements: Acra

Singapore

DIRECTORS from four out of 49 listed companies received warnings after the Accounting and Corporate Regulatory Authority (Acra) completed its first review of financial statements under an expanded surveillance programme, the regulator announced on Thursday.

Insufficient scrutiny and over-reliance on management lay at the root of non-compliance with Singapore accounting rules, Acra said in the inaugural report on its Financial Reporting Surveillance Programme.

As part of the programme, which was expanded in 2014 to include financial statements that had received clean audit reports, Acra reviewed 49 financial statements from Singapore-incorporated and Singapore-listed companies for the financial years that ended in 2013.

The reviews, which were carried out with industry experts from the Institute of Singapore Chartered Accountants' Financial Statements Review Committee, found four instances of serious non-compliance. But those four instances led only to warning letters and not the more severe regulatory sanctions of fines or prosecution.

The reviews also found 54 instances of minor non-compliance and 74 areas of improvement that required only advisory or closure letters. Two cases have yet to be fully resolved.

Only two companies - both large market-capitalisation stocks - went through the review with no enquiries.

The review looked at 17 companies with the market cap of more than S$1 billion, five with the market cap of between S$500 million and S$1 billion, 17 with the market cap of between S$100 million and S$500 million, and 10 with the market cap of below S$100 million.

The companies were selected based on a risk assessment that considered factors such as the existence of modified audit reports or operations that require significant judgment in accounting treatment.

Acra said it will soon announce the surveillance programme's areas of focus for the fiscal 2015 financial statements to serve as a reference for directors.

Overall, Acra described the state of financial reporting as "generally healthy", but with "room for improvement". The regulator was encouraged that directors in companies that faced enquiries were generally quick to take corrective action.

The report highlighted seven case studies aimed at educating directors and companies on issues that arose.

For example, one construction company wrongly used steel consumption as the basis of a project's completion percentage, allowing the company to recognise revenue too aggressively.

Another company consolidated results of a subsidiary before control of the subsidiary was obtained, allowing the company to wrongly post a profit when its existing business was actually loss-making.

David Gerald, president of the Securities Investors Association (Singapore), welcomed the case studies.

"With the publication and case examples, investors can have a better understanding and will know what to look out for when reading the annual reports and financial statements," he said.

Acra identified three main causes of non-compliance. First, directors did not scrutinise the financial statements enough. Directors were also over-reliant on management, and too deferential to management judgment.

"Directors as company stewards have a statutory responsibility to apply the right accounting standards in financial reporting," Acra chief executive Kenneth Yap said in a statement. "It is crucial that they review the financial statements carefully and when necessary, question management's judgements and estimates. They have a duty to provide their stakeholders with an accurate picture of the financial health of the company."

Joyce Koh, executive director of the Singapore Institute of Directors, said the surveillance programme was a "wake-up call" to directors, many of whom had relied on audit committees to closely inspect the financial statements and recommend adoption.

"This is the reason that most directors, especially those not on the audit committees, were surprised by the query letters from Acra on the financial statements," Ms Koh said of the review process.

"While from a statutory standpoint, the directors are responsible, practically, directors expect that management especially the chief financial officer who prepared the statements, and the auditors who approved them before it comes to the audit committee and board, should be the ones to be first queried by Acra," she said.

Proper financial reporting is the responsibility of every director, she stressed.

"The message that SID has for its members is: All directors - not just members of the audit committee - need to be financially literate," Ms Koh said.