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Financial reporting better, but sticking points remain, says Acra
Another left out an estimated fair-value loss of $20 million from its books when it failed to value a workers' dormitory it was then building.
Yet another recorded a substantial amount as trade receivables, which it later discovered to be non-existent.
These are some of the accounting errors and issues picked up by the Accounting and Corporate Regulatory Authority (Acra) in its policing of Singapore's financial reporting landscape.
In its second annual Financial Reporting Surveillance Programme (FRSP) report which it released on Tuesday, Acra counted 21 cases of non-compliance with accounting standards and 19 cases where the accounting could be better.
Warning letters were issued to two companies, whose non-compliance was more serious and whose financial statements may have to be restated, re-audited and re-filed. Advisory letters were sent to 21, whose instances of non-compliance were less serious.
Altogether, 50 sets of FY2014 financial statements of listed companies incorporated in Singapore were reviewed by Acra in this second cycle. (The first took place last October.)
Acra's chief executive Kenneth Yap said: "We observed instances of non-compliance in this cycle which impacted key measures used by investors, such as revenue, profits and operating cash flows."
What was encouraging was that when these issues were flagged to the companies concerned, many were prompt and willing to put things right, he added.
"Many directors of listed companies are making the effort to promptly rectify financial reporting gaps identified by Acra. Of 21 non-compliances and 19 areas for improvement communicated to companies before their FY2015 financial statements were finalised, 95 per cent of non-compliances and 63 per cent of areas for improvement were rectified."
Another four non-compliances and one area for improvement were pre-emptively rectified by the companies in their FY2015 financial statements, well before their reviews were concluded, he noted.
"The high rectification rate, especially for those cases with areas for improvement - for which corrections are not mandatory - is highly encouraging. It shows that the vast majority of boards of listed companies in Singapore are committed to delivering high-quality financial statements to investors."
Acra's report also noted an overall good level of quality in financial reporting among the listed companies reviewed. In most cases, the regulator said, companies' boards took ownership of financial reporting; many took steps to document their deliberations on complex accounting matters.
But companies struggled with the following areas:
- New consolidation standards;
- Accounting for business acquisitions;
- Impairment of long-lived assets;
- Fair value of properties.
Problems sometimes arose in these areas because the company's finance team did not understand or was not told of unique arrangements made or non-standard contract terms negotiated by the operations team, or because directors were not given enough time and opportunity to check whether the accounting concurred with their understanding of the business.
An example of this was detailed in a case study in the report by Acra, which does not reveal the names of the companies whose statements it reviews, although the case studies are based on actual happenings.
In one specific case, a company referred to as Company A did not consolidate the accounts of a loss-making property development vehicle (PDV) into its own accounts, it said, because it did not legally own a share in the PDV. Instead, it had invested $200 million into the PDV via five-year notes; another investor, called John, invested $1 into the share capital of the PDV and owned 100 per cent of it.
Upon closer examination of the transaction and Company A's accounts, Acra found that Company A had inked a "watertight agreement" with all parties, giving Company A contractual rights to unilaterally direct Company A's activities; its notes were also convertible to shares, giving Company A 99.99 per cent of the returns achieved by the PDV.
Acra said this gave Company A effective control of the PDV, so it should therefore consolidate the PDV's accounts into its own, going by the accounting standards here. This consolidation of the PDV's losses would have effectively decreased Company A's profit before tax by 90 per cent that year.
Another case not detailed in Acra's report came to light through an announcement by the company. China Environment, whose stock is currently suspended, announced in June that it had been asked by Acra, as part of the regulator's first review cycle, to restate and re-file its FY2013 and FY2014 financial statements.
Acra had asked the company to, among other things, "critically assess" whether any impairment should be made in respect of certain trade receivables recorded on the company's books.
China Environment subsequently made a substantial impairment (over 50 per cent) to these trade receivables, when it released its half-year results in August. It then announced this month that a special investigation into two of these trade receivables have revealed them to be non-existent.
Acra initiated the FRSP in late 2011 to strengthen the financial reporting value chain at its source. It was enhanced in 2014 and expanded in scope to cover financial statements with clean audit opinions.
Mr Yap said: "Although the programme is only in its second review cycle, we see encouraging signs of a raised level of market awareness of the importance of applying the right accounting treatment in financial reporting."
With the experience gained from two review cycles, Acra intends to review the FRSP.
He added: "Some of the feedback we have received from the two review cycles include directors' concerns about the lack of involvement of other stakeholders such as the chief financial officer and auditors in the review process, and also on directors' personal liability.
"As part of our on-going efforts to ensure enforcement initiatives remain responsive and relevant, Acra will be conducting a review of FRSP policies and processes, with a view to prioritising and facilitating the process of restatements as the primary object of the programme."