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Strengthening the financial reporting value chain (Amended)
AS business becomes more complex and increasingly borderless, both institutional and retail investors are demanding for more relevant and reliable financial information in a more timely fashion.
For instance, in recent years there has been an increasing focus on environmental, social and governance (ESG) issues. However, financial reports have generally not met the demand by investors for information in this area.
As investors use such information to make decisions that drive capital markets, companies, auditors and regulatory agencies must play a role in ensuring that reliable and quality financial information is shared with investors, industry experts said.
"Financial statements need to be an effective communication tool that provides relevant information to investors in a transparent manner. At the same time, financial statements also need to evolve with the changing needs of investors and increasingly complex business transactions," said Gerard Ee, president, Institute of Singapore Chartered Accountants (ISCA).
He noted that the new leases accounting standard is an example of how financial statements are evolving to better reflect the underlying economic substance of leasing transactions.
Financial statements, however, need to do more than just provide relevant and reliable information, but do so in a clear and transparent manner that even less sophisticated investors can digest relatively easily.
"In Singapore, efforts have been taken to represent retail investors, as well as to educate them on the interpretation of financial statements, which are getting increasingly complex. These initiatives should continue and be scaled up to cater to the increasing pool of retail investors," said Mr Ee.
As financial reporting standards in Singapore are principles-based and do not prescribe detailed rules in their applications, preparers of financial statements must exercise professional judgement in deciding what information needs to be disclosed in the financial statements, he added.
Pru Bennett, head of BlackRock Investment Stewardship for Asia-Pacific, said that in Singapore, companies tend to be very compliance focused when it came to reporting.
"The reports meet all regulatory requirements but tend to fail to explain risk, and in particular, environmental and social risks in a manner which investors can use in their valuation models. Companies that are transparent about risk and have strong corporate governance frameworks tend to attract a share price premium that has a positive impact on the company's cost of equity," she said.
In particular, she argued that reporting on ESG issues is still "a journey" for most companies, although she has observed improvements in the overall quality of such reporting.
"We have also seen some companies move to Integrated Reporting which provides a deeper understanding of value creation and enhancement. Integrated reports focus on value protection and value creation," she said.
She encouraged Institutional shareholders to engage with companies and communicate what information they need and more importantly how such information is used by investors.
Improving audit quality
While financial statements provide the baseline figures to guide decision-making, audits are key to providing assurance and confidence that the numbers can be relied upon.
A study by the Accounting and Corporate Regulatory Authority (ACRA) and the Singapore Management University in 2014 showed auditors passing 3,222 audit adjustments to correct misstatements in the unaudited financial statements. The adjustments had a total gross value of S$33.9 billion in 257 Singapore-listed companies studied.
"Given the subjectivity inherent in principle-based accounting standards, it is more important than ever that the bar for quality financial reporting and audits continues to be raised. Notably, shareholders and other investors are increasingly demanding greater transparency from companies in Singapore," said Kenneth Yap, chief executive of ACRA.
He noted that audits also needed to evolve to keep pace with the changing business environment, which include the rise of disruptive technologies such as blockchain and cashless transactions.
"To stay relevant, auditors must adapt and hone their skills to audit the transactions and infrastructure for such cryptocurrencies. This may also involve investments in technology and use of data analytical experts to detect transaction irregularities and provide greater assurance on the veracity of financial data," said Mr Yap.
Late last year, ACRA introduced an Audit Quality Indicators (AQIs) Disclosure Framework, which helps audit committees better evaluate and select the right auditors. The authority also recently expanded the scope of its Financial Reporting Surveillance Programme ("FRSP") and published its first annual report in October 2015, with the next annual report due in September 2016.
The 2015 report revealed that the state of financial reporting by Singapore-incorporated listed companies is generally healthy. However, it noted that there was still room for improvement as a number of instances of non-compliance with accounting standards were identified.
"The observations shared in the report are also aimed at helping directors avoid some common pitfalls and further enhance the quality of financial statements put out by their companies," said Mr Yap.
Embracing global standards
Kevin Kwok, audit committee chairman at the Singapore Exchange, said that Singapore uses financial reporting standards that are the same as those used in most of the world's major financial markets. By January 2018, Singapore will be fully converged with the International Financial Reporting Standards (IFRS) standards laid down by the International Accounting Standards Board (IASB).
Adopting this new framework will increase Singapore's competitiveness in an increasingly global market place where international comparability is critical.
"Our progress in embracing the IASB standards and in doing so, improving the quality and relevance of financial reporting in response to the needs of investors has been rapid and reflects our desire to be a key financial centre - facilitating the free flow of investments into Singapore," said Mr Kwok.
In recent years, the IASB has issued new accounting standards for financial instruments, revenue and leases, aimed at enhancing the quality of financial reporting. To smoothen the implementation of these new revised standards, ISCA, through its Financial Reporting Committee (FRC), has set up various taskforces to better understand and address the challenges faced by the accountancy profession in implementing these new standards.
Said Mr Ee: "ISCA is also currently working with the Accounting Standards Council (ASC) to facilitate the smooth transition from SFRS to the new accounting framework under IFRS."
There was a typo in an earlier version of this article, it should have been Pru Bennett.