Why CFOs should be qualified professional accountants 

THE financial markets in Singapore have evolved to meet the new challenges in a dynamically changing world. This is particularly the case for financial reporting. Accounting standards issued by the Singapore Accounting Standards Committee were enshrined into the regulatory framework with the passing of the Accounting Standards Act in 2007. This makes compliance with accounting standards legally mandatory. It removes any possible ambiguity as to the importance and relevance of complying with the accounting standards for financial statements to be deemed true and fair.

This provides a significant framework for directors to comply with Section 201 of the Companies Act, which holds all directors responsible for ensuring that the financial statements provide a true and fair view of the financial position and performance of the company. The presumption here is that the preparation of financial statements in compliance with the accounting standards will result in true and fair financial statements.

As asserted by the auditors, the preparation of financial statements is the responsibility of management and directors, who oversee the production process. In addition, the directors provide an explicit statement that the financial statements comply with the accounting standards and are true and fair.

However, when incidents of misleading or fraudulent financial statements arise, the blame and responsibility always fall squarely on the shoulders of directors and auditors. In such instances, the directors would be forced to resign or may even be charged under the Companies Act, while the auditors face civil liability and professional sanctions. What about management, and in particular, those who prepared the financial statements? Shouldn’t they be held accountable for producing the misleading financial statements? Can we strengthen the financial statement preparation function to prevent such irregularities?

In two recent cases of financial reporting irregularities, directors faced legal consequences. It was also discovered that the chief financial officers (CFOs) of the companies involved (who were presumably responsible for preparing the financial statements) were not professional accountants (ie chartered accountants). Could this have been avoided if the companies had hired CFOs who are professional accountants? It is perhaps timely that the regulatory authorities revisit the requirements of mandating that financial statements are prepared by professional accountants.

Who oversees financial reporting?

Financial statements are the end products of a team of expert financial statement preparers. Who are these experts? There is a natural expectation that they would be trained, skilled and experienced in financial reporting and had undergone significant professional recognition. This lead role is likely helmed by a company’s CFO or chief accountant who oversees the preparation of the financial statements. Interestingly, there has never been a mandatory or legislative requirement that those who prepare financial statements should be professional accountants. This is indeed an anomaly as it will be highly unusual – indeed, untenable – for a team of surgeons to embark on a complex surgery when the head of the surgical team is not a surgeon in that specialisation.

The issue of a CFO’s professional accounting qualifications was raised by the International Federation of Accountants in 2014 and 2020. The most salient points in the discussions are that the provision of financial statements is a public interest responsibility and if the preparer is a professional accountant, it provides added confidence to the market and stakeholders. Professional accountants have continuing professional development obligations and must adhere to a code of ethics.

A recent study found that the introduction of integrity oath-taking by CFOs who were professional accountants resulted in a reduction in income-increasing discretionary effects.

In 2022, the Accounting and Corporate Regulatory Authority pointed out that companies with heads of finance who are professional accountants were associated with a 21 per cent decrease in proposed audit adjustments. However, a desktop search on the CFOs of companies listed on the Singapore Exchange with capitalisation above S$500 million, found that 16 per cent of the CFOs do not hold professional accountancy qualifications and are not supported by finance managers or directors who are professional accountants. In the UK, an accountancy qualification is typically required to become the CFO of FTSE 100 companies.

Strengthening financial reporting

The US Sarbanes-Oxley Act of 2002, Section 302, states where the corporate responsibility for financial reports lies – on the shoulders of the CEO and CFO. The CEO and CFO are required to personally certify the completeness and accuracy of the financial statements. The CEO would not be able to provide this certification if he or she is either not conversant with financial reporting or does not have a CFO who can provide that assurance. In other words, being a professional accountant would help the CEO and CFO to discharge this responsibility.

Should Singapore follow this model of certification to further reinforce the prudence and due diligence required of management in producing the financial statements?

Strengthening financial reporting by professional accountants

Having laid out the case that financial reports should be prepared by financial reporting experts and the need to further strengthen the accountability for financial reporting, the natural conclusion then is that the CFO who is ultimately signing off the financial statements should be a financial reporting expert. And the role of a financial reporting expert would be best served by a professional accountant.

Despite this logical conclusion, globally there is no mandatory requirement for CFOs to be professional accountants. There are two possible reasons: Firstly, the role of CFO encompasses more than financial reporting and thus there is a need to look beyond a financial reporting expert. Secondly, experience matters more than mere professional qualifications. Both are reasonable explanations; however, they are not consistent with the notion that financial reporting should be done by a financial reporting expert. This may be the malaise that the accounting profession is suffering from – namely, the unwillingness to insist on the recognition that financial reporting should be done only by professionally qualified accountants.

Why change is needed

I would offer three reasons why we should require CFOs – or those leading the preparation of financial statements – to be professional accountants.

First, the public interest in ensuring that financial statements are prepared with integrity and reported truthfully is crucial. If the financial statements are not prepared by the relevant financial reporting experts, what other mechanisms are there to warrant the integrity of our financial statements? Not insisting on having a professional accountant to prepare the financial statements would amount to paying lip service to the public interest of financial reporting.

Second, financial statements produced by professional accountants come with the assurance that the preparer is constantly undergoing professional developments, kept abreast of the latest developments, and required to abide by a code of conduct and ethics. This code requires professional accountants to renew their integrity and ethical oath every year. In addition, if professional accountants do not discharge their due diligence, they will be sanctioned by the professional accountancy body and they can lose their credentials (and hence their livelihood).

Finally, like many other countries, Singapore has invested significantly in professional accounting education, training and accreditation – only to arrive at the conclusion that one of the most critical roles of the accounting profession need not be done by a professional accountant. This is clearly illogical and self-defeating. Little wonder, perhaps, that young people today have concerns about whether the accounting profession is really a profession akin to engineers, doctors or architects.

It is often argued that we may not have sufficient talents who are professional accountants to be CFOs. Alternatively, that professional accountants are not the only people who can prepare financial statements. These arguments will always be “correct” if we do not have a mindset shift to the possible state of requiring financial statement preparers – particularly CFOs – to be professional accountants. There is a case for public interest on the question of requiring CFOs – or those who prepare financial statements – to be professional accountants. Is this public interest important enough?

The writer is a professor and deputy dean of the Chow Yei Ching School of Graduate Studies at City University of Hong Kong