|
|
|
|
SOME ISSUES AND RISKS IN FINANCIAL REPORTING: CAN THE ACCOUNTANT DEAL WITH ALL IN THE FINANCIAL REPORT?
Financial reports should provide useful information to decision makers. Such decision makers include investors and creditors. Without a reasonable understanding of business and economic activities and the willingness to study the information with appropriate diligence, financial reports will not be comprehensible to the reader. Within the inherent contradiction lies the dilemma of the accountant with his or her communication tool – “The Financial Reports”.
The accountant’s problem is compounded by the risks of certain financial reporting issues. Accountants are expected to assess the risks associated with internal control weaknesses, liquidity and viability, unusual transactions including transactions with related parties even if these are usual transactions, off-balance sheet arrangements and the adequacy of disclosures. After due consideration of the risks, the accountant issues a report.
Significant changes in organization structure that result in unfilled or amalgamation of some positions, can affect internal control over certain accounting functions. After a lay-off or staff reduction, the remaining staff can become overwhelmed by their workloads. Incumbents may be called upon to perform too many tasks so that the time to complete some tasks and make appropriate decisions, whilst meeting a reasonable standard of accuracy, might not be enough. A thorough risk analysis of the internal control function may show that key functions that were segregated before are now performed by one employee. There is no doubt that breakdowns in internal control create an opportunity for fraudulent activities and sharp practices which can lead to the misappropriation of assets. Communicating the effect of the internal control weakness is a task for the accountant.
Presently the economic and business environments have resulted in liquidity challenges for some companies. Conditions of recurrent operation loss, negative working capital, loan defaults and refusal of credit from suppliers can cause accountants to question the ability of a company to continue as a going concern. International Accounting Standards (IAS) 2002 is very clear on the ability of an entity to continue as a going concern. The accountant must determine how the liquidity challenges and the internal control weaknesses will be addressed.
Extraordinary or unusual transactions carry significant reporting risks especially when these occur near the end of the reporting period. There is the risk that the transactions might not be disclosed or if disclosed it might be wrongly treated or it may not be subjected to the checks and balances called for in the internal control system. Some unusual transactions are; sales of fixed assets, introduction of a marketing promotion near the end of the period, and disposal of a segment of a business. Transactions with related parties may not by itself be an unusual transaction but such transactions may intensify the risk of improper accounting or disclosure. Also related party transactions usually lack the independent negotiation present in transaction with unrelated parties. Accountants are called upon to recognize the business purposes for entering into unusual transactions along with the financial benefits and obligations. Difficult economic times increase the possibility that the substance of some related party transactions might be other than their legal form. Off-balance sheet arrangements have become a creative way for some entities to do business. A main entity may use another entity to provide financing, credit support, leasing arrangements, research and development among others. The main company may enter into contractual obligations like underwriting loans and funding losses. Whilst these may have no impact on the financial statements as a whole there are consequences for contingent liabilities. Sometimes these arrangements are not recorded in board minutes. Therefore the disclosure of potential impact of off-balance sheet is appropriate since the performance or non-performance of the other contracting party has financial impact on the reporting entity at some future date.
Accountants disclose an item if it can influence the economic decision of users of a financial statement. This concept is called materiality and it is judgmental. However, to have consistency IAS 1 (revised 1997) on Presentation of Financial Statements provides the guidelines for the preparation and presentation of financial statements. The guidelines purport to demonstrate that clear and complete disclosure is crucial. The accountant must bear in mind that complex transactions especially those with related parties and off-balance sheet vehicles require special treatment. Situations involving contingent obligations, derivative and other financial instruments, hedging, financial guarantees, inter alia intensify the importance of risk assessment. It is not sufficient to consider the requirement to disclose information but the depth and transparency must be of prime consideration. Justice Lindley summing up in the London and General Bank (1895) case stated, “ [The auditor] must take reasonable skill and care before he believes what he certifies is true. He must convey information to shareholders. He does not discharge that duty by simple giving them so much information as is calculated to induce them, to ask for more. Information and the means of information are by no means equivalent terms”.
Whilst the professional accountant attempts to provide adequate information to shareholders and other users of financial statements it is clear that without a reasonable understanding of business and economic activities and the willingness to study the information with appropriate diligence, financial reports will not be clear to the reader. Without doubt the accountant has a responsibility and the users of the accountant’s end product have the duty to study the information with appropriate carefulness.
Prepared By: Neville Robinson
Neville Robinson is a partner in Robinson Davis and Company For More Information Contact: |
|
Send mail to
nevil@cybervale.com with
questions or comments about this web site.
|
![[Under Construction]](../images/undercon.gif){kind=small}
