ASIC urges directors to lift financial reporting game
The corporate watchdog says directors and auditors should watch out for the impacts of economic uncertainty in reports ending this year.
Company directors are struggling to assess business risks in the face of economic uncertainty and need to raise their game to avoid poor-quality financial reports, ASIC says.
The regulator said directors needed to dedicate resources to the financial reporting process and highlight areas for special scrutiny, with accurate asset values at the top of the list.
Reports that failed to assess the impact of uncertain conditions could damage market integrity and investor confidence, it said.
Commissioner Kate O’Rourke said it was important for directors to keep investors informed on how developments impacted their company’s financial position and performance.
“Directors should ensure there are adequate resources, skills and expertise applied to promote quality in the reporting process so that assumptions underlying estimates and assessments for financial reporting purposes are reasonable and supportable,” she said.
This included ensuring judgments on accounting estimates and forward-looking information were backed up with documentation and disclosed if appropriate.
Auditors also were in a “privileged position” in the financial reporting cycle and “essential” to maintaining market integrity, Ms O’Rourke said.
“Auditors should focus their professional judgement and scepticism on those areas of the financial report preparation process that are most reliant on estimates and are uncertain,” she said.
Financial report elements that would be impacted by the current economic environment included the impairment of non-financial assets, values of property assets and expected credit losses on loans and receivables.
Similar issues were prominent in the operating and financial review (OFR), a statement accompanying a company’s annual accounts where directors “tell the story of how the entity’s businesses are performing”, ASIC said. As a result, directors should explain the underlying drivers of the results and their financial position, as well as risks, management strategies and prospects.
While auditors were not required to form an opinion on the OFR, ASIC said they had to ensure it was free from material misstatements and inconsistencies with the financial report.
Audits would also need to report suspected contraventions of the Corporations Act 2001 where disclosures were “materially inadequate or misleading”, such as in cases of “greenwashing”, ASIC said.
Other focus areas for directors and auditors included reviewing subsequent events, which were events occurring after December 31 but before the financial report’s completion, to determine whether they affected assets, liabilities, income or expenses at year-end or related to new conditions requiring disclosure.
Provisions should also be made for the need for onerous contracts, leased property make good, mine site restoration, financial guarantees given and restructuring.
ASIC said its focus areas were based on findings from its first integrated financial reporting and audit surveillance report released in October.
The surveillance involved a review of 180 financial reports of ASX-listed entities and 15 related audit files.
It found “concerning” instances of non-compliance when accounting for asset impairment and revenue recognition in reports, resulting in $215 million of adjustments to previously released financial information.
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