Thursday 10 December 2009

Work on reporting process now

IT is that time of the year again. We are not talking about Christmas shopping or going for a long end-of-the-year break. It is about preparing for the financial reporting season that will be faced by many companies when the new year kicks in in about three weeks.

Some might be wondering why the issue of financial reporting is raised during this period where most people are thinking about the Christmas gift they are going to get or planning for a well deserved break. After all, most Malaysians will be working for three consecutive four-day weeks this month. For listed companies that close their accounts in December, the third-quarter financial results were just announced last month. Doesn't financial reporting also deserve a break?

High quality financial reporting is one of the key indicators of good corporate governance. For companies that raise money from the public, financial reports communicate to the stakeholders about their performance and financial positions and would be the basis on which dividends would be declared.

While audit committees are normally tasked to look into financial reporting matters in detail, the whole membership of the board of directors should accord high interest and be critical towards financial reporting matters.

Companies face financial reporting problems when they underestimate the effort required to generate high quality financial reports. The financial reporting chain involves many parties from the board, management, auditors and other experts such as lawyers, valuers and actuaries. Beyond the physical infrastructure such as comprehensive accounting and management reporting systems, the quality of financial reporting is determined by ethical practices deployed and the integrity of all individuals in the reporting chain.

How a member of the board or audit committee would know that the financial reporting plan of the company under their care for this year is on the right track? Here are some questions that would help in assessing where you are:

a. Has the financial reporting milestone been determined?
Listed companies that end the financial year in December would have to announce their fourth-quarter results by February and the audited financial statements by the end of April.

By now, the management should be able to explain to the board and audit committee what their efforts are between now and those critical dates considering the Chinese New Year break and other key events that might be stumbling blocks to the milestones. This should also cover subsidiaries and associated companies which are operating overseas. Coordination up to this level is very important.

b. Have all the potential financial reporting issues and measures to resolve them been identified?
A good starting point for this is the management letter issued by the auditors for the last audit. If management has not resolved all the issues raised by the auditors, the chances are they would recur this year. In fact, failure to address concerns raised in prior audits reflects possible weaknesses in the financial reporting practices of the company.

What about issues that were identified in the preparation of the last quarterly statement? The game plan to address those issues in detail needs to be provided by management by now.

c. What about the risks of fraud?
Directors should be prepared to challenge management on this matter. If we look back, a number of financial reporting irregularities around the world involved those holding senior management positions.

d. Was there any change in financial reporting requirements?
The management should identify all the changes in financial reporting standards and regulations, provide their assessment on the impact to the company and explain to the audit committee how those changes are addressed.

e. Does the company have enough competent people to prepare high quality financial reports?
Financial reporting nowadays is fairly complex and challenging. Therefore, continuing assessment on the quality of people available to do the job is very important. Boards and audit committees should not compromise on this as the risks of having financial reporting problems would be high. If there is a gap in the skill set, measures to mitigate them such as outsourcing the task to outside experts need to be considered seriously.

f. What are the views of the auditors?
The audit committee should have a discussion with the auditors without the presence of management. Let the auditors spill out thoughts on the financial reporting matters and consider those issues objectively.

The auditors should explain financial reporting risks and how they would address them in their audit. The roles of the management and the board in resolving those issues should be agreed upon with the auditors.

Get the auditors to frankly express whether their fees are adequate for a high quality audit to be performed. Boards should consider audit as part of its risk management process and due consideration on this should be given. After all, audit fees in Malaysia are the lowest in the region!

The questions above are not exhaustive but should provide directors, especially the independent non-executive directors, with a clear idea how the financial reporting for this financial year would be managed.

It is better to ask the question now rather than be subject to stress and risks if financial reporting shortcomings are identified at the very last minute.

This article was also published on the Edge Malaysia website here:

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