ASIC warns directors on financial reporting

The corporate regulator has warned company directors that it will be closely scrutinising 2011 company financial reports as directors consider the implications of a court ruling that found directors breached their responsibilities by signing off on accounts that were later revealed to be misleading.

Releasing 11 areas of concern, Australian Securities and Investments Commission Commissioner Michael Dwyer reminded companies that it was “important to provide investors and other users of financial reports with meaningful financial information that assists them in making decisions”.

The areas of focus for listed companies are:

• Segment reporting
• Consolidation of controlled entities
• Use of the going concern assumption
• Asset impairment
• Fair value of financial assets
• Financial instrument disclosures
• Disclosures of estimates and accounting policy judgements
• Accounting for business combinations
• Related party disclosures
• Operating and financial review
• Alternative profits

Sue Prestney, principal of accounting company MGI, says it’s likely that ASIC would look at similar areas of concern for SMEs that have to prepare general purpose accounts.

“This is especially so for asset impairments,” Prestney said.

ASIC reminded companies that “material disclosures necessary for investors to understand the financial position and performance of a company should be included in financial reports”.

“This includes key assumptions supporting asset values, sources of estimation uncertainty and information on difficult accounting policy choices,” ASIC said.

“Financial reports should also disclose key components of statutory profit in accordance with accounting standards to assist investors to understand the result.”

The regulator pointed to an increasing number of audit reports drawing attention to uncertainty surrounding the entity’s ability to continue as a going concern.

ASIC says for the 2010 calendar year 13% of entities raised doubts versus 10% for the year to June 2010.

“The appropriateness of applying the going concern assumption remains an important issue,” ASIC says.

“Where material uncertainties exist that may cast significant doubt upon an entity’s ability to continue as a going concern those uncertainties must be disclosed.

“Entities should continue to focus on their ability to refinance debt due for repayment and any foreseeable increases in the cost of borrowing.”

The warning follows a Federal Court ruling that directors of property group Centro breached their obligations by signing off on accounts that were later revealed to be misleading.

While many have argued that the ruling has the potential to scare off directors, particularly those not hired for their financial expertise, others say it merely reflected directors’ responsibilities, and that relying on management and auditors was not enough protection.

The Australian Institute of Company Directors said after the judgement that it “continues to be concerned about the ongoing confusion between the roles of non-executive directors and management”.

“In an environment where complexity of financial reporting standards and their application continues to increase, the role of company directors continues to become even more onerous,” AICD said.

Denis Pratt, CPA Australia head of accounting policy, said the decision was “not saying that board members have to be expert but they need to ensure there’s a good communication process and that they query and question the accounts”.

“Financials are an important part of running any company, so a director needs to have a minimum standard of how accounting works,” he said.