Directors' Duties in relation to Financial Reporting
Quality financial information is crucial for strong and vibrant markets. More than ever, investors, suppliers, financial institutions, customers, company directors, corporate executives and many more are asking for reliable and timely financial statements in order to obtain a more accurate picture of the business, whether in terms of generating value or understanding the risks involved.
Over the past decade, businesses have also become more challenging and business models more complex. To cope with them, financial reporting standards have become increasingly complex and require more professional judgement on the part of the preparers of financial statements. Examples include the accounting for business acquisitions, the fair value measurement of assets and revenue recognition of multi-element transactions.
It is essential that the market remains confident in the level of transparency, integrity and quality of financial reporting. In response to this, ACRA has commenced a Financial Reporting Surveillance Programme to enforce against poor financial reporting that leads to unreliable information and/or non-compliance with the prescribed accounting standards.
Companies Act requirements
Under sections 201(2) and 201(5) of the Companies Act (the "Act"), directors are responsible to present and lay before the company, at its annual general meeting, financial statements that:
- comply with Accounting Standards1 issued by the Accounting Standards Council; and
- give a true and fair view of the financial position and performance of the company.
In addition, directors of a company incorporated in Singapore are responsible to maintain a system of internal accounting controls and keep proper accounting and other records that will enable the preparation of true and fair financial statements under sections 199(2A) and 199(1) of the Act, respectively.
Guidance to directors in carrying out these financial reporting duties
- Review of financial statements– Directors, whether executive or non-executive, should exercise care, competence and diligence in the review of the financial statements that are presented to shareholders and subsequently filed with ACRA. Directors should read, understand and enquire into the form and content of the financial statements to ensure that the financial information presented is clear, complete and consistent with their understanding. Even if they are not accounting experts, directors should question the accounting treatments applied when the treatment does not reflect their understanding of the substance of arrangement. They should also apply professional scepticism when assessing management views’ on areas of significant judgement and estimates.
- Financial literacy – Directors are not expected to be accounting experts, but should have sufficient and up-to-date knowledge of the accounting principles and practices to perform an effective high-level review of the financial statements. Otherwise, directors should seek help and/or attend training.
- Appointment of management- Directors should ensure that senior management of the company, such as the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), have adequate knowledge, competence, experience and integrity to undertake their roles.
Under the Code of Corporate Governance 2018, directors of listed companies should comment in the Annual Report on whether they have received assurance from the CEO and the CFO:
- that the financial records have been properly maintained and the financial statements give a true and fair view of the company’s operations and finances; and
- regarding the adequacy and effectiveness of the company's risk management and internal control systems.
Whilst the assurance from the CEO and the CFO do not diminish the directors’ responsibility in these areas, it can provide directors assurance that management has exercised due care in the financial reporting process.
Competent and adequately resourced finance function – Directors should ensure that management maintains competent and adequately resourced finance function who can prepare high quality financial statements. Qualified accountants should be recruited and provided with relevant and continuous training to keep them abreast of the financial reporting developments.
- Using external help – Directors could seek professional accounting advice and/or outsource to professional accounting service providers the keeping of accounting and other records and the preparation of financial statements. However, they remain responsible and should ensure any such advice and/or service(s) are provided by suitably qualified persons with an appropriate level of expertise and knowledge of the accounting standards, and that such advice is unbiased and objective.
- Working with the independent auditors – The independent auditors are required to communicate with those charged with governance on significant audit findings, including why they consider a significant accounting practice is not appropriate to the particular circumstances of the company, prior to issuance of the audit reports. Directors should resolve these issues amicably and seek help when necessary. Directors should not rely on the independent auditor in forming their own opinion on the financial statements. Doing so will undermine the objective of an independent audit.
- Internal control system and accounting and other records –Directors should ensure that management adopts appropriate accounting policies, designs and implements appropriate internal controls and processes, and maintains complete and accurate accounting and other records. This obligation exists regardless of whether books and records are maintained in-house or outsourced to a third party.
The above is meant to guide directors in complying with certain significant duties in relation to financial reporting. They do not exhaustively define the duties applicable to directors under the Act and/or related legislation. When in doubt, legal advice should be sought by directors to clarify the scope of their duties.
Financial Reporting Resources for Companies and Directors
ACRA provides companies and directors with help resources such as: