SINGAPORE'S national regulator of companies and businesses will soon have the legislative power to bring the courts to bear on companies that have committed serious financial-reporting breaches, so that they will be compelled to restate, re-audit and re-file their financial statements.
Companies which commit less serious breaches will be asked to restate the comparative figures, or include or improve the disclosures in the following year's financial statements.
If they fail to do so, they will be publicly named and shamed and their directors held accountable.
These are among the major policy changes to be announced on Friday by the Accounting and Corporate Regulatory Authority (Acra).
The regulator will detail these changes at the Audit Committee Seminar 2017, which it will jointly hold with the Singapore Exchange and the Singapore Institute of Directors.
It shared some of the key aspects with The Business Times ahead of the event.
Currently, directors of companies found to have one or more instances of severe non-compliance with financial-reporting requirements stated in the Companies Act are given warning letters; those whose instances of non-compliance are less serious are given advisory letters.
Soon, Acra will have the courts behind it, giving it the firepower to act against companies which refuse to restate their accounts.
Acra chief executive Kenneth Yap said: "Our focus is to ensure that financial reporting breaches are remediated on a timely basis, and communicated promptly for the benefit of investors."
The changes flow from Acra's Financial Reporting Surveillance Programme (FRSP), which was launched in 2011 to ensure that financial statements present a true and fair view of a company's financial health and comply with the accounting standards.
The programme was ramped up in its second cycle in 2014 under a larger drive by the government to uphold corporate-governance standards and safeguard Singapore's markets against abuse.
Mr Yap said: "One striking observation from our last two review cycles, which led to the review of the FRSP policies and processes, is that poor-quality financial reporting is often due to the directors' ignorance of accounting standards, rather than deliberate errors that are fraudulent in nature."
However, with business transactions becoming more convoluted and accounting standards, more complex, Acra recognises that more areas in financial reporting - such as revenue recognition, impairment and ad hoc gains - will be subject to estimates and judgement.
This means greater subjectivity and possible misapplication of accounting standards.
With that in mind, the regulator hopes to adopt a "restatement first" approach for the next cycle of its FRSP, which starts on April 1.
It is an approach also adopted by jurisdictions such as Australia and the United Kingdom.
To that end, directors of companies which commit serious financial reporting breaches will have to restate, as well as re-audit and re-file the affected financial statements. They will also have to announce the restatement within a prescribed time.
Directors of companies who commit less serious breaches will be asked to re-state the comparatives or include or improve the disclosures in the following year's financial statements. Acra will publicly name the companies that refuse to do so and hold their directors accountable.
Later this year, Acra will also be empowered by a change in legislation to apply to the courts to compel companies to re-state their financial statements. Directors will also be empowered to voluntarily correct defective accounts.
"The ideal end-point would be a market culture that considers high quality financial reporting to be the minimum standard in our corporate landscape, with all stakeholders in the eco-system playing an active part such that FRSP is no longer needed," Mr Yap said.
Acra also recognises that such measures - regulatory sanctions and requiring restatements - alone will not address the root cause of financial mis-statements.
Findings by the FRSP and other studies that Acra has commissioned have pointed to, in some cases, a lack of skills and competency on the part of the company's finance function.
This, in turn, results in the auditor having to spend time to correct the financial statements, instead of focusing on conducting a good audit. The regulator is, therefore, "looking upstream" and exploring the feasibility of developing a set of indicators that would help companies assess the adequacy and competency of their finance function, perhaps even better, identify key attributes and best practices to emulate and make necessary investments to improve.
These financial reporting indicators (FRIs) would enable companies to assess their own standard of financial capability.
Mr Yap said: "No doubt, the FRIs will not be a silver bullet to ensure quality financial reporting; and this exercise is not going to be easy, as we also need to take into account the differences across industries, countries of operations and complexities in business model among companies listed in Singapore.
"However, we hope that the indicators will strengthen the conversation between the board, CEOs and CFOs (chief financial officers) on implementing high standards throughout the financial reporting process.
It will also enable companies to showcase to investors that it has robust financial reporting framework in place, to assure them of the trustworthiness of its financial information."
Read also: More changes to Companies Act proposed
This article was first published on Jan 12, 2017.
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