Changes in reporting requirements

During a recent visit to Australia, Mervyn King – one of the top proponents of integrated reporting across the globe – indicated that it was never the intention to replace financial statements with integrated reporting. Integrated reporting is the latest incarnation of the quest to improve the quality of narrative reporting about matters usually outside the scope of financial statements.

King was in the country for a Global Reporting Initiative conference and he took the opportunity to meet with various representatives of the profession. He provided some assurance to those in Australia who had real concerns about financial reporting disappearing. However, there are other issues that need to be reflected on in this context.

Investigation needed

Policy-makers in Australia need to think about how an integrating reporting model could be implemented in the regime as it currently stands. They need to consider how they can measure the regulatory impact of the introduction of such a framework.

Regulatory impact analysis on something like a narrative reporting framework might be a challenge – as it is with accounting and auditing standards generally – but it will need to be done in this context. Now that we know that integrated reporting is not intended to replace financial reporting there is the question of how much greater the compliance cost will be for entities that may use such a framework. This will be even more critical in a context where it may be contemplated integrated reporting be mandatory for certain businesses.

Risks in making it mandatory

Integrated reporting in the first instance appears somewhat appealing as a vehicle for reporting by listed companies, large charities and not-for-profits and, of course, government departments and some large agencies. These entities will generally be sufficiently resourced to cope with a change from their current narrative practices to something different. Many listed entities already prepare narrative reports to describe what they do, as a way of ensuring a more transparent level of accountability.

Care needs to be taken, however, that integrated reporting does not find its way too far down the reporting tiers. Would people feel comfortable with small clubs and associations providing an integrated report to stakeholders? Would small clubs and associations have the time, finances or even skills to be able to compile a report of an adequate standard?

It may sound absurd to reflect on this so early on in the development of the integrated reporting framework but such reflection must occur earlier rather than later.

The adoption of IFRS is a case in point. For many years after first-time adoption, groups within the not-for-profit sector complained about the complexity of financial reporting for smaller clubs and associations. They also complained about the need to engage a registered company auditor to do the audit work.

The complaints arose because the full suite of accounting standards was seen as being too heavy a burden on these entities some years after the event. The failure to do a proper regulatory impact analysis when the adoption decision was being made in 2002 resulted in almost a decade of lobbying for things to change.

We now have a regime where the smallest public companies limited by guarantee that are not deductible gift recipients are able to avoid the preparation and audit of a full set of accountants in accordance with IFRS. This applies to those public companies limited by guarantee that have $250,000 turnover or less.

Why raise this at the current time? People come up with great ideas all the time. Some – like integrated reporting – capture the imagination of a significant number and then there is a tidal wave of support. Somewhere in all this enthusiasm there needs to be an examination of the cost of what is seen as a beneficial concept for the shareholders and others with an interest in having a holistic view of entity performance. There may be the small matter of the handbook of the Office of Best Practice Regulation (OBPR) and its process for regulatory impact analysis for people to keep in mind.

It should also be noted that while integrated reporting is developing internationally there are domestic reviews continuing of the way in which narrative information is provided to the marketplace. Regulatory authorities such as the Australian Securities and Investments Commission (ASIC) are looking at providing guidance on narrative reporting presented by companies to the market.

ASIC monitoring special purpose

ASIC has alerted stakeholders to the fact that it will be looking again at entities that lodge special purpose financial statements during its regular surveillance of financial statements. These financial statements are being examined as a way of providing ASIC with some indication of what entities at the lower end are doing.

There will be those who assume the corporate regulator is only interested in looking at the bigger end of town.

While this may be generally true, ASIC is an agency that takes its role in regulating the market as a whole seriously. This means that it will, from time to time, examine the financial statements of entities that purport to prepare special purpose financial statements in order to assess the level of compliance.

What does this mean for you?

Those members working in companies that lodge financial statements need to ensure the entity is complying with recognition and measurement criteria in accounting standards. The Commission expects entities to comply with recognition and measurement as a minimum. It is important that this is remembered.

Practitioners compiling financial statements must also be aware that their work will be under scrutiny if the company lodges information that is deemed to be non-compliant.

Care needs to be taken to ensure that the various methods of accounting are consistent with the accounting standards.Auditors or reviewers of financial statements could also get caught out if they have failed to stay up-to-date with the changes in accounting literature. This is critical.

Changes occur in a range of accounting pronouncements, and reasonably frequently. Failure to keep track of these differences can lead to accountants providing less than timely advice. The best way of staying in touch with developments in accounting standard setting is via the web site of the Australian Accounting Standards Board (AASB).

Templates and other matters

Institute members frequently request information about where to access a range of templates. The Institute’s web site provides access to some engagement letter templates.

There is also a range of templates provided by our partner, Business Fitness, in a wide range of areas. Members should consult those resources in the first instance. One frequent query, however, is the best way to update the templates that firms have prepared on their own for audit procedures and checklists for audit and financial reporting.

This can be somewhat tricky because AASB and the Auditing and Assurance Standards Board (AUASB) web sites only upload PDF versions of their respective standards. The ‘cut and paste’ method is clumsy and requires some redoing of the text. It becomes a task that consumes more time that it saves.

Members should visit the CommLaw web site ( www.commlaw.gov.au ). Accounting and auditing standards are law in Australia and are made available on this web site as a part of the legislative instruments register.

You can find the most current version of an accounting or auditing standard by searching on this web site and then looking at the tab that provides you with the downloadable version of the relevant standards. The standards are available in Word document format as well as PDF.

This make is easier for an accountant to transfer the text into their own documents and customise it as required.

This can be done for a range of sample letters that are supplied in the various auditing standards. A practitioner can update their own templates using the Word version of the standards.

There is something important that needs to be kept in the forefront of the minds of people in practice. Templates should at all times be customised for the entities for which the practice is engaged to provide a service. It is true that a range of things will be similar but it is dangerous to assume that transposing the same template to a client in the same industry is sufficient.

National Business Name Register

Members will notice that there is a new way to register business names following the harmonisation of the various registers that existed across the country. This is a visible sign of red tape reduction at work, given that a company working across Australia is able to now have one name across the country rather than registering a business name in every jurisdiction. The project has been run by ASIC and has been through countless focus group consultations in order to ensure that the final product is as user friendly as ASIC could possible make it.

Let us know here at the Institute if you are having any difficulties with the new register. We will raise any concerns directly with ASIC and see what can be done to resolve those difficulties.