SINGAPORE - There remains room for improvement in the quality of financial statements that Singapore's listed companies provide for audits, a study revealed on Wednesday (Jan 12).
The study, which was commissioned by the Accounting and Corporate Regulatory Authority (Acra), found that more can be done in preparing good financial statements.
Companies are responsible for preparing financial statements, with directors having a duty to table a set of audited financial statements to shareholders at annual general meetings.
The auditor's duty then is to objectively examine the company's financial statements and see if they are prepared according to relevant accounting standards.
The auditor may propose adjustments to correct misstatements, for instance.
The study, which analysed proposed adjustments made to financial statements by 412 Singapore-listed companies from 2018 to 2020, found that there was a high occurrence of factual and misclassification errors in the financial statements.
Acra said: "(This) highlights the need for companies to review the financial reporting process and controls with the objective of improving the quality of financial statements."
From 2018 to 2020, auditors proposed 22,051 audit adjustments amounting to $78.67 billion for the 412 listed companies under the study.
About $67 billion - or 85 per cent - of these proposed adjustments were primarily to correct factual or misclassification errors in the financial statements.
These proposed adjustments also amounted to an overall reduction in net income of about $1.15 billion in the financial statements over the three years, Acra said.
Meanwhile, some firms also had issues finalising their accounts for audit, with one-third of proposed audit adjustments being due to companies themselves identifying issues during the course of the audit.
About 80 per cent of these late client adjustments relate to factual or misclassification adjustments, Acra said.
"This suggests a weakness in the financial statements preparation process. Companies should consider investments in digital solutions and automation of financial processes to minimise errors and improve the efficiency of financial year-end reporting processes," it added.
But Acra also found that a minority of companies accounted for most of the proposed audit adjustments, some of which continue to show a high level of adjustments each year.
Over the three-year period, there were 165 sets of financial statements from 87 companies with more than $100 million worth of audit adjustments proposed by auditors.
Collectively, these financial statements accounted for close to 80 per cent of all the proposed audit adjustments in the study.
Out of these 165 financial statements, 28 companies had over $100 million of proposed adjustments every year during the three-year period, accounting for nearly half of the total proposed audit adjustments.
"The persistently high level of adjustments each year is indicative of an over-reliance by these companies on the auditor to produce a proper set of financial statements," Acra said.
"Audit committees and management in these companies should place greater scrutiny over these audit adjustments and take prompt actions to address their root causes."
The study also surveyed about 280 audit committee chairs and heads of finance in the firms studied to get their viewpoint on the effectiveness of their companies' finance functions.
Acra chief executive Ong Khiaw Hong said: "The study shows that there is room to further strengthen the finance functions of companies in Singapore to improve the preparation of financial statements.
"Acra will work with professional bodies and other stakeholders in the financial reporting ecosystem to help companies raise their accounting capabilities and provide guidance on areas they should pay attention to."
He added that monitoring and enforcement efforts will be focused on firms with higher risks of financial misstatements.
