Clampdown on misleading company financial statements in the pipeline

Articles: Clampdown on misleading company financial statements in the pipeline

Posted by admin on Wednesday, December 27, 2006 - 09:43 AM

Sanchia Temkin - Professional Services Editor
COMPANIES that fail to comply with financial reporting standards when issuing their financial statements may be guilty of an offence, according to new company laws in the pipeline.
This will include financial and tax advisers and those merchant bankers that set up a financial arrangement or transaction for a company that is misleading. The provisions of the Corporate Laws Amendment Bill are far-reaching for companies and their financial advisers, says Philip Austin, a partner in accounting and auditing at Deloitte. Companies will have to be wary of aggressive tax arrangements offered by merchant bankers as they could be seen to be financially misleading. “Companies will have to review their infrastructure and practices to minimise the risk that the entity issues misleading or incorrect financial information,” Austin says. They will have to take appropriate steps to minimise an investigation into the organisation’s financial information, he says. For the first time, it will be law that “widely held companies” must comply with accounting standards based on international financial reporting standards. The definition of a widely held company includes listed companies. If companies fail to comply with the standards, they will have to explain themselves to the Financial Reporting Investigations Panel — SA’s new financial watchdog. The Generally Accepted Accounting Practice (Gaap) monitoring panel, which plays a similar watchdog role for quoted companies, will be dissolved once the Financial Reporting Investigations Panel comes into force. This panel is expected to have tight reporting deadlines which far exceed those of any other financial reporting body worldwide, including the US Securities and Exchange Commission. If the panel concludes that financial information is incorrect or misleading, a company could be ordered to take remedial steps or pay a fine. Unless the company agrees with the finance minister on remedial steps, directors can be fined up to R1m. Austin says that users of financial statements will be pleased to know that such a monitoring process will be in place. “In the past, some companies would threaten the Gaap monitoring panel with litigation, which could be a drawn-out process,” he says. There were also knee-jerk reactions by companies to query letters issued by the panel. The bill also makes provision for sanctions against a company, its officers and others who commit an offence in the issuing of misleading financial information, Austin says. “Companies need to be careful that the information is accurate,” Austin says. It will be an offence for an organisation and its officers to issue information in the financial statements that is not accurate. He says companies need to define a process for ensuring that financial statements are compliant. They will also need to define a process for responding to a query. In future, entities will also need to consider what outside involvement there should be: for instance, what role accounting experts, auditors and lawyers should play in drawing up financial statements, arrangements and transactions for the company. In the past, a company’s responsibility was to its shareholders and its prospectus went to the shareholders. However, under the new legislation, the responsibility of a company for its financial information is extended to any user, specifically including a current or prospective shareholder, creditor, regulator or government agency. Companies will also be required to establish an audit committee. Austin says that this was previously a case of good corporate governance or, as in the case of a listed company, a listing requirement of the JSE. At least two of the audit committee members will have to be independent nonexecutive directors.

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