Boards delegate their responsibility towards ensuring integrity of financial reporting to audit committees in listed companies and others use their CFO for the oversight of financial reporting. Legal and regulatory compliance is noted as a significant challenge for audit committees worldwide. Many of such audit committees focus on areas such as the risk of fraud and corruption or IT and regulatory compliance with somewhat minimal focus on the impact of new accounting standards.
As a real life case, just think about what’s happening currently. For example IFRS 15 and IFRS 9 are two important standards coming into effect from 1 January 2018. It is generally understood from global experience and preliminary work done in local companies that the impact from implementing the IFRS 9 standard in Financial Institutions would be significant. CFOs and Audit Committees have to ensure that such significant future impact is disclosed to the shareholders and the capital markets for good governance and transparency reasons even without the requirements of a Standard.
Anyway, the accounting standard also states “If an entity has not applied a new standard or interpretation that has been issued but is not yet effective, the entity must disclose that fact and any known or reasonably estimable information relevant to assessing the possible impact that the new pronouncement will have in the year it is applied. [IAS 8.30]”
However, in the case of IFRS 9 it is a concern to hear that banks cannot practically assess the impact for disclosure purposes, despite this Standard being issued many years ago. In all the European countries the impact assessment was done many years ago and the ECB and other central banks have managed the transition without much fuss. But in Sri Lanka, even after the standard has come into effect on 1st January 2018, they do not know the impact, which in all probability is supposed to be significant. Despite disclosing some limited information to the Central Bank of Sri Lanka on the potential impact, the banks are trying not to disclose the impact to the stakeholders, in their annual audited financial statements. Most of the banks are not even ready to apply the standard in the 1st quarter of 2018 and are lobbying the Institute of Chartered Accountants to get an exemption.
This lackadaisical attitude is a fundamental issue in many spheres in the country and therefore holding back the country from moving forward. Another case in point being the impact of the new tax law. The justification used by CFOs for not disclosing will give a bad impression of the Board, forcing people to ask ” If you are unable to quantify the impact of a known accounting standard, how can we expect them to understand future trends and risks that need to be mitigated for the growth of the company?” Audit committees should listen to good advice and protect the integrity of financial reporting without being misled.
One critical aspect to the success of every company is establishing a non-negotiable set of values around compliance and make it their culture. Companies should not stoop to low levels of trying to hide significant information due to tolerance of incompetence or a culture of promoting non compliance. It’s time to take the bull by it’s horns and disclose such significant matters in the financial statements to give credence to the claim of being a competent board and audit committee member.