Are Accountants Liable for Faulty Financial Statements?
The compilation of financial statements is a critical task that Business Accountants in Practice (BAP)SAs registered with the Chartered Institute for Business Accountants (CIBA) undertake with a high degree of professionalism and precision. Their role extends far beyond just meeting legal obligations; they significantly enhance the value of financial reporting for their clients and the broader economic landscape. Through their efforts, financial statements become reliable tools for decision-making and accountability. However, the accountant's role in this process is often misunderstood, underlining the need for a clearer understanding of their responsibilities and the standards they follow. We look at these responsibilities in more detail below.
1. Meeting Legal and Regulatory Standards
BAP(SA)s should comply with various legislative requirements depending on the type of entity they're dealing with. For instance, companies are guided by the Companies Act of 2008, while non-profits follow the Non-Profit Organisations Act of 1997. Other specific sectors like government entities, banks, and co-operatives have their own set of rules. Understanding and applying these regulations ensure financial reports are both clear and compliant.
Under the Companies Act of 2008, financial statements need to accurately reflect a company's fiscal health, demanding:
Accuracy and Compliance: Financial reports must accurately depict the company's financial status, adhering to standardised reporting norms.
Timely Approval: Statements should be finalized and approved within six months post the fiscal year-end.
Accessibility: Stakeholders must have access to these statements, ensuring transparency.
Full Disclosure: Statements must include detailed disclosures, such as director compensations, providing a comprehensive view of the company's financial activities.
For statements needing independent compilation, BAP(SA)s follow International Standard on Related Services (ISRS 4410) guidelines, ensuring the work's credibility and reliability based on the company's records and applicable financial standards.
2. Choosing the Right Reporting Framework
South Africa's financial reporting is adaptable, catering to various company sizes:
IFRS: Large and publicly listed companies adhere to these international standards for consistency and clarity.
IFRS for SMEs: A simplified set for smaller enterprises, making compliance easier and less costly.
Custom Accounting Policies: Smaller companies have the flexibility to adopt accounting policies that best represent their financial situation, without the complexity of full IFRS.
3. Maintaining Standards
Ethics: BAP(SA)s follow a strict ethical code, ensuring their work is performed with integrity, objectivity, and confidentiality.
Quality Management: A rigorous process checks every aspect of financial statement preparation, including staff training and ethical adherence.
Guidance from ISRS 4410: This standard provides detailed guidelines on compiling financial statements, emphasizing accounting expertise rather than auditing.
4. Performing the engagement
ISRS 4410, "Compilation Engagements," provides a comprehensive framework that guides practitioners, such as Business Accountants in Practice (BAP)SAs, through the process of compiling financial statements. While this standard emphasizes the practitioner's role and responsibilities, it doesn't detail how to prepare financial statements but rather how to approach the compilation engagement. Here’s a breakdown of its key requirements:
1. Engagement Acceptance and Continuation:
Client Acceptance: Before accepting an engagement, accountants must ensure they have the appropriate capabilities and resources and that there is no conflict of interest.
Engagement Terms: The terms of the engagement should be agreed upon and signed by the client in a formal engagement letter. This agreement outlines the scope and nature of the engagement, the lack of assurance provided and the responsibilities of both parties.
2. Performing the Compilation Engagement:
Understanding the Entity: A thorough understanding of the entity’s business, its operations, the industry in which it operates, and the accounting principles it uses is crucial for the accountant.
Compilation Procedures: Procedures might include collecting, classifying, and summarising financial information and drafting financial statements. The exact procedures will depend on the accountant's understanding of the entity and its environment.
Documentation: Accountants are required to document their work sufficiently to demonstrate that the engagement was performed in accordance with ISRS 4410 and the terms of the engagement.
3. Compilation Report:
Report Requirements: Upon completion of a compilation engagement, accountants must prepare a compilation report. This report should clearly state that the financial statements were compiled without an audit or review and, accordingly, no assurance is expressed.
Disclosure of Lack of Independence: If the practitioner is not independent of the entity, this fact must be disclosed in the compilation report. However, lack of independence does not preclude the practitioner from performing the compilation engagement.
4. Dealing with Incorrect Information:
If the practitioner identifies that the information provided by the client is incorrect, incomplete, or otherwise unsatisfactory, they should request corrected or additional information.
Withdrawal from Engagement: If the client refuses to provide the necessary information or corrections, the practitioner should withdraw from the engagement and provide reasons for the withdrawal to the client.
5. Agreement on Financial Reporting Framework:
Practitioners and their clients must agree on the financial reporting framework to be used in preparing the financial statements. This framework dictates how financial transactions and other events are recognized, measured, presented, and disclosed in the financial statements.
When faced with incorrect or incomplete information from management, accountants should seek to rectify the situation by requesting accurate details. If cooperation is not forthcoming, it's professional and necessary to withdraw from the engagement, clearly communicating the reasons to management.
Assist your clients better: learn about the IFRS for SMEs
Attending this webinar will equip you with the following skills:
Be refreshed on the key elements that all financial statements cover such as revenue and property, plant and equipment.
Evaluate the messaging conveyed to financial statement users through narrative notes, emphasizing effective communication of key information.
Gain awareness of significant areas identified for potential changes under the IFRS for SME Accounting Standard exposure draft, assessing the potential implications for their clients and companies.
Examine indicators of going concern and other non-financial disclosures, recognizing areas that may necessitate additional attention and consideration.
Scrutinise the financial statements being prepared, ensuring alignment with user objectives and meeting their needs effectively.
