Professional accountants have to complete intensive academic as well as practical training before they can qualify. The academic training of a professional accountant is at least 3 years. During the period the accounting student is expected to acquire an in-depth technical knowledge of the International Financial Reporting Standards (IFRS)/ International Financial Reporting Standards for Small and Medium-sized Entities (IFRS for SME’s).
As part of this in-depth study, accounting students are exposed to the “Conceptual Framework for Financial Reporting” as IFRS calls it or “Concepts and Pervasive Principles” it is called in the IFRS for SME’s very early in their academic career.
The qualitative characteristics of information in financial statements are clearly given in the above standards. Amongst the characteristics are the following that is discussed in this article:
When preparing financial statements, the professional accountant should keep these ground rules in the back of their minds all the time.
When the student accountant starts with the practical training, they are exposed to “Illustrative Financial Statements” prepared by firms as well as software applications that prepare financial statements for you. Since time is money, it is so easy just to copy and paste the financial statements from the “Illustrative Financial Statements” or to rely on the software to prepare the financial statements. By doing this, the accountant may hide behind completeness. The qualitative characteristic of completeness means that the information should be complete, but does not mean superfluous information.
The result may be that financial statements no longer adhere to the qualitative characteristics mentioned above.
- If the notes are just copied and pasted from the “Illustrative financial statements”, did the accountant make sure that only information that is relevant to the specific entity was included?
- Are there not too much information included that clutter the financial statements and make it less understandable because too much information was included?
- Are the information copied and pasted really material – that means will it influence the economic decisions of the users?
- Are the information reliable – meaning that it faithfully represents that which it could reasonably be expected to represent?
Using software can also be a risk. If the software programme does not have preset financial statements for example a club and the format provided for example a body corporate is pre-set and used, does the financial statements of the club in the format of a body corporate meet the qualitative requirements? The reliability and relevance of the financial statements swept right out of the door! Members are now called trustees! Does the financial statements really faithfully represent what it can reasonably be expected to represent?
The business model of many accounting firms relies on most of the work to be done by trainees, who do not necessarily have the skill to link their academic knowledge with what is done in practice. They also have not developed their professional judgement. It is the duty of the senior to train the trainees to be able to link practice to theory and to help them understand that all statements can not be prepared only using illustrative financial statements or software programmes. The trainee will be skilled with professional judgement and not only to prepare financial statements.
It is the duty of every professional accountant to make sure that each set of financial statements leaving the firm meet the qualitative requirements prescribed by IFRS/ IFRS for SME’s and the exercise professional judgement in doing so.
If the accounting profession is not going to exercise professional judgement in the preparation of financial statements, the profession may lose it relevance and can be replaced by software programmes.
Ronell Britz is Associate Professor at the School of Accountancy, University of the Free State