Tags: Corporate governance
This Board Briefing examines the challenges and pitfalls and presents the elements of responsible financial reporting.
In exercising their responsibility to prepare financial statements that show a true and fair view, directors need to demonstrate the following six hallmarks of responsible reporting:
- Turthfulness and integrity
- Neutrality supported by prudence
- Fair presentation
The report explains how these hallmarks are not optional extras – they are essential ingredients.
Independent non-executive directors must use all the resources at their disposal in seeking the truth that is the foundation of responsible financial reporting. They must challenge accounting policies and how they are applied, as well as the accuracy of the information used. They must probe related party transactions, which can often be controversial when viewed through the lens of shareholders. They must go out of their way to get feedback on the financial statements from professional analysts and shareholders. Last but not least, they should take steps to ensure that the auditors bring to bear an appropriate degree of professional scepticism.
In this Board Briefing, Guy Jubb, who has spent several decades looking at company accounts from the perspective of an investor, examines the challenges and pitfalls and presents the elements of responsible financial reporting.
Responsible financial reporting lies at the heart of responsible capitalism and, in today’s world, it is more than ever up to directors and, in particular, independent non-executive directors to ensure they do the right thing as a board when it comes to making choices about how to present profits and other key financial data.
Yet this is more than just a question of conforming to the rules laid down by standard setters. Most accounting involves judgment and all judgment contains an ethical dimension.
The board of directors has the ultimate responsibility to prepare and approve financial statements that show a true and fair view. The audit committee plays an important role in assisting the board by providing advice. But the buck stops with the board. In a unitary board each and every director shares that burden of collective responsibility. It can be challenging for independent non-executive directors, especially when they do not have financial expertise, to engage effectively in board discussions about the financial statements.
To assist them, this Board Briefing examines a number of dilemmas that arise when preparing and approving financial statements. These include decisions around revenue recognition, mark-tomarket valuations, changing accounting policies, and accounting policy choices.