Backing the Board on external financial reporting

By in Accounting and Finance, Opinion

And so we come to the end of another AGM season. While Company Directors are in the public eye, it’s CFOs who appreciate the hard work that happens in the background, when it comes to issuing financial reports.

As the CFO, you seem to be responsible for everything including co-ordinating processes, people and systems, and if things go wrong, guess who takes the heat?

But the Company Directors are in the spotlight for a reason – the legal responsibility for ensuring that financial reports are accurate rests on their shoulders.

Having attended over 20 AGMs in the last couple of months (and observed many more) it’s clear that some Directors only have a limited understanding of external financial reporting complexities, relying heavily on their CFOs to verify their entity’s compliance and financial position.

This comes as no surprise when you consider the contents of the financial report, which sit largely in the domain of the CFO (including key matters which can have a material effect on the financial performance and financial position of the entity).  These include:

  • Adequacy of systems and accuracy of measurements
  • Selection of accounting policies
  • Key financial estimates and judgments of the accounting policies
  • Quality of disclosures in the financial report
  • Classification of assets and liabilities
  • Timing of the preparation of the financial report

As CFO, you can add greater value to the Board by taking a leadership role and guiding them through the financial reports. Highlighting key changes, movements in account balances, financial performance, and the adequacy and meaning of disclosures, will all help solidify your role as a respected figure in the board room.

Even where there is a quality Audit Committee in place with independent members supporting Board members of the Committee, the CFO who takes the time to educate the Board has a significant role to play.

Stepping up and sharing knowledge with the Board not only takes the pressure off Company Directors, but it can, in some instances, allay tensions for the CFO.

CFOs can often find themselves under duress to report results in accordance with published forecasts (which are predominantly set by CEOs). In fact, in cases where CFOs commit material accounting manipulations for external reporting purposes, pressure to meet published forecasts has been found to be a key reason[1]

Having a strong and open relationship with the Board and Audit Committee can act as a counter-weight to the assertive pressure of a CEO and indeed strengthen the corporate governance of the entity.

In my experience, as a CFO you have a great burden of responsibility which can be can alleviated through greater interaction with the Board and/or Audit Committee members, including:

  • Being proactive with early reporting of papers for discussions at least one week before the relevant meeting where possible
  • Highlighting the key areas of change or movements and contentious matters which have been or remain in discussion with the auditors
  • Promoting education and awareness of external financial reporting requirements, trends and analysis where possible.

An informative (and some even might say fun) way of kick starting this conversation, is to challenge your Board to complete the financial reporting quiz on the ASIC website.

The free quiz contains 10 questions and should take no more than 20 minutes to complete. Completing the quiz should help Directors to comprehend how difficult external financial reporting can be to understand, and may prompt them to further their own knowledge in this area.

Assuming a leadership role by financially educating your Directors will not only help to discharge your responsibility and ensure your Director’s compliance with legal obligations, it could also be the next step in your journey towards a future role as a Company Director, an Audit Committee Chairman or indeed as a Company Chairman.

The future is in your hands.

[1] Journal of Accounting and Economics, Vol 51, No 1 – 2, February 2011, pages 21 – 36

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