Credible financial reporting is a matter of public confidence, yet in many cases, it has failed to meet expectations, especially in recent times. Debates and discussions have taken centre stage, with arguments and counterarguments being fervently exchanged. Let us revisit the fundamentals.
Financial reporting has gained significance, especially when management, owners, and other stakeholders are distinct entities. To standardise the reporting framework, standards such as International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS) have been adopted alongside country-specific regulations. Besides, the United States Generally Accepted Accounting Principles (US GAAP) apply to entities within that jurisdiction. This uniform framework is designed for the benefit of investors and stakeholders, especially in the context of cross-border investments.
It is worth noting that financial statements, including explanatory notes and auditors’ reports where applicable, are very important sources of information upon which financial decisions, such as investment or disinvestment, are based globally.
It is a universally accepted practice that management bears primary responsibility for preparing and presenting financial statements and ensuring reliable financial reporting. Auditors, on the other hand, form an independent opinion on the fairness of these financial statements, based on the audit and the management’s representations, as outlined in the International Standards on Auditing (ISA).
Unfortunately, in instances of financial misreporting, blame is often, and sometimes unjustifiably, directed at auditors. In some cases, regulatory interventions that disregard established financial reporting frameworks and principles have further compounded the problem. This has been observed in banks and non-bank financial institutions (NBFIs) when making provisions for bad and doubtful loans. Similar interventions have been made in mutual funds and merchant banks in dealing with margin loans.
The pertinent question now is why the quality and authenticity of financial reporting are being questioned and who is principally accountable. What often goes wrong is an absence of clarity regarding the respective roles of financial statement preparers and auditors.
In essence, management is responsible for preparing credible financial statements free from material misstatements and omissions. Auditors, in turn, must provide an opinion on those financial statements, free from material misstatements and gross negligence in the audit process.
People often confuse terms like audit, special audit, review, investigation, fraud examination, and forensic audit. However, forming an opinion on the fairness of financial statements is distinct from other verification exercises, each of which has its own objectives, methodologies, and outcomes. Thus, the roles of management and auditors must be clearly defined and understood within the context of financial reporting standards and frameworks.
Regulatory bodies must be adequately knowledgeable about the respective roles of preparers and auditors. Users of financial statements should also possess a reasonable level of financial literacy. The involvement of professionals is essential in assessing the quality of financial reporting. In this regard, the Financial Reporting Council (FRC) has a greater role to play in involving the right professionals to oversee and enhance the quality of financial reporting.
In Bangladesh, poor financial reporting has, in several instances, deceived stakeholders. Both preparers and auditors should be held accountable for their respective failures. Management should be penalised for material misstatements and omissions, while auditors should be held responsible for material misstatements and gross negligence in the audit process. Until such accountability is enforced, the practice of presenting substandard financial statements will persist, negatively affecting the economy, particularly in terms of revenue collection.
While auditing is undoubtedly important, greater emphasis should be placed on the accurate preparation of financial statements. Good corporate governance is also instrumental in ensuring transparency in financial reporting.
