Financial reporting excellence as a component of doing business reforms

We have over the last few weeks looked at the benefits, challenges and ways of enhancing International Financial Reporting Standards (IFRS) compliance in Rwanda. The country’s adoption of IFRS was a big leap forward and should be seen in the context of the ambitious programme to be a leader in doing business reforms. The implementation process has been challenging, and will continue to be, but the commitment of the local profession towards achieving compliance with the IFRS framework has gone a long way in enhancing the quality of financial statements for Rwandan companies. High quality financial reporting has become more important globally, with increasing demands from all stakeholders for companies to provide reliable information on their financial performance and position. Rwanda is no exception. Increased focus on corporate reporting around the world comes against the background of highly publicised big-money business failures and shakeups around the world. Readers of financial information may be forgiven for taking for granted the ability to distinguish between weak and strong organisations from an analysis of their financial statements and other publicly-available information. However a number of highly rated organisations globally have experienced distress but were able to hide their true financial condition from the outside world, until the problems that they were experiencing spiralled out of control. Pressure to achieve challenging performance targets, increasing demand for shareholder value, coupled with the increasing complexity of business systems and transactions, are some of the challenges that management have to deal with today. Expectations on earnings growth and financial ratios, for example, may influence the choice and application of accounting treatments and the level of disclosure adopted in financial reports. Creative accounting may be used to disguise the substance of a transaction, so as to avoid reporting unfavourable performance. What then constitutes financial reporting excellence? Good financial reporting provides information about an entity that supports rational decision making. That information should enable a reader to understand the reporting entity’s financial condition and risk profile, to enable them to make informed assessments in their dealings with the entity. To achieve this, the highest level of management sets the tone by demonstrating a commitment to integrity, openness and transparency. Such a commitment, supported by competent actions, will help to foster the confidence that is so critical to an organisation’s sustainability. Good financial reporting should include disclosure of all information that is likely to be important to the reader. IFRS as a reporting framework prescribes a minimum level of disclosure necessary to achieve compliance. There may also be a special purpose reporting responsibility, for example regulators may impose the need to provide certain information for regulatory or public use. However there is often scope to increase the level of disclosure so as to properly address issues that may be significant in the context of the reported information. The extent of the level of disclosure would depend on the nature of the entity, for example whether it is a company with public accountability obligations like a bank. This may be achieved by a comprehensive operating and financial review in the Chairman’s Report, statements from the directors on corporate governance matters, disclosures on estimates and judgemental matters, disclosures of contingent obligations, explanation of the different types of risk facing the organisation, disclosure of information to do with an enterprise’s dealings with related parties, among others. Driving financial reporting excellence will therefore see the accountancy profession play its rightful role in the country’s doing business reform agenda. Samuel Kariuki is a Manager with PwC Rwanda samuel.g.kariuki@rw.pwc.com