Good Accounting Practices

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IT FIGURES

A good set of accounts is a stepping stone to business success

BY TAN WEI LING

DO YOU value your company’s reputation and business credit rating?

Are you keen to ensure that current and potential investors will view your  company as a choice investment? How do you make your business operations even more efficient? A key starting point to achieve all these is to ensure that your company has a good set of accounts.

Before deciding to invest in a company, savvy investors start with the basics, such as paying close attention to the amount of money that a company has in the bank, and its levels of debt. A set of accounts is often used as a good reference point, as it reflects the performance of the company for the year.

If the accounts are prepared properly, investors can conduct their investment analysis. They will feel assured that if the company has a proper accounting system in place, it will likely be efficient in other aspects of business operations, including proper management of the company’s financials.

Conversely, a bad set of accounts only adds to investors’ doubts and damages a company’s reputation.

Likewise, banks and suppliers also refer to a company’s accounts as a basis for measuring the credit risk of a business. A poorly prepared set of accounts can reduce a company’s chances of getting financial loans.

Company management can also benefit from having a good set of accounts. They can be used to assess the success rates of their past strategies, as well as to formulate their business strategies for the years ahead. Take for instance a company which has consistently been making losses for the past

few years. There may be a need for more stringent cost-cutting measures or to develop new ideas to generate more revenue to sustain the operations of the company. The profit and loss account can then be a useful tool to identify which product lines with negative profit margins should be discontinued, and which line of expenses are eroding the profits.

WHAT IS A GOOD SET OF ACCOUNTS?

Essentially, a good set of accounts is one that presents fairly the financial performance and financial position of the company. This means including information that would be of significance and relevance to users for their decision-making needs, can be trusted and relied upon by users, and is prepared using a consistent basis and in a timely manner. 

In Singapore, companies should take reference from the prescribed accounting standards, which are referred to as the Singapore Financial Reporting Standards (SFRS).

Accounts which do not highlight or disclose significant transactions are of no value to users.

Similarly, accounts with inappropriate accounting treatments may give users a false perception of the financial strength of the companies.

For example, a company which bought quoted investments should not account for it at its original purchase price, but should adjust for its market value changes as required under the accounting standards. Otherwise, when market values rise or decline, the company would have understated or overstated the value of the quoted investments.

WHO IS RESPONSIBLE FOR PREPARING A GOOD SET OF ACCOUNTS?

The Companies Act places the responsibility of preparing a company’s accounts on the directors who are assisted by management. Unfortunately, many directors mistake this responsibility to be that of the auditors. While the auditor is a good financial expert, leaving the accounts to the auditor is inappropriate and creates risk to the company. This is because the auditor is not intimately involved in the business operations, and the audit takes place only once a year, and usually long after the end of the financial year.

Instead, the management should ensure timely preparation of accounts through the year, and use the annual audit as a test of its own compliance with accounting standards.

Directors, as assisted by the management, need to lead the way and ensure that good accounting becomes a top business priority.

Companies should also ensure that qualified staff are hired to prepare the accounts. For small companies, it might be more efficient to find help from a reliable service provider.

To raise directors’ awareness of their financial reporting duties, the Accounting and Corporate Regulatory Authority (Acra) launched a Financial Reporting Surveillance Programme in July 2011 to proactively review selected financial statements. Where necessary, Acra will query directors for prima facie non-compliances with accounting standards. Regulatory action will be taken where the directors are found guilty of non-compliance. Having to comply with statutory requirements, however, should not be the key driving force for a company to start having a proper set of accounts.

Rather, companies should see the value that a good set of accounts can bring in helping them grow and flourish further. 

 


 

The article, It Figures” was written by Tan Wei Ling, head of the Financial Reporting Surveillance Division of ACRA. The attached article can be found in SME Magazine Jan/Feb 2013 issue”

 

HBS’ opinion:

Many SMEs tend to prepare compliant accounting to meet the annual submissions to the Accounting and Corporate Regulatory Authority (ACRA) and the Inland Revenue Authority of Singapore (IRAS). If only SMEs recognise the “Treasure” that their Financial Statements presents, they would appreciate its true intrinsic value.


A GOOD set of accounts essentially

1. presents the Financial strength of the company 
2. gives the company a better position when sourcing and placing financial loans 
3. gives suppliers a basis for the measure of a higher credit limit and risk
4. interests stakeholders to take larger equities 
5. provides value-added investment analysis
6. helps Directors to formulate business strategies confidently

 

We recommend
1. Good accounting be placed as top business priority
2. Engaging qualified staff to prepare the company’s accounts
3. SMEs find reliable service providers to support the management

When all this in place, the company directors would use Accounting as a “Tool and Equipment” to grow the company’s business hundredfold.

 

Filed Under: Accounting PracticesBusiness in Singapore

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