Yesterday, the FMA released its guidance and expectations to help financial service providers meet their statutory requirement to keep proper accounting records. This guidance addresses emerging and persistent issues the FMA has identified in financial reporting.
Who needs to read it? Why?
Financial Markets Conduct Act 2013 (FMCA) reporting entities and their directors and auditors should pay close attention to this guidance. The FMA expects reporting entities to review and apply the guidance both for the purpose of keeping proper accounting records and complying with wider financial reporting requirements.
Some aspects are also relevant to entities that are not FMCA reporting entities, but have financial reporting processes and wish to improve the quality of their accounting records.
What does it cover?
The FMA acknowledges that the FMCA and other legislation that refers to the requirement to keep proper accounting records do not provide specifics on the expected content of those records.
The FMA considers that what is practically required by the legislation has changed overtime and become more complex; for example, in their view, bank statements and invoices may no longer be sufficient; documentation that supports accounting considerations, decision making and conclusions may also be required.
The FMA says it has noticed an increasing trend of financial statements which are not appropriately supported by proper accounting records providing evidence that the entity complies with financial reporting requirements and all applicable accounting standards.
Through its review, the FMA identified some entities:
- preparing supporting documentation only at the time of the FMA’s review.
- lacking adequate documentation and accounting records to support recorded transactions, an entity’s accounting position and materiality considerations, including the level of disclosures in the financial statements.
- being unable to source detailed documentation to support recorded transactions and the accounting approach applied in statements that have been authorised by director(s).
- relying on auditors to have documentation and complete analysis of an accounting treatment, in absence of their own accounting records.
- being unable to provide sufficient evidence on some of their more complex accounting decisions in the financial statements.
The FMA points out that the board of a FMCA reporting entity is directly responsible for the quality and accuracy of financial statements, and as such should have a “rigorous policy” to ensure the quality of financial reporting. This should include processes and controls to ensure the accounting records are complete, accurate and reliable.
In its guidance, the FMA sets out the following key principles and considerations for entities to follow:
- Every entity must keep and maintain reliable accounting records that include sufficient detail to support the accounting approach and how it demonstrates compliance with applicable accounting standards.
- Accounting records should be kept and maintained in a reasonable format, with consideration to the type of accounting record, and whether it is in a format that can be effectively shared.
- Accounting records should be readily available for inspection. This means they should be easy to access, regardless of how and when and by whom the record was created.
- Consideration of materiality is a fundamental part of preparing financial statements. In accordance with generally accepted accounting practice in New Zealand, information should be disclosed only when it is assessed to be material to users’ decision-making processes.
- Entities should prepare accounting records in a timely manner and, where applicable, keep them maintained throughout the year. Where records are updated, entities should maintain an audit trail.
- Accounting records and supporting documentation should be kept in a way that supports financial statements authorised by director(s).
- Entities should have adequate safeguards and contingency plans in place for keeping and maintaining accounting records, including back-up copies. As part of this, entities should include authorisation policies on altering accounting records.
- FMCA reporting entities and boards should maintain an effective system of internal controls for producing reliable financial reporting and accounting records. Control processes should support the integrity, accuracy and timeliness of accounting records as well as financial reporting systems.
- The FMCA requires entities to keep accounting records or copies for at least 7 years. Entities need to consider on a case-by-case basis if specific records should be kept for longer.
- Where an entity keeps its accounting records in a location outside its registered office, it needs to ensure the records are kept following all these key principles and considerations and are accessible for the required period of time.
In addition to these key principles, the FMA states that for entities and their directors to be able to support their accounting position and approach in areas where there have been significant judgements and critical accounting estimates, they should maintain proper records and documentation that outline and support in detail the:
- accounting approach taken in relation to recognition, derecognition, measurement and disclosure;
- material assumptions and inputs, including documenting background, source, considerations and rationale supporting reasonableness and appropriateness of material inputs and assumptions;
- sensitivity analysis of the carrying amounts to the methods, inputs and assumptions underlying their determination;
- level of disclosures in the financial statements relating to the areas of significant estimates and judgements, including sensitivity analysis; and
- discussions involving the board and/or Audit Committee relating to areas of significant judgements and critical accounting estimates.
The key message of the FMA is that “the objective of financial statements is to provide financial information that is useful to investors and other users in making decisions about providing resources to an entity.” The FMA underscored the importance of financial statements by noting that for many entities, such statements are the only source of financial information available to investors and other stakeholders.
Our view is that FMCA reporting entities should ensure they are not in a position where they need to debate with the FMA whether the requirements in the FMCA have effectively changed and become more complex over time.
Instead, given the FMA’s stated intention to closely monitor whether FMCA reporting entities are meeting the obligation to prepare and file audited financial statements which comply with financial reporting requirements, entities should both ensure they follow this guidance, and also consider more generally how quality accounting records will support financial reporting processes, keeping in mind the aforementioned objective of financial statements.
If you have any questions in relation to keeping proper accounting records or producing financial statements, please contact one of our experts.
This article was co-authored by Elise Plunket, a Solicitor in our Financial Services team.
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