Finance: IFRS Compliance Differs Amongst JSE-listed Companies
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Following the global accounting transition to International Financial Reporting Standards (IFRS), all JSE listed companies are required to report under IFRS, a set of international accounting standards issued by the International Accounting Standards Board stating how particular types of transactions and other events should be reported in financial statements. The primary goal of IFRS is to make international comparisons between companies as easy as possible, as well as for regulators, investors and other users of financial statements to be able to compare like with like and to ensure that firms make the same levels of disclosures and employ the same methodologies in reflecting their financial results.
In order to achieve consistent levels of IFRS compliance, the JSE has imposed stringent compliance regulations on audit firms wishing to be placed on the JSE services register. Theoretically speaking, the JSE’s regulations mean that all listed companies are now assured of a minimum level of expertise from their auditors. "However, the IFRS framework is so vast that interpretations often differ amongst audit firms and discrepancies in levels of IFRS compliance can, and do, occur, says Andrew Naudé, director of Moore Stephens Corporate Finance in South Africa.
“Some auditors seem to insist on more rigorous IFRS disclosures by their clients than others do," says Naudé, “and this has obvious implications for financial statements. A good example of an area with vastly different levels of IFRS compliance is the accounting for acquisitions, governed by the IFRS 3 statement. Some companies rigorously apply IFRS 3, often employing independent experts to report on the fair values of the assets and goodwill acquired and producing detailed disclosures, whereas others demonstrate very poor levels of compliance with the statement. How IFRS 3 is applied can have major effects on reported earnings. Also, the principal objective of the statement is to communicate to users of financial statements where the perceived value within the acquired business actually lies. If IFRS 3 is being ignored, stakeholders may not be getting the insights into a company’s acquisition rationale that they should.”
Naudé says that comprehensive disclosures not only provide users with a far greater sense of comfort regarding financial statements’ credibility, but may also imply a great deal about a particular company’s attitude to transparency.
“IFRS is principles-based, rather than being narrowly prescriptive," comments Nick Lazanakis, who oversees JSE reporting at Moore Stephens, “so differing interpretations can produce different levels of disclosures. But there is a wealth of IFRS interpretation guidelines and there really is no excuse for poor compliance amongst companies that report publicly.”
“Another area where we see different approaches to IFRS is in valuations for impairment testing,” continues Naudé. “If you look at the guidance within IFRS, this should be a very robust process, with a number of disclosures made regarding the valuation methodologies employed and assumptions utilised. Properly disclosed, there’s a great deal of information that can be gleaned by users of financial statements about, for example, the expected prospects of individual operating segments or cash-generating units. Where one company goes through this process in detail, and another has auditors who don’t insist upon it, their respective financial statements may not be entirely comparable.”
JSE-registered auditing firms are required to have an approved IFRS specialist on their team. However, this is not required to be a permanent staff member and small firms often retain an external IFRS advisor, who then services that firm and others on an ad-hoc basis.
“There’s not a lack of IFRS expertise available to audit firms,” says Lazanakis. “Much of the problem lies in the fact that some companies might not have the resources or inclination to comply with IFRS to the highest possible level. This can place auditors in a difficult position and they might, in some cases, be reluctant to insist upon anything more than minimum compliance. And the size of the audit firm is not necessarily the issue – it’s a common problem. Companies need to buy into the benefits of enhanced disclosures and individual auditors need to take a much tougher stance against non-compliance or poor disclosures by companies. The JSE regulations on audit firms are still relatively new, and we expect to see a marked improvement in IFRS compliance going forward, which can only make South Africa a more investor-friendly market.”
Julian van der Westhuisen, managing director of Moore Stephens in South Africa, adds that companies no longer need to look solely to the "big four" firms to fulfil their audit requirements with peace of mind. JSE-registered mid-tier audit firms can offer cost effective and personalised service with equally high standards of performance. “But all the JSE regulations do is confirm that audit firms have the necessary expertise available to them. Ultimately, ensuring that a company’s financial statements contain all that they should contain has to be a collaborative effort between management and their auditors,” concludes van der Westhuizen.
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