This presentation looks at key areas Audit Committees and CFOs should pay close attention to as it prepares and announces its quarterly (and annual) results. It looks at the quality of current announcements and regulatory actions taken in respect of financial statements and presents possible causal factors.

1. 12things for
Audit Committees and CFOs
to do before
announcing quarterly results
Sharath Martin
Governance and Risk Advisor
March 2017
All rights reserved

2. HOW
BIG
A
PROBLEM
IS
THIS?

4. Large variance between Q3 and Q4 results. How
much of this should have been recognized earlier?

5. Quality of financial analysis. Serious efforts on
Investor Relations?

6. Regulatory actions – SC (2015)
• Reprimands and fines -­ Niche Capital Emas Holdings Bhd
and YFG Bhd -­ non compliance with approved accounting
standards and furnishing of false or misleading
statements to Bursa
• 4 infringement notices issued to PLCs for non compliance
with approved accounting standards
• 41 administrative actions for various misconducts,
including false or misleading financial statements

7. Regulatory actions – SC (2015)
• First time a licensed audit partner convicted for
abetting a PLC in making a misleading statement to
Bursa
• 75 direct and indirect engagements with PLCs,
auditors and other parties by SC and Bursa
• 41% of its enforcement referrals related to Corporate
Governance

8. Regulatory actions -­ Bursa
PLCs Directors
2015 2016 2015 2016
Public reprimand
and/or fine
11 11 37 41
Private reprimand
and/or fine
2 4 5 3
Suspension 1
Total fines RM5.9m RM2.1m

9. Regulatory actions -­ Bursa
2015 2016
Directives:
PLCs: limited review on Quarterly
reports
5 7
Directors: Training 7 11

10. • Audit Committees/Board members
v Name and reputation in the market
• CFO and Finance team (even mid and junior levels)
v Career prospects – promotion, job hunting
• Embarrassment, esteem and psychological stress
Implications to you

11. • Complexity of today’s financial reporting environment
• Volume and pace of data impairs CFOs ability to
provide meaningful insights to Boards
• Quality of CFOs and finance staff
• Accounting for estimates – judgements and
assumptions
• Slippery slope -­ ‘earnings management’
• Board/AC scrutiny of quarterly results vs. reviewing
strategy and ‘future of its business’
Causal
Factors?

12. 12
things
for
Audit
Committees
and
CFOs
to
check
before
you
sign
off

13. 1. Time spent on historical financials vs. strategy and future
of business
2. Quality of the CFO
o Difference between 1st and final draft of audited accounts
o Large variance between cum Q3 & Q4 earnings
o Overreliance on auditors for accounting advice
3. Frank views from auditors -­ ‘near misses’, quality of
finance staff and assumptions used by management
Audit Committees

14. 4. KPIs for CFO and Finance team -­ low % attributable to
revenue and profit compared to business unit heads
5. Challenge estimates and assumptions
6. Number, nature and amount of adjustments – financial
close process and audit (by quarter)
7. Review CPEs of your Finance function -­ number of
hours, nature of training vs. roles
8. Turnover in the backroom – numbers, rank and why
Audit Committees, CFOs and Finance function

15. 9. Acquisitions -­ work with Strategy or Business
Development teams to challenge assumptions used in
forecasts/projects
10.Reasonableness tests – key ratios, metrics, etc.
11.Earnings management – do not!
12.Be wary of business units pushing through numbers in
Q4 to meet KPIs
Audit Committees, CFOs and Finance function

16. SPECIFIC
AREAS
OF
CONCERN

17. 1. Impairment and debt obligation reviews – more than just at
year end
2. Critical engineering projects – monitoring, physical visits
3. Foreign entities – most adjustments happen at year end
4. Deferred tax
5. Emphasis on getting annual numbers right
• What about quality and accuracy of information provided
to investors in Q1 to Q3?
Specific areas of concern