The outgoing chairman of the Australian Accounting Standards Board has raised “fundamental questions” about the standard of financial reporting by large private Australian companies.
Kevin Stevenson’s comments follow the release of research by the association, which found as much as 80% of private Australian companies file “special purpose financial reports” which do not comply with accounting standards.
The research, conducted by Peter Carey and George Tanewski from Deakin University and Brad Potter from Melbourne University, also found 25% of the reports are of “questionable quality”.
Stevenson said in a statement the report’s findings “go to the heart of the fundamental question of how best to serve the needs of actual and potential dependent users of financial statements by entities that are not listed”.
Stevenson said there is a lack of clarity about the basis of accounting used for many of these “special purpose financial reports” and as a result, “users are left with uncertainty and regulators face unmanageable enforcement tasks”.
“I see no consistent financial reporting purpose being served in such reporting and worry that lodgement of financial statements has become only a matter of (costly) compliance,” said Stevenson.
“The AASB would like to see a general consensus about the need for lodged financial statements to serve the needs of users (actual and potential), prepared in accordance with accounting standards and subject to meaningful audit reports,” he said.
The research examined private companies which file “special purpose financial reports” instead of general purpose accounts with the Australian Securities and Investments Commission.
Under the Australian Corporations Act, large private companies are required to prepare and lodge general purpose accounts with ASIC, unless they are classified as “non-reporting entities” which have little or no users which depend on their financial information.
It is up to the board of the company to decide if the business prepares a special purpose financial report, and among the companies which currently do so are corporate giants Grocon, Serco, Mineralogy, Glencore and Competitive Foods Australia, the company behind fast food chain Hungry Jacks.
Many micro and small Australian companies are currently exempt from these filing requirements, and while Stevenson said complete deregulation for all private companies may be going a step too far, he said there may be a case of increasing the threshold for companies to comply, as long as the companies file reports which meet applicable accounting standards.
“In the context of red-tape reduction, the main public policy issue is the trade-off between entities enjoying the privileges of incorporation/registration, for example limited liability, and the need for those entities to be accountable to external parties,” he said.