The 3 ways practitioners can improve disclosure quality in financial statements
Use your templates and checklists properly, says Bridget Noonan of Clearline Consulting
VANCOUVER – In my work as an assurance partner with Clearline CPA and through the services we provide to small and mid-size accounting firms through Clearline Consulting, I see how far away many financial statements are from focusing on providing entity-specific presentations and disclosures.
The problem has only been exacerbated by the growing use by accounting practitioners of template financial statements and related products. I am hopeful that the new tools emerging for firms, such as cloud-based engagement performance software with engagement scoping capabilities, will reverse this trend.
We looked at some examples in my last column, from “Clutter to Clarity,” and I promised to provide you with three ways to improve the quality of the disclosures in your financial statements.
1. Stop drafting the client’s financial statements and note disclosures.
Putting the conversation related to independence aside, an assurance practitioner drafting the client’s financial statements tends to result in immaterial and generic disclosures. Why is that? Consider the difference in these two scenarios where the financial statements do not include the “required” disclosures for an allowance for doubtful accounts and liquidity risk:
Scenario One. The practitioner calls the controller of the company and discusses the completeness of the disclosures. The controller concludes that the disclosures are not required, as the allowance for doubtful accounts is insignificant and the liquidity exposure has been adequately disclosed through the provision of debt and commitment disclosures. The practitioner then documents this discussion, the professional judgment used to conclude on the issue and the effect, if any, on the practitioner’s conclusion or opinion.
Scenario Two. The accounting firm staff have drafted the financial statements on behalf of the client and the practitioner is now reviewing the financial statements and notes the missing disclosures. There are two options: follow the first scenario or include generic disclosures for the two items, which amounts to ticking two boxes within your financial statement software.
Without the checks and balances provided between management and the practitioner, scenario two is likely to win. Let’s be clear though — this position is based on a justification that the practitioner has reduced costs by including disclosures that the client may or may not care are included. But at what cost in the long-term to the accounting profession when the value of what has historically been our most significant product comes into question?
2. Use your presentation and disclosure checklists as they were intended.
Disclosure checklists are nothing more than a tool to ensure disclosure requirements are not missed — a reminder checklist. When there was one accounting framework — which, honestly, was not that complex — many were not reliant on these types of tools. Today, with a number of different frameworks and significant expansion in the requirements, I do agree the checklists serve a purpose.
However, many practitioners use a general checklist — which will not identify the industry or entity-specific critical disclosures — as a completeness check which leads to the inclusion of immaterial disclosure and exclusion of potentially insignificant disclosures.
Where disclosure checklists are modified for industry or sector specific considerations and filtered to exclude those disclosures that are insignificant or immaterial they could be a value tool.
3. Modify the firm’s financial statement templates.
The third-party financial statement templates many practitioners use are generic and include one or two boilerplate examples of note disclosures. The overuse of these boilerplate examples is evidenced in standards-based projects such the IFRS Practice Statement 2: Making Materiality Judgments, changes coming into the Canadian Auditing Standards in 2018 addressing disclosures in the financial statements, and the post-implementation review findings for financial instrument disclosures completed by the Accounting Standards Board.
One might conclude that the costs many were trying to save clients in the previous example may have contributed to the costs likely to be incurred for related standards changes.
By taking the time to build internal libraries of sample notes and disclosures, by industry or sector, the financial statement templates will assist in providing higher quality disclosures without incurring the cost of tailoring for every entity.
Bridget Noonan, CPA, CA, is a partner with Clearline CPA, an accounting and financial advisory firm in the Lower Mainland, B.C. She is also a partner with Clearline Consulting, which provides practitioners and their staff with the tools, training and advice they need to succeed and build thriving accounting firms. To receive Clearline’s public practice newsletter visit our website or provide your contact information here.