At the end of this unit students should be able to:

1.  Describe the role of financial reporting 'regulators'

2. Describe the role of the external auditor

3. Describe the different users of financial statements

4. Describe the main contents of an annual report

• The regulation of financial reporting

THE COMPANIES ACT (Jamaican - 1965)

1. ACCOUNTING RECORDS' REQUIREMENT OF THE COMPANIES ACT

Books of Accounts

Section 142 (1) details the requirements as it relates to keeping 'proper' books of accounts. A summary of the section is as follows:

Every company shall have :

1. A listing of all cash received and all cash paid and the nature of such items
2. A listing of all sales and purchases of goods by the company
3. A listing of all the assets and liabilities of the company

The word 'proper' means a 'true and fair' state of the company's affairs and the ability of the books to explain transactions.

Note - Section 142 (5) states that if a director fails to take all the reasonable steps or willfully fails to comply with this section he may be found liable by a resident magistrate (RM) and subject to imprisonment with or without hard labour for a period not exceeding 6 months or to a fine not exceeding $400. J He may however escape such a conviction. See 142 (5)(a) & (b).

 

2. ACCOUNTING REQUIREMENTS OF THE COMPANIES ACT

Financial statements required to be laid before general meeting by the directors

1. In the case of an individual company [Section 143 (1) & (2)]

1. Profit & Loss Account ( Income & Expenditure Account for a company not trading for profit)
2. Balance Sheet - attached to this, shall be the following:

• A director's report
• The amount, if any, of dividend recommended to be paid
• The amount, if any, to be carried to any reserve account

2. In the case of a group of companies [Section 145 (1) & Section 146(1)]

In addition to those for an individual company,

1. A consolidated balance sheet (i.e. the parent company and its subsidiaries)
2. A consolidated profit and loss

Section 144 (5) allows the parent company's profit and loss to be omitted.

Note - A cash flow statement is not a legal requirement but is a requirement of accounting standards.

 

The form and content of the financial statements

In the cases of individual companies and of a group of companies respectively, Sections 144 and 147(1) call for the financial statements to give a true and fair view and require (subject to provisions) that they conform with the Eight Schedule, so far as is applicable.

Note - It is interesting to observe that Fourth Schedule of the UK Companies Act 1989 details the fundamental accounting concepts that should be applied in preparing the financial statements. They are:

1. Going-concern
2. Prudence
3. Consistency
4. Accruals

There is no such stipulation in the Jamaican Companies Act

Procedure on Completion of the Accounts (Sections 150 and 151)

1. The balance sheet must be signed by two directors or if there are more than two, by three directors on behalf of the board. Annexed to the balance sheet should be the profit & loss account, and also attached should be the auditors' report.
2. A copy of the balance sheet and all annexed documents required to be laid before a general meeting must be sent to every member of the company, every debenture holder and all other persons so entitled not less than twenty-one days before the date of the meeting.
3. As previously mentioned, the required statements must be laid before the company in the annual general meeting.
4. Copies must also be included in the annual returns delivered to the Registrar of Companies.

There are other Acts with which financial statements have to conform - e.g. Banking Act and Financial Institution's Act.

 

ACCOUNTING STANDARDS

In general, published accounts are required to conform to relevant accounting standards. Different bodies are established specifically to issue accounting standards. The current structure of bodies is as follows:

COUNTRY	USA	ENGLISH	JAMAICAN	INT'L
Major Body	FASB[1]	FRCÌ	ICAJË	IASB[2]
Standard setting body		ASB ----Review PanelÍ	ASC
Standards	SFAS	FRS	IAS

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[1] For more on the FASB, visit http://accounting.rutgers.edu/raw/fasb/index.html

[2] International Accounting Standards Board (formerly Committee). The IASB (established in 2001) will now issue International Financial Reporting Standards (IFRS), even though they have kept the existing IAS. See http://www.iasb.org.uk

Ë The ICAJ takes IAS issued by the IASB and through its subcommittee the ASC, adopts them for use in Jamaica. England and USA, as well as other territories make limited use of these standards issued by the IASB, but other countries employ full or partial adoption.

 Ì The FRC is a company set up by the government who with the Bank of England appoints the chairman

 Í This panel reviews the FRSs for departure from the accounting requirements of the Companies Act

Note - Any departure from these standards must be justified and disclosed.

 

STOCK EXCHANGE

In addition to the above, additional Information is required for those companies who have their shares listed on the stock exchange e.g. quarterly reports. Below is an extract from the Rule of the Jamicna Stock Exchange

( Source: http://www.jamstockex.com/rules/rl-lstco.htm#Financial Statements)

• The role of the auditor

The auditor's duty (Jamaican Companies Act - section 156):

The auditors are required to make a report (audit report) on the accounts examined by them and on every balance sheet, profit & loss account and on all group accounts laid before the company in a general meeting during their tenure. The report shall contain statements as to the matters mentioned in the Tenth Schedule.( Jamaican Companies Act) 

An example of an audit report is shown below:

To the Members of
CIBC Jamaica Limited

We have audited the financial statements as set out. These financial statements are the responsibility of the directors and management. The directors and management are required to select suitable accounting policies and then apply them consistently, make judgements and estimates that are reasonable and prudent, follow applicable accounting standards and prepare the financial statements on a going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business, The directors and management are responsible for keeping proper accounting records, for safeguarding the assets of the Group and the Company, and for the prevention and detection of fraud and other irregularities. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with standards on auditing generally accepted in Jamaica. Those standards require that we plan and perform the audit to obtain all the information and explanations which we considered necessary to provide us with reasonable assurance that the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. It also includes assessing the accounting principles used and significant estimates made by the directors and management, as well as evaluating the overall financial statements presentation. We believe our audit provides a reasonable basis for our opinion.

In our opinion, proper accounting records have been kept and the financial statements, which are in agreement therewith, give a true and fair view of the state of affairs of the Group and the Company as at 31 October 1999 and of the results of operations of the Group and the Company and cash flows of the Group for the year then ended and have been prepared in accordance with Jamaican generally accepted accounting principles and comply with the provisions of the Jamaican Companies Act applicable to banking companies.

Chartered Accountants
Kingston, Jamaica

 

• Users of financial statements

Internal Users

1. Management
2. Employees

1. Debt holders - debenture holders and other loan creditors
2. Investors/Analysts -financial analysts, stockbrokers, journalists, Credit rating companies and economists.
3. Business interest groups -customers, suppliers, trade creditors and Competitors
4. Government -tax authorities, regulatory bodies e.g. BOJ
5. Public - political parties, environmental groups
6. Other interest groups - churches etc

• Contents of an annual report

Directors are legally required to prepare Final Accounts setting out the financial results achieved by the company. These are normally included in a document called the annual report.

The typical annual report normally includes the following items

1. The director’s report
2. The report of the auditors
3. The financial Statements
4. Notes to the accounts
5. Statement of accounting policies ( optional )

1. The director’s report

In this report the directors give a brief description of the results for the year along with information on some of the following items

1. Dividends for the year
2. Future developments
3. A listing of the different directors and their individual interests(holdings)
4. Major subsequent events
5. Any research & development in progress

2. The report of the auditors

This report covers the information contained in the three principal financial statements: the P&L, balance sheet & cash flow statements. The auditors are appointed by, and are responsible to, the members (shareholders) of the company and must report to them on the accounts prepared by the directors.

Note – the directors are responsible for preparing the accounts. The audit report does not certify the accuracy of the accounts but instead it expresses the opinion that the accounts show a true and fair view. Also of note is that auditors must be qualified and are also expected to exercise an appropriate level of skill and judgement throughout their work.

 

3. The financial Statements

These as mentioned before include the P&L, Balance Sheet and a Cash Flow Statement (Statement of Changes in Equity - Jamaican). Although these are the primary ones others may be included e.g. Group related information ( group companies), multi-year summaries etc

 

4. Notes to the accounts

Included here is information which supplements as well as details summary data included in the major statements e.g.

1. The identification of the company ( e.g. location)
2. The nature of the company’s business
3. The method of taxation computation
4. The nature of the company’s turnover ( revenue) " what it consists of e.g. GCT"
5. The details of share capital
6. Details of Fixed Assets showing the movement throughout the year
7. The accounting policies applied
8. Other information including : contingencies, subsequent events, pension schemes etc

(this is not an exhaustive list)

 

5. Statement of accounting policies ( optional )

This statement is optional because as indicated at g) above( i.e. in the Notes to the Accounts), this statement is often times incorporated in the notes to the accounts

 

6. Chairman’s Review ( voluntary – it is an opinion not an attestation)

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