How to differentiate quality of accounting?
A common question
This question is especially important for clients who may not have the requisite accounting knowledge or expertise. Business owners and management are not expected to be experts in accounting, taxation and other compliance requirements. When presented with varying alternatives, it is impossible for most of them to be able to discern the difference in the various options. This is especially true when all the accounting processes seem to perform the same function and deliver the same end-products which are the accounting reports and other information (some refer to these as the “management accounts” or “accounts”).
Importance of accounting quality
The accounting reports of a business entity provides essential information regarding the financial performance and position of the entity. Without such information, the management of the entity may not know the results of their activities (are they making a profit or loss?) nor have essential information required to run its business – for example, the liquidity and solvency of the entity. In other words, management of the business may be running blind.
Accounting information is required for preparation of income tax and GST (Goods and Services Tax) returns, financial statements and for other statutory compliance requirements. Preparation of GST returns invariably involves accounting processes. Accounting reports are required for preparation of financial statements. Accounting information is the starting point and basis for preparation of income tax returns. Compliance with other statutory requirements – for example, statistical and other government surveys – often falls back on accounting reports as a source of information. Having accounting information of adequate quality are fundamental to meeting all of these requirements.
Directors of Singapore companies are also required by the Companies Act to ensure that the company maintains proper accounting records (which should include accounting reports) that will sufficiently explain the transactions of the Company and enable true and fair financial statements to be prepared. The accounting records must be kept in a manner to enable them to be conveniently and properly audited.
It can be seen that quality of accounting is important. Unfortunately, this is seldom nor easily discernible to most business owners or management of a business entity who must often make a decision at a very early point in time.
Indicators of accounting quality
Accounting work involves recording transactions completely and accurately. The transactions should also be classified correctly. Transactions that are capital in nature should be differentiated and accounted for differently from revenue items. Certain types of transactions – for example, depreciation and amortisation – are required to be calculated accurately in accordance with the required accounting principles or standards.
Ideally, the numbers in the accounting reports should be the same as the audited or unaudited financial statements, when these are available later, without requiring adjustments (i.e. “audit adjustments”). All required accounting work should have been completed when closing the accounts for the business entity. If accounting has been done correctly in accordance with accounting principles or accounting standards, there should not be any such adjustments or differences.
In addition, unless exempted, companies are required to submit an Estimated Chargeable Income (ECI) to IRAS within three months of the company’s financial year end date. The ECI is often prepared based on the management accounts. Differences between the management accounts and the statutory financial statements will inevitably mean there are differences between the ECI and the final income tax return submitted to the Comptroller of Income Tax.
Despite the importance, it is not that uncommon to encounter at least some of the above deficiencies in accounting work. Unfortunately, the shortfall in quality of accounting is seldom obvious to business owners without adequate internal accounting expertise.
In addition to the above aspects, the final aspect of accounting quality is the end-product. All the necessary accounting reports and schedules should be in appropriate formats and quality, and they should be available upon the completion of the accounting work.
Quality of accounting reports
This final factor is probably the most difficult for business owners and clients without accounting expertise to discern.
Accounting reports should contain all the various requisite reports in the correct formats. The reports should also contain essential detailed information that enables the user to understand the recorded transactions without reference to source documents (for example, receipts and invoices).
Currently, the Comptroller of Income Tax (CIT) or Inland Revenue Authority of Singapore (IRAS) may audit or request for additional information on a business entity’s income tax returns within four years from the end of the Year of Assessment (YAs). Similarly, the Comptroller of GST (Goods and Services Tax) may also request for information on GST returns within five years of the GST accounting period.
When there is such an audit or request from the tax authority, information required for responding to the tax authority will invariably fall back on the entity’s accounting records (including accounting reports). The products from accounting work form the core accounting records of the business entity and will be a key source of information to prepare the responses. Accounting records of sufficient quality are essential for a proper response to be prepared.
Accounting reports may contain missing, incomplete or meaningless detailed information of the recorded transactions. In such a scenario, it will be difficult or impossible to determine if the transactions were accounted for properly. The causes of this problem may include software limitations, time pressure (or cost-cutting), ineptitude of the person performing the work or poor attitude towards quality of accounting. When the deficiency is pervasive, the accounting reports are unusable for the various purposes. In some instances, rectification of the deficiencies may require the accounting work to be re-performed.
Can you get the information needed?
Lastly, business entities should also consider whether, if required, appropriate information can be extracted from the accounting data to support special or customised requirements for information, and how readily these information are available when required.
We understand the challenges faced by clients, especially clients without the benefit of having adequate internal accounting expertise. Business owners are understandably in need of good support for accounting, taxation and other compliance matters. We are committed to ensuring that all our services are performed and delivered to ensure that a business entity’s compliance and informational requirements are fully met and these are met promptly.
Our accounting team comprises suitably-qualified people who are supervised by adequately qualified professionals. Our entire team is easily accessible through multiple modes of communications including phone calls. The accountants-in-charge of the accounting services for our clients are able to attend directly to client’s queries and concerns.
We have quality control policies, procedures and practices in place to ensure the quality of the accounting work produced for all clients.
We can also support client’s requests for specific information with specific and customised reports from the accounting data when these are required.
We can help you
K E Wee & Associates PAC and its affiliates provide services to assist companies in meeting their business and compliance requirements. Contact us today for how we can assist you in meeting the requirements.