Business reporting and audit changes: time to identify the good, the bad and the ugly

While death and taxes are two certainties in life, for Kiwi businesses there’s a third – the need to prepare annual accounts. 

In New Zealand this year more than approximately 700,000 sets of accounts for companies, partnerships, trusts and not-for-profit organisations were prepared. But in 2013 and beyond the look and shape of more than 450,000 of them is likely to be very different due to proposed changes outlined in the Financial Reporting Bill 2012 that has just had its first reading in the House.

This Bill completely replaces the Financial Reporting Act 1993.  This is an Act that has served New Zealand well over the last 20 years because it’s given our Courts the ability to impose heavy financial penalties and even jail sentences on directors who fail to recognise the importance of preparing a true and fair set of annual financial statements.  

But where the 1993 Act is starting to show its age is its lack of alignment with business reporting requirements in Australia, its failure to recognise the unique financial reporting needs of users in the public and not-for-profit sectors and its failure to capture large partnerships.  Many of the proposed changes fix these weaknesses.

For many businesses, particularly small and medium sized companies with annual revenues of less than $30 million or total assets less that $60 million, the Bill will come as good news because they will be able to substantially reduce their accounting compliance costs and in many instances they may also be relieved from having to complete an annual audit.

For others, the Bill will be seen as bad news.  With more than 450,000 companies soon to be able to use special purposes financial statements, currently used in Australia, well entrenched accounting processes that have been in place for the last 20 years will almost certainly have to change.

And for anyone who ignores the new requirements proposed in the 181 page Bill things could soon turn ugly.  For example, failure to recognise that all entities will only have three months rather five months after balance date to prepare their annual accounts may result in late filing penalties of up to $7,000 being levied by the Registrar of Companies.

When Craig Foss, Minister of Commerce, introduced the Bill in Parliament he noted that it “rationalises financial reporting in three ways: it makes all reporting obligations consistent with the goal of financial reporting; second, it standardises the interface between the Financial Reporting Act and other Acts; third, it makes the language of financial reporting in different Acts broadly consistent.”  

Jonathan Young, chair of the Commerce Select Committee, pointed out during the Bill’s first reading that it not only affects companies, it also affects New Zealand’s 28,000 registered charities. He said “clear rules are required to improve charity reporting, and, I think, as we have those clear rules and as we have accurate and efficient reporting regarding our charities, once again we will build confidence in New Zealanders in the donation dollars that they give”.

And as might be expected Russell Norman from the Green Party said it would be “be good to see a further extension in New Zealand into environmental reporting for companies.”

Given so many entities will be affected by the Bill, the Commerce Select Committee will hopefully receive a significant number of submissions. The deadline for submissions is 18 January 2013 so for many organisations, both large and small, now is the time to highlight the good, the bad and the ugly aspects of a Bill that is going to change New Zealand’s business reporting in a profound way.