Who is responsible for getting the financial statements right?

21 January 2021: Who prepares financial statements? And what does an auditor do that is different? To members, the answers might be obvious, but the distinction is often lost in the wider world.

 “Directors are legally obliged to prepare the financial statements. Audit committees monitor the integrity of financial statements and auditors audit them,” says Katharine Bagshaw of ICAEW’s Audit and Assurance Faculty.

“Company law, EU-adopted International Financial Reporting Standards (IFRS) and the continuing obligations of listing govern the content of the financial statements of a listed company and some of the other information they include at the front end of their annual reports,” she continues. “Financial statements include the profit and loss account, balance sheet and cashflow statement, and the related notes.”

What’s more, company law also requires directors to include in the strategic report a ‘fair review’ of the company’s business and a balanced and comprehensive analysis of its performance and position, a description of the principal risks and uncertainties facing the company, and an analysis of performance and position using financial key performance indicators.

UK corporate governance rules also require directors to perform a robust assessment of the principal risks facing the company and to make a statement to that effect. They require a statement on whether the going concern basis for the financial statements is appropriate, covering at least one year, and a viability statement covering how they have assessed the longer-term prospects of the company and over what period, typically over three to five years. 

Directors are required by law and regulation to prepare an array of other financial and non-financial information beside the financial statements, including the strategic and directors’ reports, reports by the audit and remuneration committees, specific information on directors’ remuneration, and reports on carbon emissions, diversity, disability and more. 

“The auditors’ responsibilities in relation to this information are complex,” says Bagshaw. “The annual report is made up of information required either by law or regulation, together with any other information directors choose to prepare. It is all required to be ‘fair, balanced and understandable’ but a lot of it is unaudited and only the financial statements are required to give a true and fair view.”

And ‘true and fair’ financial statements contain many figures that are estimates. 

You can find a full version of ICAEW’s report ‘Financial reporting: who does what?’ here.