Benefits and Challenges of Non-Statutory Reporting

Benefits and Challenges of Non-Statutory Reporting

Non-statutory audit reports are accounts that are not part of a company’s annual statutory requirements. Unlike statutory audit reports, non-statutory reports are not required by law. The accounting reports provide an accurate view of the company’s current position. The primary motivation for including this audit information in financial statements is to bolster positive public perception, especially when a company places its stocks on the capital market. Companies engage independent auditors who review the current financial performance and offer an opinion regarding the company’s financial position. Before conducting a non-statutory review, the independent auditor must engage with the entity to determine the scope, goals, and responsibility for the analysis outcome.

Benefits

Investors rely on non-statutory audits to get a managerial viewpoint regarding the company’s financial performance. Despite a few inconsistencies that characterize non-statutory accounting, it provides critical information that provides an overall view of a firm’s economic performance. Including these reports in financial statements also ensures there is international comparability of companies. Besides, the awareness about global scrutiny bolsters discipline in the way companies issue their financial information. The accounting firm KPMG reports that the use of non-statutory audits increased in 2020 (KPMG 2020).

Non-statutory reporting can also be used to verify a company’s accounting data. In this case, companies use attestation ( a type of non-statutory reporting). The entity contracts outside accountants to conduct auditing, but the resulting information is not as detailed as is the case with statutory reporting. It involves the verification of accounting and other forms of data. Companies use attestation, especially when there is a big deal at stake (Dalvadi). For instance, a supplier may want to verify the company’s accounts to determine its creditworthiness before extending a line of credit. Also, attestation can be applied for nonfinancial purposes, such as determining a company’s eligibility for an upcoming government grant.

Furthermore, non-statutory reporting can be used for purposes other than evaluating financial performance. Other business areas, such as human resources, operations, inventory, and processes, among others, can be improved based on the results of the non-statutory analysis. For instance, it helps the management identify existing inefficiencies within the IT and accounting systems that could be responsible for inconsistencies in statutory reporting. It also provides the basis for undertaking crucial business processes such as a business takeover or amalgamation (Kaur and Kurt 2008). Also, this system of auditing may help the business improve its value and bolster customer satisfaction. Non-statutory reporting also helps managers check on a company’s efficiency by identifying its overhead and manufacturing costs and comparing them with rival figures.

Challenges

The IAASB is concerned with excessive disclosure, which characterizes non-statutory auditing. The result is the publication of immaterial information that does not require disclosure. The resulting audit report may contain too much information, which may distract a reader from focusing on significant elements of financial statements due to information overload. Essentially, non-statutory reporting presents auditors with unique challenges as they are unsure which information they will include in financial statements. As much as companies prefer to conduct non-statutory reporting in a bid to prove transparency in financial matters, they may obscure some other crucial financial information. Additionally, it is challenging to apply materiality to quantitative disclosures. That means accountants need further guidelines to correctly identify the data with decisional value, as this is a relatively new concept.

Another challenge associated with the use of non-statutory auditing is the unreliability of the sources of information. The process involves using information that is not part of the general ledger (Felicia 2014). That poses a few challenges for the auditing team. First, it is challenging to authenticate the validity of the information used. Non-statutory analysis data is mainly derived from the management’s accounting data and not from the accounting function. The management’s accounting data contains lesser control risk, thereby creating more audit risks.

Finally, the issue of timing also presents challenges for the auditor. Non-statutory reporting relies on management data, which often comes late in the auditing process (Felicia 2014). With such critical data coming so late, auditors do not get enough time to subject the auditing process to the requisite auditing procedure, creating higher risk.

Conclusion

Introducing non-statutory disclosures in financial statements is not required by law, but the practice is gaining traction. Non-Statutory disclosures help management explain financial performance to investors and improve other critical business areas. Also, third parties use the audit reports to verify an entity’s accounting data. However, there are a few challenges associated with applying non-statutory accounting, including the unreliability of sources. For instance, excessive disclosure may obscure other crucial financial information. Also, the management data used often comes late in the auditing process, hence less time to comply with auditing procedures. Also, it is difficult to verify the validity and accuracy of the managerial accounting data used in the process.

Bibliography

Dalvadi, Y., Non-Statutory Disclosure By Indian Companies: A Study Of Awareness And  Perception Of Investors. u| fdmâfz ljgf zfq8mâfz gyl.

Felicia, S., 2014. Advantages and disadvantages of applying evolved methods in management accounting practice. Annals-Economy Series, 2, pp.192-196.

Kaur, J. and Kurt, N., 2008. Voluntary Audits: Motives of Executing Voluntary Audits in Partnership Firms in Jönköping.

KPMG 2020, Uptick in ASX200 company reports using non-statutory performance measures – KPMG Australia, KPMG.

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Question: Critically evaluate the benefits and challenges of introducing non-statutory accounting disclosures in the financial statements. In your answer, provide an analysis of 3 benefits and 3 challenges.