Following up on my previous article:

Financial Performance Review

The board is also responsible to review financial performance of the company and to review interim and annual financial statements. The board should hold either directly or through its committees meetings with company’s external auditors to discuss the results of the audit and to seek clarification if there is any concern about the financial statements.  Board members must therefore be financially literate and should be able to read and understand financial reports submitted by management. The following significant functions are performed by boards with regards to a financial performance review:

1. Implement a Financial Performance Reporting System

Boards have the fiduciary responsibility to ensure that financial statements are prepared which accurately disclose the company’s financial position. It is essential to design, develop and implement a reliable and efficient financial performance reporting system to assist boards in getting accurate and reliable information on timely basis. The financial reporting system should be capable of providing board members with adequate information assisting them in answering the following key questions:

• How is the overall financial performance of the company? What is the profitability? Is it according to budget/plans?
• What is the asset quality of the company? Are these assets generating appropriate returns? Are assets being used satisfactorily towards maximizing shareholder’s wealth?
• Has there been any instance of financial fraud? If so, how was it perpetuated and what measures can be taken to prevent a recurrence?
• Are creditors paying? Has the company made appropriate provisions against unpaid receivables?
• Are policies in place regarding expense authorization, procurement, investment/disinvestment, financial risk management, etc.?  Appendix 5 provides a sample Authorization policy.
• Whether an authorization matrix is developed to assign thresholds on spending and approving expenses?
• Are shareholders compensated adequately? What is the dividend policy?
• Is the treasury department properly resourced and adequately managed?
• Is the company solvent? Is it able to service its debts and pay off its loans on time?

It is advisable that the board should specify any limits which it wishes to set on the authority of the CEO or other officers, such as monetary maximums for transactions which they may authorize without separate board approval.

1. Review Report on Reporting

Boards are generally responsible for ensuring the quality, accuracy and timeliness of all financial reports sent to regulators and other stakeholders. It is however not realistic for the board to review each and every report before it is sent out. Therefore, it is recommended that they should monitor reporting activities as a whole and review a sample of management’s report on frequent basis. In addition, boards may find it useful to develop a formal process of reporting whereby management should apprise the board on each report developed and sent to an outside party. This would act as an inventory of all reports created by the management. The following may assist towards this end:

• Design a report on reporting: Management may be asked to develop a summary report listing each report, its recipient, brief description, due date, actual completion date, etc. For example, financial institutions may make use of this report to record all forms, returns, reports submitted to the Central Bank and their frequency.
• Reports in the board report: The board should be kept updated about all the financial reports and submissions made to regulators and other outside parties. The board, if wishes to, may also require management to include all outside reports as annexure to regular board reports.
• Review/verification process: The board may decide to review a sample of these reports for its comfort or may direct internal audit or compliance function to review the same for confirming accuracy of reporting process.

1. Review and Certify Financial Statements

Boards are required to certify the accuracy of financial statements before these are published. Although this requires that board members must be capable of interpreting financial information by reading financial statements yet no one can absorb all the details in a financial report. It is thus recommended that management should provide narrative description and summaries, as well as charts and graphs to facilitate board members in understanding financial reports. In addition, boards may make use of popular tools used widely for interpreting financial performance, such as ratio analysis or trend analysis.

Although review of financial position and performance is responsibility of the board as a whole, this can be delegated to an Audit Committee.

This article will be continued in the next part of this column.

Hubert Rampersad

Hubert Rampersad is president at Business School of the Americas. This column is drawn from his new book “Authentic Governance; Aligning Personal Governance with Corporate Governance” (Hubert Rampersad & Saleh Hussain, Springer USA, New York, 2013). He can be reached at h.rampersad@tps-international.com ;  www.tps-international.com | His other books  http://bit.ly/TZhAxq | His interviews in BusinessWeek & Fortune Magazine http://bit.ly/V8EcSW | His You Tube Video http://youtu.be/tLeY5SWxqj8