Company Financial Statements Can Be Hazardous For Directors

When a company, especially a public listed one, is faced with financial controversy, every one of its directors will be in the spotlight. It would be wrong to assume that mere attendance at board meetings would be sufficient for a director in discharging his or her duties.

While there are many matters a director must focus upon, one that is important but seemingly routine concerns the financial statements of the company.1 The Companies Act 19652 ("the Act") has a myriad of compliance requirements for record keeping, accounts, disclosures and filing of returns for which a director is responsible, with criminal sanctions in the event of a breach of duty.

General duty of care, skill and diligence

Directors are subject to a combination of statutory, common law and equitable obligations in carrying out their functions and duties. At one time at common law:

"A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. ...

"A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature to be performed at periodical board meetings, and at meetings of any committee of the board upon which he happens to be placed. ... In respect of all duties that... may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform such duties honestly."3

Today, directors can no longer be exonerated for their lack of knowledge.4 It is now incumbent upon them to acquaint themselves with the nature of the company's business and to take reasonable steps to ensure that it is properly conducted.5

The intricacies of commercial life have led to an increase in the public's expectations of the duty of a director.6 At the pace where business is conducted these days, little tolerance can be given to directors who do not take proactive steps in understanding their company's affairs.7 The board's duty is to place themselves in a position to guide and monitor the management of the company.8 A director should acquire at least a rudimentary understanding of the business of the corporation and be familiar with the fundamentals of the business and are under a continuing obligation to keep himself informed about the activities of the corporation.9 Given the supervisory and monitoring function of a director, the traditional view of directors having a "right" to obtain information should now be viewed as a "duty".10

Specific requirements on financial statements

Generally, company directors and managers are required to ensure proper maintenance of accounting and other records as will sufficiently explain the transactions and financial position of the company.11 Directors are responsible for ensuring that the accounts laid before the annual general meeting are in accordance with the applicable approved accounting standards.12

The profit and loss account13 and the balance sheet,14 duly audited and laid before the annual general meeting (AGM), must be accompanied by a director's report made in accordance with a resolution of the board, with respect to the profit or loss of the company for the financial year and the state of the company's affairs.15 Every balance sheet and profit and loss account is also to be accompanied by a statement by the directors and a statutory declaration16 by a director.17 The statement by the directors must be made pursuant to a resolution of the board stating whether in the opinion of the directors, the profit and loss account and balance sheet are drawn up to give a true and fair view of the results and position of the company, and that the accounts have been made in accordance with the applicable approved accounting standard.18 The statutory declaration made by a director, should set forth his opinion as to the correctness of the balance sheet and profit and loss account.19

In Australia

There are similar requirements in Australia on financial reporting. In particular, where a public listed company is concerned, a declaration must be made by the CEO or the CFO stating whether in his or her opinion:

the accounts have been properly maintained; the financial statements are in compliance with the accounting standards; the financial statements give a true and fair view of the financial position and performance of the company; and the regulations governing financial statements and notes are satisfied.20 A report for the financial year must be signed by a director pursuant to a resolution of the board.21

ASIC v Healey

In Healey,22 the Centro Group23 failed to disclose...