Australia: Checklist for public company directors signing off the accounts this reporting season

READY?

1. Do you have the necessary minimum financial literacy and basic knowledge of key accounting standards?

As a director you have an "irreducible core duty" to:

• be able to read and understand the financial statements
• have a degree of financial literacy and knowledge of basic accounting concepts, and conventional accounting practices and standards.

2. Ensure that you have and maintain a basic knowledge about the Company, its financial position and affairs sufficient to reach a reasonably informed opinion of the financial capacity of the Company.

As a director you should:

• acquire at least a rudimentary understanding of the business of the Company and become familiar with the fundamentals of the business
• keep informed about the activities of the Company
• while not required to have a detailed awareness of day-to-day activities, monitor the Company's affairs and policies
• maintain familiarity with the financial status of the Company by a regular review and understanding of financial statements
• while not an auditor, still have a questioning mind.

3. Are the Company's risk and audit structures and processes appropriate for the Company?

You should check that:

• the board and committee charters are up to date and that the scope of the role of the board and audit & risk committee and its members is clear
• the members of the audit & risk committee are appropriate.

4. Review the nature and quantum of the financial information provided to you.

Information provided to you should be relevant and comprehensible.

Information overload is not an excuse for failing to read, understand, and focus on material provided to the board, especially material relating to the approval of financial statements.

5. Ensure that you have adequate time to review.

You must take a diligent interest in information provided to you or which you might appropriately demand.  It takes time to review detailed information.

SET...

6. Review legal requirements for the financial report (including the required financial statements, relevant notes and directors' declarations).

The Company must keep written financial records that correctly record and explain its transactions and financial position and performance (section 286).

The financial statements and notes and remuneration disclosures must:

• comply with the Corporations Act and accounting standards (section 296)
• give a true and fair view of the company's financial position and performance (section 297)
• include details of post-balance date/subsequent events.

7. Regularly refresh your memory on your personal obligations as a director, especially relating to the accounts.

As a director you are expected to "know the law" or at least have a general understanding of your obligations - "Reading the relevant provisions applicable to one's responsibilities would seem an appropriate starting point [in reviewing the accounts]" (Centro case).

As a director you are required to:

• declare whether, in your opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they fall due and payable (for example, you should review budgets and the balance sheet (including the timing of liabilities becoming due and payable and the characterisation as current/non-current)) (see item 8 below)
• declare whether, in your opinion, the Company's financial statements and notes comply with the Corporations Act, including whether they:
• •               comply with accounting standards (section 296)
  •              present a true and fair view (section 297)
• declare, if the Company is listed, whether the declarations from the CEO and CFO required by section 295A have been given
• take all reasonable steps to comply with, or to secure compliance with, the requirements of the Corporations Act relating to the accounts (section 344).

You cannot delegate these fundamental duties.

8. Do you have reasonable grounds to believe that the Company will be able to pay its debts as and when they fall due and payable?

As a director you must be able to read and understand the Company's financial statements including understanding the classification between current and non-current assets and liabilities which is relevant to solvency and liquidity.

You should check cash flow forecasts and balance sheet current liabilities and current assets.

9. Do not rely totally on management and the auditors (or other directors).

The law imposes a special responsibility on directors for approving financial statements.  You cannot simply delegate that responsibility.  If you identify a possible error in draft financial statements, you must question management and external advisers.  The defence of reasonable reliance by directors on competent persons (section 180(2)) does not apply to the approval of the accounts. 

10. Significant changes to accounting practices or standards.

Has the Company sought advice on significant changes to accounting practices or standards, or has it received confirmation that there have been such changes?

11. Meet with management and obtain all necessary sign offs (including section 295A declarations where applicable).

Management responsible for the preparation of the accounts should attend an audit & risk committee meeting (that all directors may attend), or a board meeting to provide an overview of the accounts and to answer any questions.

Before making a directors' declaration, a director of a listed company must obtain the necessary section 295A CEO and CFO declarations.

12. Non-executive directors to meet with auditors and obtain preliminary audit sign off.

Non-executive directors (all of them or at least those on the audit & risk committee) should have a session with the auditors without the presence of executive directors and the CFO.  Topics covered should include: any audit qualifications, significant items, internal processes and a frank assessment of the Company's financial record keeping and processes.

GO!

13. Obtain a copy of the final financial report.

You should ensure that you have a copy of the financial report to review.

14. Read and carry out a careful review of the financial report.

A careful review does not require you to verify all of the items in the financial statements but it does require you to carefully read and understand the financial statements before forming the opinions required.

15. Consider if the financial report is consistent with your knowledge of the Company's financial position.

You should consider whether the financial statements are consistent with your own knowledge of the Company's financial position.  This accumulated knowledge arises from a number of responsibilities you have as a director, and in carrying out your role and function as a director.

16. Bring an open and enquiring mind even in respect of matters outside your area of expertise.

Apply your mind to the overall position of the Company.  You should stand back and consider the financial reports yourself.  For example, you should consider whether any significant matters or circumstances have occurred since the balance date.

17. Consider changes to the financial report and accounts before making the directors' resolutions.

If changes are so significant that they cannot be readily absorbed, arrange a later time for approval to allow review.

If any changes have been made to the version of the final financial report sent to you, you should ensure these changes are specifically drawn to the board's attention.  Otherwise, you should obtain confirmation that no changes have been made to the version of the accounts previously provided to you.

Only once you have reviewed and understood any changes to the final financial report and accounts should you resolve to confirm the directors' declarations, and approve the financial report and accounts.