It's the reporting season, and directors are busy making sure they comply with the disclosure requirements set by the Corporations Act and the ASX Listing Rules. Listed companies will shortly be releasing their results, if they haven't done so already.
Although the market's slide over the last year may have left a tarnish on once shiny results, directors must ensure that the results they disclose are accurate and reflect the company's true financial position.
Directors are at serious risk of breaching their duties if they provide incomplete or incorrect information, or omit information (whether falsely or inadvertently), which will therefore not give a true and fair view of their accounts.
Directors' duties in relation to accounts
Directors, in respect of financial reports, must exercise their powers and discharge their duties for a proper purpose and in good faith in the best interest of the corporation. They must act with a degree of care and diligence, which a reasonable person would exercise if they held a similar position.
When preparing or reporting the financial reports, if the director omits information which will make the financial report materially misleading or fails to make adequate disclosure of doubtful debts, overstates reported profits or inflates asset values (or more poignantly, fails to appropriately write down the values), the director may be held to be guilty of making a material misstatement and omission and be in breach their duties.
Even though directors are permitted to delegate their duties, they must be well informed about matters relating to the company. Where a director has delegated financial responsibility of the accounts, for example to an accountant or an officer of the company, he or she may still be found to be in breach of their duties and found to have not acted with a reasonable degree of care and diligence if they did not check the financial accounts, failed to take the reasonable steps to ensure that statements were not misleading, or if information was omitted, which makes the reports misleading.
Directors or officers may be protected from an alleged breach of their duties if they can show that they made the judgment that the financial statements were true and fair and they:
- acted in good faith and for a proper purpose;
- did not have a material personal interest in the subject matter of the judgment;
- informed themselves about the subject matter to the extent that they reasonably believed was appropriate; and
- rationally believed that the judgment was in the best interests of the corporation.
However, even if a director relies on an accountant or another individual to provide information in relation to the accounts, ultimately the responsibility of financial reporting lies with the director. Keeping these obligations and the risk of breaching these duties in mind, there are a number of duties a director has in relation to the financial accounts.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
