Financial acumen exam bank may not be every director’s strength but ignorance is
no excuse when it comes to understanding company accounts. The former directors
of property group Centro found this out the hard way in June when the Federal Court brought down its landmark decision against
them regarding their lack of due diligence in the lead-up to the company's near
collapse in 2007.
The eight former directors and executives were found
to have breached the Corporations Act by signing off on financial exam bank reports that
failed to disclose billions of dollars of short-term debt. The case was watched
closely by boards of directors across Australia, although the recently
announced penalties were considered lenient. Declarations of contravention were
made against all defendants.
Regardless of the lightness of the penalties, the case
will continue to hold important lessons for Australian company directors. In
his ruling in late June, Federal Court judge John Middleton commented that the
omission of more than A$2 billion of debt from the accounts could have been
identified ‘without difficulty’. What was required of the exam bank directors was
‘critical and detailed attention’, rather than relying on the information
presented to them by management and Centro’s auditors PricewaterhouseCoopers ‘no
matter how competent or trustworthy they may appear to be’.
The Centro case will continue to be upheld as a prime
example of what can go wrong when directors rely on others for information
rather than make it their business to read the question bank download financial statements and check
them.
‘The judgement is more of a wake-up call to say “don’t
skim the accounts and don’t rely on the assurances of others. You need to
exercise judgement and use an inquiring mind”. Which is consistent with the
legal principles that directors have to be pro-active when it comes to
understanding company affairs including its financial affairs,’ he (Anil
Hargovan) says.
Leigh Warnick, a partner with Lavan Legal in Perth,
says there are two key messages company directors and their advisers should take
home from the Centro judgement: directors are the last line of defence on
financial question bank download reporting; and information overload is no excuse — directors must
take control.
Directors across Australia would be entitled to react
to the Centro case with alarm if it obliged them to read financial statements
with the eyes of an expert, but this is not the case, Warnick says. The
requirements outlined by Justice Middleton were to have enough financial
literacy to understand basic accounting conventions, and to exercise proper
diligence in reading financial statements.
John Colvin, managing director and chief executive of the
Australian Institute of Company Directors (AICD), says the judgement against
the Centro directors highlights important issues and provides some timely
reminders of the significant responsibilities that come with a board seat and
just how difficult being a director can be. ‘It is important for all company
directors to have an understanding of the business they oversee, as well as a
basic understanding of the financial position of the company,’ says Colvin.
However, in an environment where the complexity of financial reporting
standards and their application continues to increase, the role of company
directors continues to become even more onerous for question bank download.
