In brief – Breach of financial reporting obligations
and duties of care and diligence
The Federal Court has found that eight directors of Centro
Properties Group and Centro Retail Group breached their financial
reporting obligations and their duties of care and diligence under
the Corporations Act 2001 in approving incorrect financial
reports during 2007.
ASIC sought declarations of contravention against each director
in relation to compliance with financial reporting obligations
under section 344(1) and statutory imposed duties of care and
diligence under sections 180(1) and 601FD(3) of the
Corporations Act 2001.
The allegations concerned the 2007 approval of Centro's
annual financial reports, in which some US$2 billion worth of
liabilities were incorrectly categorised as being non-current and
some US$1.75 billion worth of short-term liability guarantees were
For more information about the commencement of ASIC's
proceedings against the Centro directors, please see our earlier
article Directors in the hot seat.
Federal Court decision in Centro case
On Monday 27 June 2011, Justice Middleton of the Federal Court
of Australia handed down his judgement. It was found that each
defendant director had breached the statutory imposed duties of
care and diligence and had failed to take reasonable steps to
ensure compliance with financial reporting obligations under the
The defendant directors have 21 days from the date of judgement
to appeal the decision.
Financial statements must accurately reflect the company's
The central question before the court was whether directors of
substantial publicly listed entities are required to apply their
own minds to, and carry out a careful review of, the proposed
financial statements, to determine that the information they
contain is consistent with the director's knowledge of the
company's affairs, and that they do not omit material matters
known to them or material matters that should be known to
Justice Middleton held that:
"Directors are entitled to
delegate to others the preparation of books and accounts and the
carrying on of the day-to-day affairs of the company. What each
director is expected to do is to take a diligent and intelligent
interest in the information available to him or her, to understand
that information, and apply an enquiring mind to the
responsibilities placed upon him or her. Such a responsibility
arises in this proceeding in adopting and approving the financial
statements. Because of their nature and importance, the directors
must understand and focus upon the content of financial statements,
and if necessary, make further enquiries if matters revealed in
these financial statements call for such
Summing up, Justice Middleton stated:
"I do consider that all that
was required of the directors in this proceeding was the financial
literacy to understand basic accounting conventions and proper
diligence in reading the financial statements. The directors had
the required accumulated knowledge of the affairs of Centro, based
upon the documents placed before them and discussion at board
meetings. Each director then needed to formulate his own opinion,
and apply that opinion to the task of approving the financial
Directors need to be financially literate
The judgment has a clear message for corporate Australia.
Directors should have the capacity to scrutinise the content of
their company's accounts to ensure accuracy.
It is essential for directors to be able to read, interpret and
understand the content of financial statements. It is no excuse for
a director to say that he or she relied solely on the skill of the
accountant or auditor and made the assumption that a financial
statement was correct before signing off on it.
This means that financial literacy is a crucial prerequisite for
any person to be appointed to the board of a substantial publicly
listed company. Without this skill, a director will not be able to
judge whether there is a need to make further enquiries about the
content and effect of financial statements prior to approving
Next stage of the Centro case
The question of relief from liability and penalty will be
determined by Federal Court hearing on 1 August 2011.
Swaab Attorneys was the highest ranking law firm and the
13th best place to work in Australia in the 2010 Business Review
Weekly Best Places to Work Awards. The firm was a finalist in the
2010 BRW Client Choice Awards for client service and was named the
winner in the 2009 Australasian Legal Business Employer of Choice
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guide to the subject matter. Specialist advice should be sought
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