The recent decision in the Centro case confirmed that
directors must have some financial literacy in order to fulfil
their directors' duties when approving the accounts.
Basically, the accounts (prepared by a professional accountancy
firm) indicated some borrowings were non-current, but in fact there
were facilities of over $1.5 billion which were to be repaid within
12 months, which made them current liabilities.
The directors argued they'd relied on their accountants to
prepare the accounts, they couldn't be expected to know the
accounting terms in relation to liabilities and that the accounts
documents were complex. These arguments were rejected by the court
a director cannot exclusively rely on others in relation to the
financials, as it is a director's duty to consider the
information available before approving the accounts;
the note to the accounts clearly stated what liabilities were;
the complexity was irrelevant as the directors knew these large
borrowings were maturing in the short term and a basic
understanding of "current liabilities" should have led to
questions being raised.
In summary, you don't have to be an accountant to be a
director but it may help. Seriously though, you don't have to
check the accuracy of every figure in the accounts, you can
delegate that to the experts, but to properly evaluate the accounts
enough financial literacy to understand basic accounting
an understanding of the business, including its financial
What about the penalties for not doing so? In this case a
$30,000 fine was imposed on the CEO and the CFO was disqualified
from being a director for 2.5 years, so you'd better brush up
on your accounting knowledge and make sure you understand exactly
what you're signing off on when it comes to the accounts... as
a director it's your duty!
Questions? Give us a call.
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