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 because:

  • 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; and
  • 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 you'll need:

  • enough financial literacy to understand basic accounting principles; and
  • an understanding of the business, including its financial status.

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!

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