In late June 2011, the Australian Federal Court was asked to
look at the scope of a director's duties when signing off
company accounts and the annual reports. The Australian Securities
and Investment Commission ("ASIC") sued the directors of
Centro Properties Limited, Centro Property Trust and Centro Retail,
on the basis that they had breached the Corporations Act 2001 (Cth)
when they failed to notice "significant errors" in the
consolidated financial statements of this group. The directors
claimed to have relied on the work done by their auditors, PWC, in
signing off on the accounts and report. The court looked at the
degree to which a director is required to critically review
financial statements, so as to essentially form an educated
independent opinion as to the accuracy of the accounts –
the court held that directors must have sufficient financial
literacy to understand financial statements and the relevant
accounting standards to be followed, and it was not possible for
directors to delegate these obligations to management or auditors.
The court also concluded that the directors had contravened
sections 180 and 601FD(3) of the Corporations Act, by failing to
"take all reasonable steps" to ensure compliance with the
Act, and failed to exercise the necessary degree of care and
diligence required when reviewing the accounts and reports.
Directors of Australian companies are strongly urged to keep this
decision in mind when reviewing the accounts and annual reports for
their companies – directors need to ensure that they
maintain a working knowledge of the relevant accounting standards
involved, and ensure that they carry out a critical/probative
examination of the accounts and reports so that an independent view
can be established. Of course, a prudent director will ensure that
they also maintain records sufficient to prove that they have
worked through such processes.
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.
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