Australia: Directors duties and annual reports – the Centro Decision

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.

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