Increased Focus on Director Obligations
It’s fair to say that the expectations and skill sets demanded of company directors has never been higher. With significant requirements around corporate governance, keeping abreast of corporate regulations and other relevant legislation – not to mention the ever-dynamic changes in financial reporting and accounting standards – being a Director in these current times is challenging.
It’s also fair to say that due to these expectations, smart directors will surround themselves with a strong team with expertise in areas such as legislative and regulatory compliance, financial reporting and disclosure.
Certainly, for larger companies and listed public companies, this team may also include internal auditors, and external parties such as external auditors, valuation experts, tax and research and development consultants and advisory boards.
Surely having the access to, and benefit of, significant and talented resources will help mitigate the many risks faced by directors, or possibly ‘band-aid’ some of the possible knowledge short-comings of directors?
As a result of a recent case - ASIC v Godfrey – ASIC (Australian Securities and Investments Commission) have re-asserted their ongoing view that directors be alerted to their obligations regarding the financial reporting requirements of the Corporations Act 2001 and the Accounting Standards. In essence, the court held that directors cannot discharge their obligations solely with reliance on management of the company, its internal audit and corporate governance committee or its external auditors.
The case centred around Mr Godfrey, who was the former Managing Director of the Banksia Financial Group, of which Banksia Securities Limited was one of the entities of the Group. Receivers were appointed to Banksia Securities Limited and the entity was subsequently liquidated during 2014.
ASIC commenced proceedings against Mr Godfrey in June 2017 alleging that Banksia Securities Limited’s (Banksia) financial reports for the years ended 30 June 2011 and 30 June 2012 (and the half-year financial report for the half year ending 31 December 2011) did not comply with the relevant accounting standards, nor did they give a true and fair view of the financial position and performance of the entity. The specific area noted by ASIC was in relation to the adequacy and completeness of the entity’s provisioning against bad or doubtful debts, with ASIC stating (publicly), that Mr Godfrey “did not have, and failed to obtain, a proper understanding of the requirements of the relevant accounting standard, AASB 139 Financial Instruments: Recognition and Measurement (AASB 139)” as it applied to the determination of:
- The value at which a loan or receivable was to be recognised in Banksia’s financial reports;
- Whether or not there was objective evidence that a loan or receivable was impaired; and if so,
- The proper amount of any provision for impairment.
In a court judgment handed down in December 2017, the Court made declarations that Mr Godfrey had breached the Corporations Act 2001 as alleged and disqualified him from managing corporations for five years with a pecuniary penalty of $25,000.
Importantly, ASIC has taken the view that, despite financial statements being prepared by a finance team and subject to external audit, relevant company directors must be aware of their responsibilities under the Act with respect to all aspects of financial reporting and compliance with Australian Accounting Standards. Failure to do so may result in the above issues and dealings – which aside from physical costs and time costs, could also create long-standing reputational damage to both companies and individual directors.
PKF have significant expertise in corporate governance and assurance and advisory services, specifically in relation to the application of accounting standards – please do not hesitate to contact us if we can assist.