While directors have a wide range of responsibilities, these insights concentrate on their financial reporting responsibilities. Built on the CAANZ and ACCA’s report ‘Directors’ Responsibilities for Financial Reporting’, this article aims to help those charged with governance in understanding and fulfilling their financial reporting responsibilities.
Directors are collectively responsible for meeting their obligations in relation to financial reporting. Thus, every director needs to understand the financial information and the process involved in such information being presented. Though a media release by the Australian Securities and Investment Commission (ASIC) notes that ‘directors do not need to be accounting expert’, it is important to highlight that directors are not able to delegate their responsibilities for financial reporting. It is common, however, for directors to obtain external professional advice and information (including from accounting firms and audit committees) to assist them with fulfilling their responsibilities.
Directors’ responsibility for financial reporting arises from their ‘duty of care’ outlined in various legislative and other regulatory requirements such as the Corporation Act 2001, state/territory-based Association Incorporation Acts, Australian Charities and the Not-for-profits Commission Act 2012 etc.
While directors are not expected to be an accounting expert, they do need to have sufficient financial literacy to perform the following duties:
- Review financial statements to understand and assess the accuracy, credibility and understandability of financial statements;
- Understand the processes (systems) in place to prepare and review the financial statements which are referred to as an ‘internal control system’. While management is responsible for implementing internal controls, directors have a responsibility to constantly monitor the operating effectiveness of internal controls, usually performed through continuous monitoring of management reporting and audits (both internal and/or external);
- Consider the appropriateness of the accounting policies and the key areas of judgments and estimates being used in the preparation of financial statements; and
- Liaise with the external auditor, if applicable, and oversee the quality and independence of the external audit process, including approving the audit fee and the scope of the audit.
When the company is required to lodge its financial reports with ASIC, directors need to include the following declarations with their lodgment:
- Whether, in the director’s opinion, there is reasonable evidence for the firm’s ability to pay in their debts when they become due;
- Whether the financial statements and notes comply with accounting standards and give a true and fair view of the financial position and performance of the company and any consolidated entity;
- If listed, submitting the declarations required for the Chief Executive Officer (CEO) and Chief Financial Officer (CFO).
Discharge of this responsibility
To successfully discharge their responsibilities, directors need to:
- challenge the information presented by management;
- apply professional scepticism to question the appropriateness of accounting judgments, and treatments.
While it is not appropriate for directors to completely rely on the expertise of others (i.e. management and external auditors), they may benefit from consulting with accounting professionals for guidance and advice to understand the financial information.
Directors discharge their financial reporting responsibilities on annual basis (half-yearly for listed firms). Continuous oversight and review of financial reporting processes and information helps directors to identify and resolve issues on a timely basis. Thus, it is a recommended practice for directors to review the financial reported prepared by management in board meetings.
To read the full report including a list of example questions that directors can ask management and external auditors, click here.