Five top tips for directors ASIC

Being a company director has always been a serious business - recent highly publicised corporate collapses just highlight this.

The job requires dedication, skill, and most of all, commitment. Joining a board or starting your own company is not a task that can or should be taken on lightly, because when you are quite literally responsible for the direction of a company, a great deal of work has to be done. With all the tasks a company director must perform, and all the responsibility that is attached to them, how can you ensure that you give your company the best chance of success?

Know your responsibilities

Understand that you have a role to play in the strategic direction and management of the company, and that you have a relationship with staff, shareholders, stakeholders and creditors. It's therefore vital to get to know the business and the company's aims, and how your role as a director is linked to their future. Remember that as a director you are not a captain of a ship, but a member of the crew. You have a responsibility to other people's money and investments. Learn your responsibilities under the law, and ensure you have enough time to perform them thoroughly and diligently. If you break the law, even if not deliberately, you can be punished. Start with our information sheet The Watchdog's Guide: For company directors and secretaries, which you can download from the "Info for companies" page of our website www.asic.gov.au.

Have a healthy scepticism

You are a director, so you are accountable to your shareholders, lenders, creditors and other stakeholders. You must understand your company's present financial and business position and its plans for the future. You must understand the financial reports that are presented to you, and you cannot simply accept somebody else's word that they are correct - scrutinise them, ask questions, be painstaking. Be prepared to speak with important staff members within the company, to get different perspectives on the same story. Gaining your own understanding of the detail means you can be an active company director rather than a passive one, which not only protects you against potential misdoing, but in turn protects the entire company. Maintain an independent audit committee The audit committee is a vital part of your company's governance structure. It is crucial that you have confidence in their integrity and commitment, and that they have confidence in yours. An independent and fearless audit committee will report accurately back to you on the true state of the company.

An effective audit committee must be independent of the management team. This reduces the opportunity for complicity or selfish motivations, and normally means that the committee will be made up of non- executive directors, as they are less closely involved with the decisions of the board. The committee must meet regularly, and be capable of building open channels of communication with staff as well as the internal and external auditors.

Maintain a rigorous financial reporting system

An accurate, timely, cogent, coherent and reliable financial reporting system is essential. Monthly rigorous budgeting and comprehensive reporting is absolutely necessary to maintain an accurate picture of the company's wellbeing. In fact we are currently investigating compliance with two new accounting standards, and surveying audit independence, as part of our ongoing campaign to improve financial reporting. We will assess compliance by up to 100 companies with two Australian Accounting Standards Board standards: AASB 1018, which deals with profit and loss reporting. It requires disclosure of the cost of sales (the margin) and does away with "abnormals". AASB 1019, which deals with measurement and reporting of inventories. This affects the costs of sales figure required. Working with the Group of 100, we'll also survey Australia's top 100 companies on audit independence. If we investigated your company, how would you fare? We expect to report the results of our surveillance by the end of this year, and results of the audit independence survey by end October. Check how your company compares.

Cultivate trust

As a company director, all responsibilities can be traced back to you. If you do not have the trust and respect of people within the company, and they do not have yours, disaster is imminent. Particularly important is the relationship you have with your auditors and your audit committee, who must be able to feel confident of speaking with you about any issues that may come up. Equally important though is the trust and respect you must earn from, management, stakeholders, creditors and shareholders. This is the trust you will earn from ensuring you perform your duties as a director thoroughly, honestly and diligently.

To find out more about setting up and running a company, dealing with other companies, to closing down a company, visit the "Info for companies" page on our website www.asic.gov.au

Disclaimer

The purpose of this database is to provide a full-text record of all articles that have appeared in the CDJ since February 1997. It is aimed to assist in the research and reference process. The database has a full-text index and will enable articles to be easily retrieved.It should be noted that information contained in this database is in pre-publication format only - IT IS NOT THE FINAL PRINTED VERSION OF THE CDJ - therefore there might be slight discrepancies between the contents of this database and the printed CDJ.