Approving the financial report

Friday, 01 February 2013

James Lonie photo
James Lonie

    Directors are responsible for approving and adopting the financial report and cannot delegate that responsibility, even to apparently competent and reliable people. James Lonie provides a checklist to assist directors of public companies in signing off the accounts.





    Do you have the necessary minimum financial literacy and basic knowledge of key accounting standards?

    As a director you have an "irreducible core duty" to:

    be able to read and understand the financial statements; and

    have a degree of financial literacy and knowledge of basic accounting concepts and conventional accounting practices and standards.

    Ensure you have and maintain a basic knowledge about the company, its financial position and affairs sufficient to reach a reasonably informed opinion of the financial capacity of the company.

    As a director you should:

    acquire at least a rudimentary understanding of the business of the company and become familiar with the fundamentals of the business;

    keep informed about the activities of the company;

    while not required to have a detailed awareness of day-to-day activities, monitor the company’s affairs and policies;

    maintain familiarity with the financial status of the company by a regular review and understanding of its financial statements; and

    while not an auditor, still have a questioning mind.

    Are the company’s risk and audit structures and processes appropriate for the company?

    You should check that:

    the board and committee charters are up to date and that the scope of the role of the board and audit and risk committee and its members is clear; and

    the members of the audit and risk committee are appropriate.

    Review the nature and quantum of financial information provided to you.

    Information provided to you should be relevant and comprehensible.

    Information overload is not an excuse for you failing to read, understand and focus on material provided to the board, especially material relating to the approval of financial statements.

    Ensure you have adequate time to review information.

    You must take a diligent interest in information provided to you or which you might appropriately demand.

    SET …


    Review the legal requirements for the financial statements and reports (including the notes to the financial statements, directors’ declarations, directors’ report and auditors’ report).

    The company must keep written financial records that correctly record and explain its transactions and financial position and performance (section 286).

    The financial statements and notes and remuneration disclosures must:

    comply with the Corporations Act 2001 and accounting standards (section 296);

    give a true and fair view (section 297); and

    include details of post-balance date/subsequent events.

    Do you have reasonable grounds to believe the company will be able to pay its debts as and when they fall due and payable?

    As a director you must be able to read and understand the company’s financial statements, including understanding the difference between current and non-current assets and liabilities, which is relevant to solvency and liquidity.

    You should check cash-flow forecasts and balance sheet current liabilities and current assets.

    Do not rely totally on management and the auditors (or other directors).

    The law imposes a special responsibility on directors for approving financial statements. You cannot simply delegate that responsibility. Where you know enough to spot a possible error in draft financial statements, you must question management and external advisers. The defence of reasonable reliance by directors on competent persons (section 180(2)) does not apply to the approval of the accounts.

    Regularly refresh your memory on your personal obligations as a director, especially relating to the accounts.

    As a director you are expected to "know the law" or at least have a general understanding of your obligations. "Reading the relevant provisions applicable to one’s responsibilities would seem an appropriate starting point [in reviewing the accounts]" (Centro court case).

    As a director you are required to:

    declare whether, in your opinion, there are reasonable grounds to believe the company will be able to pay its debts as and when they fall due and payable (for example, you should review budgets and balance sheet (including the timing of liabilities becoming due and payable and the characterisation of assets and liabilities as current or non-current) (see item 8 below);

    declare whether, in your opinion, the financial statements and notes comply with the Corporations Act, including whether they comply with accounting standards (section 296) and present a true and fair view (section 297);

    declare, if the company is listed, whether the declarations from the CEO and CFO required by section 295A have been given; and

    take all reasonable steps to comply with, or to secure compliance with, the requirements of the Corporations Act relating to the accounts (section 344).

    You cannot delegate these fundamental duties.

    What significant accounting practices and standards apply? Have they changed?

    Ensure significant accounting policies and assumptions are disclosed.

    Has the company sought advice on significant changes to accounting practices or standards? Has it received confirmation there have been no such changes?

    Consider asset values.

    Have non-current assets been independently valued? If not, how was their value determined?

    Meet management and obtain all necessary sign offs (including section 295A declarations where applicable).

    Management responsible for the preparation of the accounts should attend an audit and risk committee meeting (that all directors may attend) or a board meeting to provide an overview of the accounts and to answer any questions.

    Before making a directors’ declaration, a director of a listed company must obtain the necessary CEO and CFO declarations (section 295A).

    Non-executive directors to meet auditors and obtain preliminary audit sign off.

    Non-executive directors (all of them or at least those on the audit and risk committee) should have a session with the auditors without the presence of executive directors and the CFO. Topics covered should include: any audit qualifications, significant items, internal processes and a frank assessment of the company’s financial record keeping and processes.



    Obtain a copy of the final financial statements.

    You should ensure you have a copy of the final financial statements to review.

    Read and carry out a careful review of the financial statements.

    A careful review does not require you to verify all of the items in the financial statements. It does, however, require you to carefully read and understand the financial statements before forming the opinions required.

    Consider if the financial statements are consistent with your knowledge of the company’s financial position.

    You should consider whether the financial statements are consistent with your own knowledge of the company’s financial position. This accumulated knowledge arises from a number of responsibilities you have in carrying out your role and function as a director.

    Bring an open and enquiring mind, even in respect of matters outside your area of expertise.

    Apply your mind to the overall position of the company. You should stand back and consider the financial reports yourself. For example, what major transactions occurred during the reporting period? Have any significant matters or circumstances arisen since the balance date?

    Consider areas of high risk and subjectivity.

    Have management and the board considered areas of high risk for the company? Have these areas been appropriately identified, scrutinised and disclosed?

    Do the financial statements present a true and fair view?

    Think about the form and substance of the financial statements. Do they present a true and fair view applying common sense as well as the technical requirements?

    Consider changes to the financial statements and reports before passing the directors’ resolutions.

    If changes are so significant they cannot be readily absorbed, arrange a later time for approval to allow review.

    If any changes have been made to the version of the final reports and statements sent to you, you should ensure these changes are specifically drawn to the board’s attention.

    Alternatively, you should confirm no changes have been made to the version of the reports and financial statements previously provided to you.

    Only once you have reviewed and understood any changes to the final reports and financial statements should you resolve to confirm the directors’ declarations and your approval of the reports and financial statements.


    James Lonie
    Henry Davis York

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