Chartered Accountants Australia and New Zealand (CA ANZ) and the Association of Chartered Certified Accountants (ACCA) have released a publication entitled “Directors’ Responsibilities for Financial Reporting” which is designed to assist directors in understanding and fulfilling their responsibilities in relation to financial reporting.

The publication is useful for directors of all types of companies, be they listed companies, unlisted public companies, private companies and companies limited by guarantee.  In fact, the concepts discussed in the publication are also very useful for board members of not for profit entities. The publication refers generally to “directors” but these can also include anyone who is in a position of overseeing the strategic direction of an organisation (eg committee members, board of management members, trustees, etc).

The publication addresses the following five questions:

Who is responsible for financial reporting?

There are numerous participants in the financial reporting process that play a role in ensuring that relevant, useful, comparable and consistent financial information is presented to enable users to make financial decisions. These include management, directors, external auditors, stakeholders and regulators.

However, it is the directors who have ultimate responsibility for ensuring compliance with legislative requirements in relation to financial reporting. As a result, all directors are required to understand the financial information being presented and the processes behind the preparation of this information.

Why are directors responsible for financial reporting?

Directors’ responsibility for financial reporting arises from the duty of care directors have to the organisation they are governing. This duty of care generally emanates from legislation and other regulatory requirements which the entity must adhere to. For example, in Australia this could be the Corporations Act 2001, various state-based Associations Incorporation Acts, Australian Charities and Not-for-profits Commission Act 2012, etc.

What are directors responsible for in relation to financial reporting?

The Australian Securities and Investment Commission (ASIC) has stated in one of its media releases “Directors do not need to be accounting experts”. However, directors do need to have sufficient financial literacy to understand, monitor and direct the organisation.  As a result, directors are expected to be able to read and understand the financial statements and to form a view on the accuracy, credibility and understandability of the information presented, as well as understanding the processes in place to review the financial statements. This was borne out clearly in the 2011 Centro case where the Federal Court ruled that directors are expected to take a diligent and intelligent interest in the information available to them, to understand that information, and apply an enquiring mind to the responsibilities placed upon them.

How do directors discharge their financial reporting responsibilities?

Directors should challenge the information presented by management and should question the accounting treatments applied when the treatments do not reflect their understanding of the substance of the transaction.  They should also apply professional scepticism when assessing management’s views on areas that have required significant judgement and estimates.

It is not appropriate for directors to place complete reliance on the expertise of others (including management, external auditors, etc), however it may be useful for them to consult with those with a financial background for guidance and advice to assist in understanding financial terms, processes and requirements.

When do directors discharge their financial reporting responsibilities?

This generally occurs on an annual basis (or half-yearly for listed entities and some other entities), however it is important that directors provide continuous oversight over the financial position of the organisation – eg reviewing financial reports prepared by management at each board meeting. This will help in supporting the directors’ review of the financial statements at the end of each statutory reporting period.

The publication also contains a list of example questions that the directors can ask management and external auditors to assist them in understanding the financial information presented and to ensure that they have discharged their financial reporting responsibilities.

Click here to read the full publication.