Company directors’ responsibility for board sign-off of financial statements | Financial reporting
18 November 2021 18:06
Senior Legal Writer, Practical Guidance – Corporations Module
Signing-off on financial statements is one of the key responsibilities discharged by company directors under the Corporations Act 2001 (Cth).
The Corporations Act requires disclosing entities, public companies, large proprietary companies and registered managed investment schemes to prepare and lodge audited annual (and, in some cases, half-yearly):
- financial reports (comprising financial statements for the year, notes to the statements, and directors’ declaration about the statements and notes); and
- directors’ reports (disclosing a broad range of information about the company’s operations, activities and affairs): ss 295, 298, Corporations Act.
Although the obligation to prepare these documents is imposed on the reporting entity itself, rather than on the directors, it is the directors who remain primarily responsible for the contents of the reports.
The directors must, among other things, declare that the financial statements and notes comply with accounting standards and give a “true and fair view” of the company’s financial position and performance (s 295(4)) and make the reports and declarations in accordance with board resolutions (ss 295(4), 298(2)). In addition, they face sanctions for failing to take reasonable steps to comply or secure compliance with the financial reporting provisions (s 344).
Practitioners and directors alike will be familiar with judicial pronouncements on the scope of directors’ responsibility to sign-off on financial statements. In the well-known decision, Australian Securities and Investments Commission v Healey  FCA 717, the Court made it clear that:
- there is a “core, irreducible requirement” of directors to be involved in the management of the company and to take all reasonable steps to be in a position to guide and monitor; and
- each director is ultimately responsible for reading, understanding and focusing on the contents of financial reports in order to sign-off on them.
There have been three developments in more recent times that have again placed a spotlight on this responsibility.
- First, the Banking Royal Commission identified numerous failures of corporate governance linked to boards’ failing to seek further or better information and to challenge management, and their inadequate supervision of management, among other things.
- Second, shareholder activism in Australia has increased, with issues of director accountability and remuneration and reporting of climate-related financial risks highlighted in activist campaigns.
- Third, the volatility and disruption brought about by the COVID-19 pandemic has created additional uncertainty around the scope of financial reporting obligations. Indeed, ASIC has seen the need to publish COVID-19 FAQs to guide businesses keen to ensure their compliance with their reporting obligations.
Signing-off on financial statements is therefore no light burden on company directors, particularly non-executive directors who face additional challenges in navigating this responsibility.
The parameters of the task are not only defined by the words in the specific provisions of the Corporations Act, but the task must also be understood in the broader context of directors’ general duties, which are enshrined in ss 180-184 of the Corporations Act, and their duties at general law.
Directors need several items in their arsenal of tools, including adequate board briefings to support the sign-off process, at least a basic understanding of the company, sufficient financial literacy, and an independent, enquiring and critical mindset. These issues and more are covered in our Checklist of key considerations for board sign-off of financial statements.
Learn more about Practical Guidance Corporations HERE.
For more information or to request a complimentary trial, please email Sales.Enquiries@lexisnexis.com.au, or call us on 1800 772 772.