Directors – What are my financial reporting obligations?

As 30 June fast approaches it is time for Directors of all entities to ask themselves and each other, what are my financial reporting obligations?

Duty to keep books and records

Directors must ensure that the Company they govern keep adequate financial records to correctly disclose and explain transactions and the company’s financial position and performance. A failure of a director to take all reasonable steps to ensure a company fulfils this requirement contravenes the Corporations Act.

Reading and understanding the financial statements

Each director has a duty to read and understand the financial statements.

Your responsibilities are not limited by your specific knowledge and experience. Being appointed to the Board for your HR expertise does not dispel you of your obligations as a company Director in regards to the financial statements.

You must read and understand the contents of the financial statements. You should apply your own knowledge and understanding of the Company and carry out a detailed review including any accompanying information such as CEO and CFO reports. It is your responsibility to determine that the information contained is consistent with your knowledge of the Company’s financial position and affairs, and ensure that material matters known to you, or that should be known to you, are not omitted.

In reading the financial report, you should:

  • ensure, as far as possible and reasonable in the context of materiality, that the information included is accurate
  • there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due
  • 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
  • question the accounting treatments applied in the accounting policies note, and
  • examine the adequacy of disclosures and whether any matters have not been disclosed that should be disclosed.

Post review, you should inquire further into the matters revealed by that financial statements that are outside you knowledge and understanding of the Company.

Quality….

Directors must ensure that the financial statements are of high quality and that useful and meaningful information is provided to users.  This can be assisted by engaging external experts where appropriate, or considering incentives for company management that are focused on financial reporting quality.

……..not quantity

In recent years, there has been widespread acknowledgement that financial statements have become too lengthy and complex. This reduces your ability to effectively demonstrate how the Company is performing. Even financially literate readers can find it difficult to understand reporting jargon and identify key disclosures. As a result of this the Australian Accounting Standards Board revised AASB 101 Presentation of Financial Statements. The revised standard clarifies several key concepts around the preparation of financial statements, all aimed at “cutting the clutter” and making the financial statements more readable.

Ways of cutting the clutter

  • Use plain English
  • Focus on and highlight key disclosures Those disclosures of greatest interest to investors and other users should be presented first
  • Is the Company able to produce financial statements under the Reduced Disclosure Regime?

Benefits of cutting the clutter

  • Better alignment of messages and results reported to stakeholders
  • Improved internal communication and understanding of the financial report
  • Reduced length of the financial statements saves management time and report production costs.

The end result is a simplified, easier to read, sharper and more relevant set of financial statements.

If you or your organisation would like to have a deeper conversation in relation to your financial reporting obligations, please contact Crowe Horwath.

By Sean Pye
Manager – Audit and Assurance