• Property & conveyancing
  • Business legal services
  • Building & construction
  • Legal Counsel Packages
  • Wills and estates

Stay in touch with how the law affects you! Subscribe to our

Subscribe to Forum Law News

* indicates required

Company Law News October 2011

The fall-out from the Centro case: implications for directors unfold

The Centro case emphasises the importance of fulfilling duties of care and due diligence when signing off on financial reports this annual reporting season, or in respect of other matters on behalf of a company.

In our last newsletter, we considered the recent decision of the Federal Court in the Centro case (ASIC v Healey & Ors). By way of recap, 8 directors of the Centro group of companies were found to have approved financial statements that, inter alia:

  1. Improperly classified some $1.5 billion in short-term liabilities as “non-current liabilities”; and
  2. Failed to disclose guarantees of short-term liabilities totalling approximately $1.7 billion.

On the basis of such errors, the directors in question were found to have contravened their duties to act with due care and diligence and to take all reasonable steps to comply with the financial reporting obligations contained in the Corporations Act. The practical implications of Centro for directors are far-reaching. In summary, key points illustrated by the decision include the following:

  • Directors are not entitled to rely blindly on the advice of managers and external advisors: it is crucial that directors turn their own attention to examining crucial reports and statements that it is the responsibility of the board to approve.
  • It is not open to directors to delegate responsibility for approving financial statements.
  • Directors must be alert to potential errors in draft statements and ought to raise any such concerns with managers and advisors.
  • Directors must have financial and accounting competence sufficient to allow them to read and understand financial reports and statements.
  • Directors need to recognise the importance of debt classification.
  • Directors are not entitled to rely on the accuracy of internal and external financial reporting processes in approving financial statements, without giving due consideration to financial reports and statements themselves.
  •  “Information overload” is no defence to director error – directors have a duty to properly consider all material necessary to confirm the accuracy of financial statements, regardless of the quantity of material needed for this purpose.
  • Directors should arrange for necessary audit committee meetings to take place well in advance of end-of-financial-year in order that sufficient time is allowed to deal with any problems.
  • By way of cross-checking, it will be useful to compare current financial reports and statements against those for the previous year in order to identify any major divergences or points of concern.  Similarly, an “auditor’s representation letter” may be a useful tool for ensuring that all matters that are required to be addressed in approving financial statements have been dealt with.
  • It may be useful to consider competitors’ financial statements and compare and contrast them with the reports to be approved.

Forum Law is an active member of several reputable law and industry associations. We have recently obtained ISO9001 accreditation.