Directors are accountable to ensure the numbers are correct
"LAWYERS for disgruntled Centro investors have argued there is ample evidence to show executives and directors of the shopping centre owner were nervous about the company's short-term debt position ahead of a disastrous $3.1 billion error in the company's 2007 accounts" ( "The Australian" 6/3/2012)
Directors are accountable for the financial information distributed to shareholders, stakeholders and members of the public. They must ensure all statements represent a true and fair account of the organisation's activities and financial position for the year that they are being reported on. No director wants to be in court trying to explain that they hadn't done their job of scrutinising the accounts properly. How is it possible to miss a 3.1 Billion dollar error?
Am I hearing that it won't happen to me? It can.In recent times we've had Directors in court ( in particular Feltex and Lombard Finance come to mind) trying to explain why they haven't looked at the financial statements close enough.
Do your job properly
It is not enough just to accept accounts because they have been prepared and audited by a chartered accountant. Directors are accountable for the financial statements; they need to test them independently to ensure that they do reflect that "true and fair" view.
Here is a check list of 10 items in which directors should test the financial information presented to them before signing off. This is not aimed to be a comprehensive list but a reminder of some of the areas as directors you might want to seek further information on. The board may want to delegate this to their audit committee.
- Check what reporting regime the organisation must follow. There are certain rules regarding what financial reporting an organisation must follow. The following chart allows you to check whether your organisation has extra reporting responsibilities or not. If in any doubt you should check and get assurance from your auditors.
- Do you have any unearned revenue? Some organisations may have received revenue before they had met their contractual obligations. For example receiving a grant from an organisation for a 12 month period which is subject to providing certain services and your year end is six months after receiving that grant.
- Debtors. Are the amounts in the balance sheet for accounts receivable/debtors fully collectable, have you reviewed all amounts 90 days plus and has sufficient provision being made for bad debts?
- Inventories. If your organisation has stock, then you need to check whether that stock is valued correctly and whether provision has been made for any obsolescence or possible very slow-moving stock.
- Plant and equipment. Does the value of the plant and equipment in the balance sheet represent fair value? What depreciation rates have been used? Do these rates need to be reviewed especially in the area of technology which is moving very quickly and economic lives are getting shorter and shorter.
- Intangibles. If your organisation has intangibles are these fairly represented?
- Have you disclosed all related party transactions?
- Have the auditors done a systems review on any areas of concern they have raised and what has been their reported responses to these concerns?
- Are there any contingent liabilities? Have these being disclosed?
- Are there any areas of concern about the performance of the organisation and have these been accurately portrayed in either the chief executive or the chairman's report accompanying the accounts.