• You are here: Home
• News

Look after the basics

The importance of proper disclosure

Two recent significant court judgements have implications for financial reporting and auditing. They highlight the importance of making sure basic procedures are performed correctly.

Litigation over Centro Properties has been in two parts. In 2011, the Federal Court found directors guilty, without penalty, of breaches of directors’ duties after ASIC brought actions against them. The Chief Financial Officer and Chief Executive Officer were also found guilty and fined, with the CFO also banned from acting as a company officer for 2 years.

In May 2012, class action litigation against the company, officers and auditors was settled for an approximately $200 million sum of damages plus costs. This action alleged the making of statements that were misleading or contained omissions.

The legal action followed shareholder losses through a substantial decline in share price. This was said to be associated with lack of disclosed information about the need to refinance major amounts of debt, which became a difficult to achieve in the financial market and lending conditions of late 2007 and 2008.

The Federal Court found directors had allowed financial statements to be issued that misclassified one and a half billion dollars of debt as non-current, when it should have been classified as current. They also failed to disclose a subsequent event of entering into guarantees when refinancing debt.

Amongst the reasons for finding the directors and officers guilty were two matters of documentary evidence. Section 295A of the Corporations Act requires the CEO and CFO of a listed entity to make a declaration to the directors of their opinion on whether the financial statements comply with accounting standards and present a true and fair view. In the Centro case, the declaration given was copied from one used for the auditors. As it was in the wrong format it did not contain the required declarations. The directors were found to have breached their duties by not ensuring the right declaration was used.

Further issues arose in respect of disputes over communications between the auditors, management and the directors. The absence of a record in the minutes of advice on the misclassification of debt said to have been provided caused a problem with a “I did” “You didn’t” contradiction in evidence.

Similar issues arise in recent litigation involving James Hardie Limited’s announcement to the market that an asbestos liability fund was “fully funded”. Directors’ claims about which documents they saw and what they did or did not approve were tested against the minutes. Their failure to correct the minutes was crucial to what the courts saw as the final position.

	Martin Fensome Audit and Assurance T:+61 3 9018 4666

Think Ahead. Talk to Bentleys Today.

READ MORE…

x

Name
Email
Phone
Location Select an office nearest to you AdelaideBrisbaneCorporate RecoveryHead OfficeMelbourneNewcastlePerthSydneyTamworth
Specialty Choose a specialty to help you Accounting Services Audit and Assurance Business Advisory Corporate Recovery Financial Planning Internal Audit Property and Construction Superannuation Taxation Consulting Trusts and Estates

Comments/Enquiry