Australian Court Case Sheds Light on Directors' Responsibilities for Compliance with Accounting Standards
The Federal Court of Australia has handed down penalty orders in a case involving financial reporting issues (the 'Centro case'). The penalty orders follow on fr om an earlier decision on 27 June 2011 wh ere the Court found directors had breached their duties when they signed off on financial reports that failed to disclose significant matters.
The Centro case includes allegations brought by the Australian Investments and Securities Commission (ASIC) over two financial reporting matters: the classification of liabilities (between current and non-current) and the disclosure of guarantees given.
Under the Australian Corporations Act 2001, financial statements are required to comply with Australian Accounting Standards (equivalent to IFRSs) and directors are required to approve the financial statements. Accordingly, non-compliance with Accounting Standards or the approval processes is a contravention of the law. In the most recent judgement, the Court refused the directors' applications to be exonerated from their contraventions and made declarations that all directors and the Chief Financial Officer contravened the law.
The Centro case considered the obligations of directors in relation to Australian financial reporting, including the extent to which directors can rely on management and external advisers, the degree of financial literacy required of directors, and the approval process for financial statements. It has been the matter of considerable debate in Australia.
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