“It smacks of lack of controls”: What can SMEs learn from the Freedom Foods debacle and the role of directors?

Aussie cereal brand Freedom Foods is being investigated by the corporate watchdog, with the Australian Securities and Investments Commission launching a probe into serious accounting failings that resulted in the misreporting of financial results to shareholders.

Freedom’s shares have been suspended since June, when former chief executive Rory Macleod and chief financial officer Campbell Nicholas were ousted from the business. Two board members are also set to retire early next year.

The furore opens up questions about how the directors and board members allowed the ASX-listed business get into such a mess, but it also shines a light on the responsibilities of directors and board members more broadly.

At the end of the day, for a listed business like Freedom Foods, the directors’ responsibility is to the shareholders, says Remco Marcelis, accountant and founder of Standard Ledger.

“It’s up to every director to satisfy themselves,” he says.

“Are they comfortable with what’s gone on? Are there enough controls in place?”

In this case, there were reportedly payments made to employees that the board was unaware of. Legally, that should never happen, Marcelis explains.

“It does sound like there was not that attention paid … it smacks of lack of controls.”

What are auditors for?

There’s also the issue of write downs in order to overstate profits. Freedom reportedly spent large sums of money on equipment, but did not put that down as an expense, instead waiting for the assets to depreciate.

This in itself is a valid accounting strategy in some cases, Marcelis explains, if it’s in line with policies laid out by the CFO. But not if the intention is “to drive an unreasonable view of profitability”, he says.

“From a director’s perspective, understanding those things on the balance sheet and the policies that go with them — when you’re a certain size — is appropriate.”

Marcelis says it also appears like there may have been an auditing failure at some point, and the directors arguably should have picked up on that too.

“In theory, there’s nothing wrong with adopting policy, but they’re done in accordance with underlying commercial realities, not a desire to unduly influence a profit outcome,” Marcelis explains.

“Don’t tick the box for policy, [ask] does this make commercial sense?”

What should SMEs look out for?

So, if you’re heading up a small business or a startup, and building out a board of directors for the first time, how do you make sure your governance structure is bulletproof?

A spokesperson from the Governance Institute of Australia tells SmartCompany it’s all about getting a mix of skills on the board.

“What skills do you already have, what else do you need?” they say.

Marcelis stresses the importance of having at least one person with a head for numbers, who is able to dissect and understand the financials of the business.

He notes, however, that a lawyer would likely recommend having a legal mind, and so on and so forth.

“It is essential that your board is able to address existing and emerging governance issues, including having oversight of workplace culture,” the Governance Institute spokesperson adds.

“Small businesses can potentially have more challenges in getting access to quality directors, but they really should be aiming to get the best quality they can, with the right skills.

“This is a very important consideration for small to medium size organisations, where it is so important to get the basics right.”