Directors’ responsibilities clearer after Centro case: expert

A court ruling that directors of troubled property company Centro breached their obligations by signing off on accounts later revealed to be misleading shines a light on director responsibilities, an accounting expert says.

Some company directors have raised the alarm on the ruling, with ASX Ltd and the Reserve Bank of Australia board member David Gonski telling The Australian that on the face of it, the decision “would appear to be increasing the burden on directors”.

The Federal Court ruling centred on financial accounts, signed off by Centro directors in 2007, which were found to have not disclosed billions of dollars of short-term debt. Centro nearly collapsed that year, having embarked on a multibillion-dollar spending spree before the global financial crisis. 

The directors argued that they had relied on expert advice for the accounts; namely auditors PricewaterhouseCoopers and management.

But Justice John Middleton said each director had “relied completely on processes in place and their advisers”.

“All the directors failed to see the obvious errors because they all took the same approach in relying exclusively on those processes and advisers. No director stood back, armed with his own knowledge, and looked at and considered for himself the financial statements,” he said.

Justice Middleton also said boards could cut back on the amount of information received in order to prevent an information overload.

The Australian Institute of Company Directors this morning declined to comment on whether the Federal Court ruling raised the bar on company director obligations, or merely reflected existing rules.

But after the judgement, the directors’ body said it “continues to be concerned about the ongoing confusion between the roles of non-executive directors and management”.

“In an environment where complexity of financial reporting standards and their application continues to increase, the role of company directors continues to become even more onerous,” AICD said.

It drew attention to Justice Middleton’s comment that there had been no suggestion that each director did not honestly carry out his responsibility as a director, and that the Federal Court had not determined whether any defendant should be relieved from liability and also whether any penalties should be imposed.

But Denis Pratt, CPA Australia head of accounting policy, says the result is not surprising and simply makes director obligations clearer.

“[The decision] is not saying that board members have to be expert, but they need to ensure there’s a good communication process and that they query and question the accounts,” Pratt told SmartCompany.

“Financials are an important part of running any company, so a director needs to have a minimum standard of how accounting works.

“An important part of being a company director is an obligation to be confident that the accounts conform with the requirements.”