Directors' financial literacy faces test

Auditors and other financial professionals are also being asked to appraise how financially literate Australia's corporate boards are, in a survey launched late last week by a taskforce set up by the government's Financial Reporting Council.

It follows a sharp focus on financial literacy among Australian company directors sparked by a Federal Court verdict on Centro, handed down last June, in which Justice John Middleton found that eight directors of the collapsed property group had breached their duty by approving accounts that failed to disclose billions of dollars in short-term debt.

Justice Middleton ruled that directors had a responsibility to "read, understand and focus upon" financial reports before they signed off on them - a task that he said required "diligence" and financial literacy - and should not rely on advisers to detect errors.

Kevin Lewis, the chief compliance officer of the Australian Securities Exchange and the chairman of the taskforce in charge of the survey, told BusinessDay that there was an "absence of any empirical evidence about financial literacy of directors in Australia".

Mr Lewis said that although the Financial Reporting Council's taskforce was set up shortly before the Centro judgment was handed down, the decision had given it "a degree of currency".

The Australian Securities and Investments Commission, which brought the case against the Centro directors, has warned directors to ensure their skills are adequate. "You are expected to have financial literacy and basic accounting knowledge," the chairman of ASIC, Greg Medcraft, told company directors in a speech late last year. "If not, retrain."

The survey's stated aim is to "gain an insight" into the financial literacy of Australian company directors and to understand "how any perceived gaps in their understanding of financial issues might be addressed".

It is looking at directors of ASX 200 companies, other listed entities, superannuation funds and not-for-profits, and includes questions about their qualifications, training, ability to understand accounting concepts and "the personal responsibility of all directors to review financial statements".