Directors' financial literacy faces test

AUSTRALIA'S company directors are being asked to judge their own and their peers' ability to read and understand financial accounts in a move that follows last year's landmark Centro decision.

By InvestSMART · 9 Apr 2012

By InvestSMART ·
9 Apr 2012

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AUSTRALIA'S company directors are being asked to judge their own and their peers' ability to read and understand financial accounts in a move that follows last year's landmark Centro decision.

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".

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Frequently Asked Questions about this Article…

What triggered the survey into the financial literacy of company directors in Australia?

The survey was prompted by increased focus on director financial literacy following last year’s landmark Centro decision, in which a Federal Court judge found directors had breached their duty by approving accounts that failed to disclose billions in short‑term debt. A taskforce set up by the government’s Financial Reporting Council launched the survey to gather empirical insight.

Who is running the directors’ financial literacy survey?

The survey was launched by a taskforce established by the Financial Reporting Council. The taskforce is chaired by Kevin Lewis, the Australian Securities Exchange’s chief compliance officer, and it also seeks input from auditors and other financial professionals.

Which types of directors are included in the Financial Reporting Council’s survey?

The survey targets directors of ASX 200 companies, other listed entities, superannuation funds and not‑for‑profit organisations to assess financial literacy across major corporate and governance settings.

What kinds of questions does the survey ask directors about financial literacy?

The survey asks about directors’ qualifications and training, their ability to understand accounting concepts, and views on the personal responsibility of all directors to review and understand financial statements.

Why is financial literacy important for company directors?

Financial literacy matters because judges and regulators expect directors to ‘read, understand and focus upon’ financial reports before signing off on them. The Centro judgment and ASIC commentary highlight that directors must show diligence and basic accounting knowledge rather than relying solely on advisers.

What did the Centro decision say about directors’ responsibilities?

Justice John Middleton ruled that directors have a responsibility to read, understand and focus on financial reports and that this requires diligence and financial literacy. In the Centro case, eight directors were found to have breached their duties by approving accounts that omitted billions in short‑term debt.

What warnings have regulators given directors who lack financial literacy?

ASIC has warned directors to ensure their skills are adequate. ASIC chairman Greg Medcraft said directors are expected to have financial literacy and basic accounting knowledge and advised directors who lack those skills to retrain.

How will the survey results be used to help investors and boards?

The stated aim of the survey 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, which could inform training and governance practices.