LEGL 201 Responsibilities of Directors in Overall Financial Management Assessment 2 Answer
Company is operated and run by the directors and the directors are intelligent, experienced and conscientious people who takes all the imperative decisions to run the business effectively. However, they are required to maintain the true and fair view of the recorded financial statements in the books of accounts of company. .In the given assessment we will consider the duties and responsibilities of the directors of a company. For ascertaining the duties and relevancy of director’s role towards the financial management of the company, we will enlighten some decided case laws and consider the relevant details of these cases in our assessment. The report will state the active responsibilities of directors in the overall financial management of the company. We will also discuss about the impact of negligence of directors towards the finance of the company. However, directors perform as an agent of the company but have a legal and continue position in the management of the company hence they should also have a sound knowledge about the financial management of the company.
Duties mentioned in the Corporation Act, 2001
As per the duties mentioned in the Corporation Act, 2001, a director has several duties and responsibilities to perform towards the company such as to perform in the best interest of company and all other stakeholders, to look after the overall management functions of the company, to avoid the conflict of interest and to take the decisions regarding the major changes in the company (Hutley, & Hartford-Davis, 2019). The breach of any duty or responsibility by a director can cause him with penalty of a certain amount or the punishment in case of any severe matter. The directors are the main pillars of the management of a company, what they perform for the company’s management will affect the entire stakeholders of the company hence they are liable for the overall management of the company i.e. for financial management also. One single unfair or wrong decision of directors can cause worst to the company and on the other hand one favorable decision of the directors can results into large growth of the company (Jones, & Welsh,2012). Hence the good or bad of the company is somewhere depend upon the director’s management skills and intelligence. Also the directors should be aware with the financial aspect of the company so that they could take the relevant steps in case of any issue which they cannot initiate in the absence of relevant knowledge. Being an active agent of the company, the directors should take participation in the financial management of the company for protecting the interest of the company (Kamalnath, 2015).
Critical evaluating of the statement of directors are intelligent, experienced and conscientious people
In the given assessment, a statement is written that “The directors are intelligent, experienced and conscientious people. In the light of significance of the matters that they knew, they could not have, nor should have, certified the truth and fairness of the financial statements, and published the annual reports in the absence of the disclosure of those significant matters” i.e. the directors have enough capabilities and intelligence to certify the financial statements of the company as fair and true (Hill, 2014). Hence in case of incorrect and bias information in the annual report or annual report presented by the directors without the disclosure of significant facts would be consider as failure on the part of directors of the company (Langford, 2016). For bringing more clarity to the matter we will consider the facts of decided case law of Middleton J, ASIC v Healey (2011) 196 FCR 291. As per the federal Court’s decision in this case, the directors are required to involve actively in the financial management of the company. The director’s active participation in the financial management of the company will impact the future expectation of director’s duties to perform reasonable care and skills in regards of approving the financial reports of the company. So far the directors are responsible for the entire management decisions of the company but they did not have any involvement in the financial aspect of the management (Legg, 2019). They used to accept and approve the financial statement of the company on the opinion of the auditors of the company because the directors did not have the sufficient skills and knowledge of the finance to certify the financial statements. As per the decision made by the federal Court in case held of Middleton J, ASIC v Healey (2011) 196 FCR 291, the directors were in the breach of duty as they failed to notice the omission of billions of dollars of short-term debts in the financial report. The Court states that as per the duty of due care and diligence, the director should have sufficient knowledge and skills to read the financials of the company and to notice the mistakes or omissions made by the financial personnel (Hill, 2012). As in the held of Carlill v Carbolic Smoke Ball Company  EWCA Civ, it is given that as not enough on the director’s part to act in good faith and in the interest of the company, to follow the prescribed procedure with due care and to rely upon the financial professionals for the findings they made in the financial reports of the company. For actual and active participation in the finance of the company, the directors should recheck and evaluate the financial reports with their own available data and they should not entirely believe the reports issued by the financial professionals (Ong, 2016). The Court also added that there should be criteria for the directors to understand the affairs and basic financial concepts of the company; they should have accurate financial literacy, knowledge and relevant skills (Virgo, 2018).
In the given and other relevant case laws, it was emphasized that directors must have a basic or conceptual understanding about the business of the company to balance the familiarity with the financial status of the company (Welsh, & Morabito, 2014). He should not always rely upon the findings of auditor but should have an enquiring mind to find the omissions in the auditor’s financial report. For this purpose it is obligatory for the directors to write the disclosures for the significant matters in their annual report so that the stakeholders can have the proper understanding about the facts presented and the director’s involvement can also be seen.
While making the disclosures about the financial matters, the directors also come to know about several important factors and through this it becomes easy for them to find out the mistakes or omissions in the financials on the part of auditors. Hence the directors are equally responsible for the omission made in the financial statement of the company and for presenting the auditor’s certified financial data in their annual report without any enquiry or revaluation i.e. it requires the approval of directors as well