This report helps to develop an understanding on ASIC v Healey case (2011). The report also focuses on the responsibilities/duties of directors. In addition, the report also discusses the reasons why the directors contravene their responsibilities/duties. Furthermore, the report focuses on evaluation of judgments of court/tribunal along with reasons for the judgments in terms of Corporations Act. The report also helps to develop an understanding on why the responsibilities/duties of the directors should be fulfilled.
The ASIC v Healey case is also known as the Centro case. The Australian Securities and Investment Commission (ASIC) in October 2009 carried out proceedings against the six non-executive directors and two executive directors of the Centro organization. ASIC came with the statement that every defendant of the Centro entities breached their statutory duties/responsibilities of diligence and care. The directors breached sections 180(1), 344(1) and 601FD (3) under the Corporations Act 2001 (Lowry, 2012). The directors approved the financial statements, which were consolidated for the financial year ending 30 June 2007 for the Centro organization.
The classification of financial statement was consolidated inaccurately, as $1.5 billion was shown as debt in non-current liabilities although in actuality it was current liabilities. Moreover, the directors was also unsuccessful in disclosing US $1.75 billion in guarantee, as it was found as a material event that had entered post to the balance date. The approval of the report and financial statement by the directors was not merely the question regarding the technical oversight.
The information, which was not disclosed in the reports, came out with serious implications on shareholders and on share market. Risks were not being evaluated due to lack of information. The main objective of the Corporations Act 2001 states that the financial statements and director’s report should be appropriately prepared and published. This situation occurred when Centro external auditor PWC (Price Waterhouse Coopers) and Centro management, reviewed the report and financial statements and were unsuccessful in recognizing any errors in the financial accounts (Pugliese, Nicholson and Bezemer, 2015).
Before the hearing of the Centro organization case, the former CFO, Mr. Nenna, confessed that sections 180(1), 344(1) and 601FD (3) under the Corporations Act 2001 were breached by the directors. Therefore, the case carried out by ASIC on the directors of Centro entities focused on the each director.
The directors of the Centro entities have breached sections 180(1), 601FD (3) and 344(1), in which their duties and responsibilities breached are as follows:
Section 180(1): In this section, it is stated that directors should set the standard objectives and should exercise their authorities and fulfill their duties along with the degree of diligence and care.
Section 601FD (3): In this section, it is mentioned that officers should carry out their duties and directors of the company should take all necessary steps efficiently to make sure that an organization is complying with the provisions stated in the Corporations Act 2001 (Giordano, 2011).
Section 344(1): In this section, it is stated that directors should consider the contraventions of the reporting obligations and financial record keeping.
The information from the management and external auditors was not delivered to Board especially on the financial aspect. Moreover, the directors were not concentrating properly on the financial statements. In addition, without the proper evaluation directors approved financial statements. As, the judge Middleton stated that directors cannot make excuse that management did not delivered the proper information. The Board cannot control the information they are receiving along with the overflow of information (Sharp, 2012). The Board and directors should make the policy related to the briefing of information concerning to financial statements. The directors did not read and drafted the notes and the financial statements along with the documents provided to them for making decisions. The directors simply skimmed the financial statements and based on the surety of the CFO and auditors approved the financial statements.
The directors have not interrogated advisers and management for analyzing the financial statements effectively. The directors did not focus on the procedure of approval of financial statements. They did not utilize their knowledge of accounts and material accounting standards. As, in financial statements the current liabilities were represented as non-current liabilities (du Plessis and Meaney, 2012). The directors before approving the financial statements should take advice from the external advisors, but the directors of Centro entities did not preferred to do so. The directors of the Centro entities were not attending the audit meetings prior to the approval of financial statements. The audit meetings could have helped in getting appropriate information related to financial accounts.
The decision
The judge Middleton declared that the directors of Centro organization breached the sections 180(1), 344(1) and 601FD (3) under the Corporations Act 2001. The directors were unsuccessful in taking the appropriate steps to establish compliance with the Corporations Act 2001. The directors were also not able to make proper utilization of their authority, as they were unsuccessful in analyzing the financial statements of the Centro entities with accuracy (Banerjee and Humphery-Jenner, 2016). Moreover, the directors were unsuccessful in implementing their degree of diligence and care, which was needed while evaluating the financial statements of the Centro entities.
The judge Middleton held:
The directors of the Centro organization cannot substitute their reliance on the suggestions of the management just for their concentration and evaluation on the other significant matter, which falls particularly in the responsibilities of Board’s due to the obligations of reporting. The Corporations Act 2001 places responsibility of sanctioning the financial statements on each director and Board of the Centro entities (Gamertsfelder, 2013). As a result, every member of the board of Centro entities was charged with the accountability of focusing and attending accounts of the company. Moreover, the directors of the Centro entities could not hand over or abdicate their responsibility to other employees within the organization. The judge also stated that directors were experienced, conscientious and intelligent people. In addition, there were no recommendations regarding that director were not carrying out their duties/responsibilities with honesty.
The judge Middleton highlighted that the proceedings was not related merely to technical oversight. The question is that whether the directors of the Centro entities are needed to implement their own brain to conduct and review carefully the financial statements of the company to propose the director’s report (Morgan and McLennan, 2011). It is also essential for the director’s of the company to determine that the data they are having is appropriate according to the knowledge of the director’s of the organization. Moreover, the directors of the Centro entities should not omit the material matters acknowledged to them or material matter that should be acknowledged to them.
In addition, Justice Middleton by depending on the law related to case confirmed that there is irreducible and strong need of the directors to be included in the management of the Centro entities. So, that the director’s of the company can take the decisions and fulfill the duties/responsibilities required at their position to assist and evaluate (Fisher and French, 2014). The directors should also understand and concentrate on the content available in the financial statements. So, that they can fulfill the responsibilities/duties enforced by the Corporations Act 2001 on them.
The directors of the company should also rely on the management and auditors for the financial accounts to collect all the information required to approve the financial statements. It is impossible for anyone to have infinite knowledge and capability, so the person depends on one another (Laing, Douglas and Watt, 2015). The directors can delegate the responsibility of preparing the accounts and books and everyday operations of the organization. The anticipation from director of the company is that they should take interest in the information they are having and should understand it appropriately. So that they can implement their enquiring brain in sanctioning financial statements of the Centro entities. The directors should focus properly on the financial statements and if there is any issue then directors should enquiry regarding issues (Prescott and Silcock, 2011). Moreover, it was also discovered that in this situation the important matters were not disclosed effectively in front of directors.
Conclusion
From the above discussion, it can be concluded that the directors of the Centro entities have not fulfilled their responsibilities accurately. The directors did not read the reports their own for accuracy. Moreover, the directors also did not interrogate the external advisors and management for confirming that financial statements were prepared effectively. To represent the fair and true financial statements confirmation is necessary. The directors sanctioned the financial statements based on assurance of CFO of the company. The directors did not carry out the duty of diligence and care properly. Moreover, the directors did not set standard objectives to exercise their duties.
References
Banerjee, S. and Humphery-Jenner, M. (2016) ‘Directors’ duties of care and the value of auditing’, Finance Research Letters, 19, pp.1-14.
du Plessis, J.J. and Meaney, I. (2012) ‘Directors’ liability for approving financial statements containing blatant incorrect items: lessons from Australia for all directors in all jurisdictions’, Company lawyer, 33(9), pp. 13-24.
Fisher, J. and French, E. (2014) ‘The big issue: Annual reports and directors’ duties: Ensuring compliance with financial reporting requirements and director participation’, Irrigation Australia: The Official Journal of Irrigation Australia, 30(3), p. 34.
Gamertsfelder, L. (2013) ‘Corporate information and the law’, Keeping Good Companies, 65(9), p. 516.
Giordano, F. (2011) ‘Company Secretary: Financial Reporting Duties of Directors-Ten Corporate Governance Lessons from Centro for Non-Executive Directors of Listed Public Companies’, Keeping good companies, 63(7), p. 390.
Laing, G., Douglas, S. and Watt, G. (2015) ‘Aspects of Corporate Delegation, Reliance and Financial Reporting: Lessons from Australian Securities and Investments Commission v. Healey’, Canberra L. Rev., 13, p. 16.
Lowry, J. (2012) ‘The Irreducible Core of the Duty of Care, Skill and Diligence of Company Directors: Australian Securities and Investments Commission v Healey’, The Modern Law Review, 75(2), pp. 249-260.
Morgan, J. and McLennan, M. (2011) ‘Demanding duties: approving financial statements after Centro’, Law Society Journal: the official journal of the Law Society of New South Wales, 49(9), p. 56.
Prescott, L. and Silcock, K. (2011) ‘Corporate law: Opes prime-fallout from Australia’s biggest stockbroking collapse’, Keeping Good Companies, 63(9), p. 546.
Pugliese, A., Nicholson, G. and Bezemer, P.J. (2015) ‘An observational analysis of the impact of board dynamics and directors’ participation on perceived board effectiveness’, British Journal of Management, 26(1), pp. 1-25.
Sharp, C.A. (2012) ‘Centro Revisiting old warnings for NFPs’, Keeping Good Companies, 64(6), p. 334.
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