The Australian Corporate Governance Regime - Assignment Example

Auditors and CFO Responsibilities Institution Date Introduction The Australian Corporate governance regime requires corporations to regularly present reports on the financial performance and position. The Australian Corporation Act governs how financial reports should be presented in Australian jurisdictions. The Act demands that the company present a true and fair view of how it is performing. It is an offence to omit or misrepresent material matters in the company’s annual reports. The duties of ensuring the financial reporting of a Corporation is true and fair fall upon company officers and directors. These company officers commit a breach of their duties under the Corporations Act if they fail to ensure financial reporting is true and fair. Issue Has peter breached his duty under the Corporation Act for failing to disclose material matters that would have shown Forever potential losses in the next trading period? Law Financial reporting is one of the most important Corporate Governance element regulated by the Corporation Act 2001(cth): the Act. The Act in Section 297 asserts that all reporting entities in Australian jurisdiction must present financial reports that present the company’s financial position truly and fairly 1. Section 295(4) of the Act, also deals with financial reports and requires company directors to make a declaration that financial reports made public are a true and fair view of the organization financials2. The Company’s Chief Financial Officers bears great responsibility as regard the accuracy and trueness of the company’s financial reporting. Section 295(A) asserts that Chief Financial Officers must ensure that the Organization’s financial reporting is in line with Accounting Standards and make a declaration to that effect3. The Act also requires directors to furnish additional information alongside the financial statement if they know the financial statement published are not a true and fair view of the Corporation’s financial position. Discussion Peter as the Chief Financial Officer and director of Forever Insurance has several duties to fulfill as regard the company’s financial reporting. According to Vines v ASIC [2007] NSWCA 75 it is his responsibility to ensure that Forever’s financial statements are a “true and fair” view of the financial performance and position in the reporting period4. Section 297 of the Corporations Act 2001 (cth)5 specifically requires thecompany’s’ financial reports and note be true and fair presentation of the performance and financial position of the organization. The reference to true and fair in section 297 creates a broad provision that covers most situations where reporting entities might present financial reports that are misleading to the public. The broad provision arises from the impracticality of creating disclosure rules or accounting standards for every scenario where the company financial reports are not true and fair6. Australian accounting standards require that all information of material nature be presented accurately for financial reports to be judged as true and fair 7. Consideration of the materiality of the issue under investigation is one of the key considerations in determining whether financial reports are true and fair. In Paragraph 9 of AASB 1031 Accounting Standards, information is considered material if its non-disclosure, omission or misstatement can individually or collectively8: a. Influence the economic decision making of users of the company’s financial statements. b. Affect the responsibility of the reporting entity to the management or governing body. Non-disclosure, misstatements or omission are material if they impact on the economic decisions of readers of a Corporations Financial reports. However, materiality is contextual and the size and nature of the misstatement or omission is key in determining whether it is material9. Courts will most likely use a combination of nature and size, or just consider the two factors individually to judge whether a matter is material. Peter as the CFO of Forever Insurance failed in his obligation in ensuring all material information was contained in the Company financial reporting for the year. The omission of the information of the potential losses from the bushfire is material. Instead of ensuring the potential losses from the bushfire claims were reported, Peter presented financial reports that misstated that Forever would probably make a small profit the next year. Peter was also in breach of his duty in section 295(4) of the Act as regard a Director’s declaration of the trueness and fairness of financial reporting. The CFO and the Chief executive officer are obligated to make declarations that commit to the accuracy and fairness of the Company’s financial reports. Section 295(4) of the Corporations Act 2001, requires that the CFO make a statement that the financial reports are indeed a true and fair view of the corporation’s performance and position10. The declaration must also state whether the financial reports are compliant with the AASB accounting standards for financial reporting11. The declaration should state whether the director/CFO believes the company is able to repay its debts when they are due. Secondly, it requires a statement on whether the financial reports are compliant with provisions of the Corporation Act regarding financial reporting. The Financial reports of Forever Insurance were not true and fair as required by the Corporation Act and Accounting standards. However, Peter as the CFO of Forever went ahead to make the declaration that the Financial Statements and notes of Forever Insurance were a true and fair view of the insurance firm’s position and performance. He also declared that the financial statements complied with provisions of the Act and AASB accounting standards relating to financial reporting. Peter knew that Forever Insurance would most probably make a loss the next financial year but still declared the statement true and fair despite knowing they omitted material information. Peter can be held personally liable as directors/officers who are reckless, careless or fraudulent in making director’s declarations are held to be personally liable12. Peter as the CFO and a director of Forever has failed in his obligation to ensure the company is complaint with the Australian Corporate governance regime. According to ASIC v Fortescue Metals Group Ltd FCAFC , directors are responsible for ensuring that their company’s monthly, quarterly and annual financial reports contain accurate and reliable information13. The information should not mislead any reader who relies on it to make economic decisions. CFOs also have an ethical and legal responsibility to ensure that their company’s financial reporting is true and fair. However, Peter’s conduct while preparing and approving forever’s financial statements shows he breached his obligations14. Peter clearly breached many provisions of the Corporation Act by presenting information that omitted future potential losses and misrepresented that the Insurance Company would probable turn a loss. Peter also breached his duty to exercise reasonable skill, diligence and care as a director of Forever insurance. Section 180 of the Corporation Act requires that officers be diligent when relying on advice from others. Peter failed to act diligently as he accepted Belinda’s advice about the impact of the fire without not he ring to analyze the matter closely. InASIC vRich[2009]NSWSC 1229 asserts that directors are supposed to be reasonably informed about the subject matter of a decision before making the decision15.In ASIC v Healey &Ors [2011] FCA 717, non-executive directors were held to in breach of section 180 as they made a faulty decision about matters known to them or matters they ought to have known well16. In ASIC v Healey &Ors [2011] FCA 717, the directors were held liable for releasing financial reports that significantly understated the company’s current liabilities position. Conclusion Peter is in breach of many of the provisions of the Corporation Act regarding financial reporting. First, he breached section 297 by failing to ensure the financial reports were true and fair. Secondly, he breached section 294 by declaring that the financial statements were true and fair while knowing the opposite. He also breached section 180, by making a decision based on third-party information he ought to have known was not reliable. Question 2 Is Jane liable for breach of his duties under the Corporation Act for failing to fulfill his duties as an auditor of Forever Insurance? Law Auditor’s have a number of obligations as regard the preparation and presentation of Corporation’s financial reports as set out in Section 174 of the Corporation Act 2001(cth)17. In subsection 2(a), auditors are required to give their opinion on whether the financial statement “give a true and fair view of the matters required by section 169” and other provisions of the Corporation Act that require the corporation “to give a true and fair view of the company's affairs”. They are also supposed to give their opinion on whether they are compliant with applicable accounting standards. Discussion According to Daniels v AWA (1995) 13 ACLC 614, Jane as the head of the audit committee of Forever Insurance bears a number of responsibilities as regard the corporation’s financial reporting18. In this case, Jane was presented with financial reports that failed to take into consideration the impact of the bushfire claims on the profitability of the insurance firm. This omission is a serious material matter that should have come to the attention of Jane as an auditor of Forever Insurance. However, Jane failed to question why this material matter was omitted from the financial statement submitted for her approval. Section 174, 2a(i), requires any auditor to give his opinion in whether the financial statement of a company give a true and fair view of the organization’s financial position. However, the financial statements of Corporations cannot be regarded as true and fair if they omit or misstate material matters19. The reports presented by Peter to Jane omitted material information about the bushfire claims, they also misstated that Forever was likely to turn a small profit in the next trading period. The bushfire claims were well known matters to Jane and the audit committee. In fact, Jane and members of the audit committee were relieved to learn that the impact of the bushfire claims would not affect the company’s profitability. However, they did not apply their mind to the matter and to find out why the event that was supposed to result in a flood of claims had become insignificant. It is also obvious that the financial reports of Forever were not compliant with section of the Corporation Act that related to financial reporting. Under section 296 require that the CFO declare the financial statements are compliant with accounting standards. On the other hand, section 297 requires that the reports presented be a true and fair view of the Corporation’s financial position. However, the financial statements of Forever Insurance failed to meet these requirements and this should have come to the attention of Jane before she approved the statement for release the public. Conclusion Jane is liable for breaching her obligations as a company auditor as set out by section 174 of the Corporations Act. Jane must remember that auditors are an important element of responsible corporate governance and therefore she should have not approved Forever’s financial statements for the year. Bibliography A. Articles/Books/Reports Brown, Philip, and Ann Tarca. "2005—It's Here, Ready or Not: A Review of the Australian Financial Reporting Framework." Australian Accounting Review 15, no. 36 (2005): 68-78. Robins, Fred. "Corporate governance after Sarbanes-Oxley: an Australian perspective." Corporate Governance: The international journal of business in society 6, no. 1 (2006): 34-48. B. Cases ASIC v Healey &Ors [2011] FCA 717 Daniels v AWA (1995) 13 ACLC 614 ASIC v Rich [2009] NSWSC 1229 Vines v ASIC [2007] NSWCA 75 Pacific Acceptance v Forsyth & Others (1970) 90 WN (NSW) 282 ASIC v Fortescue Metals Group Ltd FCAFC 19 C. Legislation Corporation Act 2001(cth) Accounting Standard AASB 1031, Paragraph 96 Read More