Directors and financial reporting

This is Information Sheet 183 (INFO 183). It explains your financial reporting responsibilities as a director.

This information sheet outlines:

• your general duties as a director
• your company’s duty to keep proper books and records
• your financial reporting obligations
• your financial knowledge obligations
• your relationship with the auditor

Your general duties

Directors have a duty of care and diligence under both general law and the Corporations Act 2001 (Corporations Act).

A director is an essential component of corporate governance. Each director is placed at the apex of the structure of direction and management of a company.

What you must do

As a director, you have a core, irreducible requirement of involvement in the management of the company. You must take reasonable steps to place yourself in a position to guide and monitor the management of the company.

Your responsibilities are not limited by your particular background knowledge and experience. You must become familiar with the business of your company and how it is run, and ensure that management is running it properly.

If you take on a role with special responsibilities, such as the chair of an audit committee or the role of an executive director, you must carry out these increased responsibilities with appropriate care and diligence.

You must take reasonable steps to comply with, or secure compliance with, the financial reporting and audit requirements of the Corporations Act, including the requirement to keep proper books and records.

Your company’s duty to keep records

Your company must keep written financial records that:

• correctly record and explain the company’s transactions and its financial position and performance
• enable true and fair financial statements to be prepared and audited.

Your obligation extends to ensuring that your company’s records are complete and accurate by adopting appropriate accounting policies and designing and implementing appropriate controls and processes. This obligation exists regardless of whether books and records are maintained in-house or outsourced to a third party, or whether they are electronic or in hard copy.

For more information, see Information Sheet 76 What books and records should my company keep? (INFO 76)

Your financial reporting obligations

Your company may be required to lodge financial reports with ASIC that are accompanied by a directors’ declaration that includes:

• whether, in the directors’ opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due
• whether the financial statements and notes comply with accounting standards, and give a true and fair view of the financial position and performance of the company and any consolidated entity
• if your company is listed, whether the directors have been given the declarations required by the chief executive officer (CEO) and chief financial officer (CFO).

What you must consider

Each director has a duty of skill, competence and diligence in the understanding of the financial report that is to be disclosed to the public.

You must read, understand and focus on the contents of the financial report. You must apply your own mind to, and carry out a careful review of, the financial report and directors’ report, determine that the information they contain is consistent with your knowledge of the company’s financial position and affairs, and ensure that material matters known to you – or that should be known to you – are not omitted.

In reading the financial report, you should:

• ensure, as far as possible and reasonable, that the information included is accurate
• question the accounting treatments applied
• examine the adequacy of disclosures and whether any matters have not been disclosed that should be disclosed.

When reviewing the financial report, you should inquire further into the matters revealed by that financial report.

Using external advice and information

You are entitled to delegate to others the preparation of books and financial reports. However, you are expected to take a diligent and intelligent interest in the information available to you, to understand that information, and apply an inquiring mind.

In making inquiries, you might request that management obtains professional accounting advice on whether treatments to be applied in the financial report comply with accounting standards and give a true and fair view. You must ensure that any such advice is provided by a suitably qualified accountant with an appropriate level of expertise and knowledge of the accounting standards, and that such advice is unbiased and objective.

You should also read and focus on the content of any market announcements of results, presentations to investors or briefings to analysts.

Financial reporting quality

To ensure that financial reports are of high quality, and that useful and meaningful information is provided to users of financial reports, entities should:

• have a culture focused on quality financial reporting
• have appropriate governance arrangements, and processes and controls
• ensure its directors' financial reporting knowledge is adequate
• apply the accounting standards
• apply appropriate experience and expertise to financial reporting, and the underlying processes supporting the information in the financial report, including engaging external experts where appropriate
• consider accountability and internal incentives for company management that are focused on financial reporting quality.

Companies must have appropriate processes and records to support information in the financial report rather than rely on the independent auditor.

Information should be produced on a timely basis and be supported by appropriate analysis and documentation for the independent audit. This will support the quality of financial information in the market and enable auditors to focus on their role in providing independent assurance on the financial report.

Audit committees

An audit committee plays an important role in ensuring financial reporting and audit quality. However, the existence of an audit committee does not diminish your responsibility for the company’s financial report.

CEO and CFO declarations

You must ensure that the CEO and CFO have sufficient qualifications, knowledge, competence, experience and integrity to undertake their roles.

If your company is listed, you must receive declarations from the CEO and CFO concerning the company's financial records, and whether the financial report complies with accounting standards and the requirement to give a true and fair view. These declarations in no way reduce your responsibility as a director for ensuring that the financial report complies with the requirements of the Corporations Act.

Your financial knowledge obligations

Directors are important gatekeepers in the financial system in providing meaningful and useful information through financial reports. The quality of the financial report is key to ensuring confident and informed markets and users.

What you should know

You are required to have sufficient knowledge of accounting principles and practices. You should be appropriately educated and up-to-date on the current accounting standards and financial reporting requirements of the Corporations Act, particularly where these are relevant to your company and any changes affecting your company’s financial report.

What you must do

You must have an appropriate level of financial knowledge, understand your company’s business and how it is reflected in the financial report, and apply your knowledge of transactions and events to the financial report.

Financial knowledge includes knowledge of such matters as:

• financial reporting
• financial products or instruments
• financial assessments for capital and funding decisions
• financial processes and controls
• how decisions can impact on the future financial health of a company.

The extent and areas of financial knowledge required may vary depending upon the companies of which you are a director and factors such as the industry and the use of complex financial products.

Even if you are not an accounting expert, you can challenge the accounting treatments applied in the financial report, seek explanations and appropriate professional advice supporting the accounting treatments chosen – particularly where the treatment does not reflect your understanding of the substance of an arrangement (e.g. financial instruments classified as equity where the intent is to borrow).

For example, although calculations supporting impairment or valuation of significant assets can be complex, you should review the cash flows and assumptions used in the calculations prepared by management or experts, bearing in mind your knowledge of the business, the assets and the future prospects of the business.

Your relationship with the auditor

The external auditor provides an independent opinion on the financial report. You are responsible for the financial report and cannot rely on the external auditor when forming your own opinion on the financial report, as this would undermine the objective of an independent audit.

You should ensure a quality audit to support the quality of financial reporting to the market and users. 

See also Information Sheet 196 Audit quality: The role of directors and audit committees (INFO 196).

What you must do

Directors, management and other officers must provide auditors with all explanations and information that they require for the audit. Transactions, risks and difficult accounting judgements that may affect the financial report should be brought to the auditor’s attention.

You should ensure that the independence of the auditor is not compromised in fact or appearance. The Corporations Act requires the audit committee of a listed company to review non-audit services and whether they affect auditor independence. The Act also requires a declaration by the auditor on their independence to be included as a part of the directors’ report.

Your company must pay the reasonable fees of the auditor. You should ensure that the fees are adequate and do not have the potential to adversely affect the quality of the audit.

Financial reporting quiz

This financial reporting quiz helps you test your knowledge of financial reporting.

Useful contacts for financial knowledge information

The following organisations may offer financial literacy courses, publications and other resources. They are provided for information purposes only and are not approved or endorsed by ASIC.

• The Australian Institute of Company Directors
• CPA Australia (see ‘Financial literacy’ section on right-hand side of page)
• Chartered Accountants Australia and New Zealand
• The Institute of Public Accountants

For more information

• Corporations Act, sections 180(1), 286(1), 295, 295A, 296(1), 297, 298(1AA), 300(11A), 300(11B), 300(11C), 312 and 331
• Regulatory Guide 22 Directors’ statement as to solvency (RG 22) for guidance on the solvency declaration
• Regulatory Guide 260 Communicating findings from audit files to directors, audit committees or senior managers (RG 260)
• INFO 76 What books and records should my company keep?
• INFO 196 Audit quality: The role of directors and audit committees
• Federal Court judgment: Australian Securities and Investments Commission v Healey [2011] FCA 717
• Contact ASIC on 1300 300 630.

Important notice

Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. We encourage you to seek your own professional advice to find out how the applicable laws apply to you, as it is your responsibility to determine your obligations.

You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases, your particular circumstances must be taken into account when determining how the law applies to you.