Australian Securities and Investments Commission v Healey  FCA 717
This recent decision of the Victorian Federal Court (known as the Centro case) illustrates that even "intelligent, experienced and conscientious" directors who act honestly may fall short of the level of care and diligence required of directors when approving financial statements. In particular, the case confirms that:
- A certain level of financial literacy is required of directors
- Directors must bring their own minds (and knowledge) to bear on the documents they approve - they are not entitled to rely entirely on management or external advice.
In the Centro case the annual reports of the companies failed to disclose significant matters that were well known, or ought to have been well known, to the directors (including both executive and non-executive directors).
The Judge held that directors must take responsibility for documents that they approve having read, understood and focused upon those documents with the knowledge they have (or should have) in their capacity as directors.
This means that they should:
- "Acquire at least a rudimentary understanding of the business of the corporation and become familiar with the fundamentals of the business in which the corporation is engaged"
- "Keep informed about the activities of the corporation", although this does not require the director to have "a detailed awareness of day-to-day activities"
- "Monitor the corporate affairs and policies" and "maintain familiarity with the financial status of the corporation by a regular review and understanding of financial statements"
- Have "a questioning mind".
Directors' duties are not limited to their particular background or expertise and directors are not entitled to rely exclusively on management and external advisers in relation to a matter that falls specifically within the Board’s responsibilities. That said, a director is not required to have "infinite knowledge or ability", and is "entitled to delegate to others the preparation of books and accounts and the carrying on of the day-to-day affairs of the company".
Directors do not need to check the accuracy of figures or accounting treatment in financial statements. However, they are expected to have sufficient financial literacy to understand basic accounting conventions and they are required to read and understand the financial statements and "then bring the information known or available to [them] in the normal discharge of [their] responsibilities to the task of focusing upon the financial statements, to ensure, as far as possible and reasonable, that the information included therein is accurate."