The Federal Court judgement against eight former and current Centro directors on Monday ruled that the directors had failed to exercise due care and diligence by signing off the financial reports for Centro Properties, Centro Property Trust and Centro Retail Trust for the year ended 30 June 2007. These incorrectly classified more than $2 billion in debt as non-current and did not disclose a $2.8 billion debt guarantee used to buy a US shopping centre portfolio.
Directors often rely on specialist knowledge and advice provided by management and external advisers. However there are limits to that reliance. The directors argued they had relied on management and company auditors PricewaterhouseCoopers to make sure the accounts were correct.
Justice Middleton said in his judgment “The basic concepts and financial literacy required by the directors to be in a position to properly question the apparent errors in the financial statements were not complicated.” He pointed out that the directors failed to see the obvious errors because they all took the same approach and relied on other advice. No director stood back and considered the financial statements for himself.
Justice Middleton’s judgement sends a clear message to boardrooms across the country about corporate accountability. There is an expectation that each member of the board must bring and apply their own skills and knowledge when declaring financial statements are true and fair.
ASIC have sought orders to disqualify the directors and officers from managing any corporation and asked the court to impose pecuniary penalties on them.
The Company Directors expressed its continued concern about the ongoing confusion between the roles of non-executive directors and management.
In an environment where the complexity of financial reporting standards and their application continues to increase, the role of company directors continues to become even more onerous. It is important for all company directors to have an understanding of the business which they oversee, as well as a basic understanding of the financial position of the company.