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Accounting is Just the Beginning

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A Wake-Up Call for Company Directors

It has not been a great 5 years for finance companies and their directors. The level of duty required by directors has been tested in recent court cases on both sides of the Tasman. The New Zealand cases of Feltex Carpets and Nathans Finance, together with the Healey (Centro) case in Australia, have helped put the spotlight on the role and responsibilities of directors – particularly in respect to reviewing and approving a company’s financial statements (and offer documents).

While the above court cases centre on high profile companies, they do hold valuable lessons for all businesses, big or small:

  • Although directors can rely on expert advice, they cannot abdicate their own fundamental responsibility to review and approve a company’s financial statements.
  • Directors must have sufficient knowledge of conventional accounting practices and must apply that knowledge based on information they received as directors.

Sections 131 to 138 of the Companies Act 1993 outline the key responsibilities of a director and it is a good idea to familiarise yourself with them. For example:

135 Reckless trading
A director of a company must not— (a) agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or (b) cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.

137 Director’s duty of care
A director of a company, when exercising powers or performing duties as a director, must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances taking into account, but without limitation (a) the nature of the company; and (b) the nature of the decision; and (c) the position of the director and the nature of the responsibilities undertaken by him or her.

Sections 373 to 386F deal with offences and penalties and as in the news recently, include custodial prison sentences, good view of the harbour or otherwise!

So how does this apply to you?

As a director you have a responsibility to everyone that relies on your company’s financial statements. Therefore it is also your responsibility to fully understand what your financial statements mean and thus ensure the best possible return for everyone. There are many entrepreneurial Kiwi’s out there but when it comes to financial matters and accounts, they change the subject or just take a “she’ll be right” attitude. Take some time to understand these, get a decent accountant who’ll explain things to you and set up some regular reporting systems – in the long run, your business will be so much better for it!

If you need help with your finances, systems or reporting contact Nick on 0800 ASK NICK or email nick@abac.co.nz.

2 Responses to A Wake-Up Call for Company Directors

  1. Thank you! Yes, we do believe that a good accountant doesn’t stop at checking your books. There is a lot more that we can do for our clients by being proactive in our approach and offering the right advice where it’s needed.

  2. NJ cpa says:

    Really great blog you have here. Your banner ‘Accounting is only the beginning really does reflect your blog; especially with this post where you branch into how to be a better leader.