Directors Duties and the Notion of True and Fair Essay Sample

Directors Duties and the Notion of True and Fair Pages
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After the failure of ABC Learning’s, Centro Properties and Hastie Group many companies and their accounts came under scrutiny. The collapses of these high profile company’s had a weighty effect on creditors, customers, employees, government and other stakeholders. The questions raised in each of these cases, is to what extent is it the director’s duty to ensure that the financial statements of a company provide a true and fair value. In answering the above research question, we’ll raised the culpability of directors, the financial causes for each of the three companies, the financial disclosures issues raised, and pinpointing the similarities in each case and ways to prevent such collapses in the future.

Section 285-318 of the Corporations Act, relates to the financial reporting provisions, including directors’ reports, director’s duty to exercise their powers with care and due diligence. For example, failure to sustain accurate financial records the directors may be subject to penalty. Further, Section 297 states that a company’s financial year statements and notes must give a true and fair view of: the financial performances of the company, disclosing entity or registered structure; and the financial position and performance of the consolidated entry if consolidated financial statements are necessary. Supplementary info must be incorporated in the notes to financial statements if the financial statements and notes prepared would not give a true and fair value and or failing to comply with the accounting standards. (Corporations Act 2001).

For the past few years, ABC’s brand is commonly recognised, with a market share of roughly 25%. Up until July 2000 when the federal government announced the childcare subsidy, the childcare industry was hardly moneymaking. It expanded too rapidly, and the huge majority of new Centre’s have come from acquisitions it overpaid for, which have been funded by a combination of hefty debt and equity. In March 2001, it had 21 Centre’s in Queensland and 10 in Victoria, in 2007 across four countries the company had 2,238 Centre’s. The unnecessary debt it’s taken on to pay for all its acquisitions has put ABC in risk of bankruptcy. The company had net debt of $20.2m, in its first full year after listing, this had increased to $1.7bn, by the end of December 2007. (Intelligent Investor Share Advisor 2008).

What believe to be the main financial disclosure raised in ABC’s case, derives to the treatment of revenues and earnings in those critical half-year accounts. Ultimately it hid the fact that a quarter of its Centre’s were losing money. The payments from developers that funded loss-making Centre’s, were included as typical revenue. Additionally, most of ABC’s balance sheet made up of valuations on intangible assets worth billions of dollars. Given that 70% of its assets were intangibles and ABC Learning’s promptly increased in profits through acquisitions, Pitcher Partners should have raised queries about the company’s interpretation underlying the valuation of assets. The methods of financial reporting being engaged here are deliberately creating apparent shareholder value, when, in fact, that shareholder value allied with child-care licenses is centered wholly upon the company’s future net cash flows, which may or may not be realised. (Sydney Morning Herald 2009).

Centro’s an expansionist property group for its aggressive, highly-geared expansion strategy. Its investors are withdrawing support for its strategy, causing Centro’s stock price to drop by 92%. During the global credit crisis, the group’s business model, which is dependent of debt has become unsustainable. Losses of $1.1b and $856m in write-downs, the company will not pay its half-year distribution, in an effort to reserve cash and avoid selling any of its assets. Centro is all but doomed when it’s suspended redemption on several of its unpublicized property funds. (Intelligent Investor Share Advisor 2007).

The case addressed the board’s responsibilities concerning the review and approval of an entity’s financial statements. Centro’s, one of the country’s highest-calibre boards were found to have failed their duties because they had not picked up an error that should’ve been spotted, breaching their duty of care and diligence. In this case it was the classifications of borrowings and disclosure of material subsequent events after the year end. The board failed to disclose several short-term multi-billion dollars’ worth of liabilities before signing off on the accounts. Further, this case highlights that the Centro’s board of directors should have be aware of significant events that could possibly effect the truth and fairness of the company’s financial statements. The directors did not act untruthfully but instead were found that they failed to take all the required steps of them. In the absence of the disclosure of those important materials, they could not have, nor should have, certified the financial statements and published the annual reports. (BDO 2011).

Hastie Group, one of the nation’s prominent providers of building maintenance and technical services, undeniably knew of the warning signs before going under. Hastie’s difficulties centered on the many mistakes of previous management. In 2011, the company’s revenue totaling $1,852m up from $1,655m the previous fiscal year. It was the net loss after taxes that sent the company over the edge. The company’s net loss after taxes totaling $87.8m down $127.6m from the previous fiscal year. Further, long term debt were simply too high and gearing was at levels specifying great risk. It’s often a recipe for disaster when the company is borrowing new money to pay off old ones. To simply sum up Hastie Group story, prior management took on too much debt acquiring companies, and increasing costs from these acquisitions. (The Bull 2012).

$20 million in accounting irregularities were identified during Hastie collapsed, possibly because of mismanagement in acquisitions, poor strategy implementation and monitoring by the board. When the disclosure documents enclosed misleading or deceptive statements the directors of Hastie Group may have actually breached their duties and the corporation’s law by failing to certify the group’s financial statements gave a ”true and fair view” of the financial position and performance of the company and offering securities. (The Age 2013). The unexpected collapse of the Hastie Group has strong parallel with the failures of ABC Learning’s and Centro Properties. A number of comparisons can be made from an accounting perspective. All three cases sought rapid growth of market share which carried significant threats evidently not reflected in their financial statements. There will be scrutiny over the standard expected of directors to take reasonable care and diligence. ASIC is likely to be a little more active this time around after the collapses of these high profile companies. To prevent such collapses in the future, the company’s will need to set aside their search for market share and reduce their debts. (University of Western Sydney 2012).

References:

BDO 2011, Lessons to be learnt for directors of adis, viewed 10 April 2013,

Corporations Act 2001, True and fair view, viewed 10 April 2013,

Intelligent Investor Share Advisor 2007, Centro announces writedowns, viewed 10 April 2013,

Intelligent investor Share Advisor 2008, Not so easy at ABC, viewed 10 April 2013,

Sydney Morning Herald 2009, Lessons to be learnt from abc learning collapse, viewed 28 April 2013,

The Age 2013, Wake-up call on director disclosures, viewed 10 April 2013,

The Bull 2012, Warning signs of Hastie’s collapse were for all to see, viewed 10 April 2013,

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