The Centro case:  Where to from here?

The final decision in the Centro Case was handed down in the Federal Court on 27 June 2011. The case addressed board responsibilities regarding the review and approval of an entity's financial statements. The Federal Court found the Directors of the Centro Properties Group had breached their duty of care and diligence.

The case revolved around the failure of the company to classify billions of dollars of debt as “short term” in their financial statements and the level of inquiry made by the directors about this decision. The wider implications of the court’s findings are yet to be widely assessed.

Greg Medcraft, ASIC Chairman, was quoted saying, “This case makes clear directors’ responsibilities to apply their skills and knowledge to the financial statements of the company”. Mr Medcraft said Justice Middleton’s judgment on the legal duties of directors and management sent a clear message to boardrooms across the country about corporate accountability.

“The central question in the proceeding was whether the directors were required to apply their own minds to, and carry out a careful review of, the proposed financial statements and the proposed directors report, to determine that the information they contained was consistent with the director's knowledge of the company's affairs, and that they did not omit material matters known to them or material matters that should have been known to them,” Mr Medcraft said.

In addition, the case warned directors about the dangers of relying on management and advisors (in this case, the auditors), without critically evaluating the information put before them. There is a minimum standard expected of boardroom participation that directors must meet, which means the key elements of a company’s financial position are something directors should understand and be able to communicate accurately to the market.

Therefore, directors need to ensure that they apply the necessary level of care and diligence in reviewing and approving financial reports, and cannot delegate this important task to senior management and/or auditors. Directors are expected to make the necessary enquiries to highlight any inconsistencies based upon knowledge of the company that they should reasonably be expected to possess.

In light of this case, directors need to be mindful of:

• Delegating of tasks to senior management and advisers, and their reliance upon these advisers without sufficient critical analysis
• Having the expected minimum financial knowledge to understand and appropriately analyse the financial reports that they are required to approve
• Ensuring that they sufficiently participate within board meetings and adequately discharge their duties of care and diligence.

For further information refer to the case summary produced by the Australian Institute of Company Directors, or contact your usual Grant Thornton advisor.