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The outcome of the case between the corporate regulator and Centro Properties Group Directors over their involvement whether knowingly or not on pieces of plots on the beach had a far more reaching impact on corporate governance and laws in Australia. Very few Australians even directors of large corporations in the country knew the active role-played by ASIC (Australian Securities and Investments Commission) in litigating directors in civil cases.
This active involvement of ASIC has made the Australian corporate law system unique from the rest of the world. The regulator has been successful in enforcing director’s duties in relation to due diligence and has made them act in good faith and keeping the best interest of companies. In many countries it is has always been the duty of the company and not the regulator to enact these duties (Tomasic 2002 p.108).
ASIC’s case against the seven directors and CFO of Centro was a test case on the duties of directors on care and due diligence as stipulated under section 180(1) of the Corporations Act.
The regulator alleged that the defendant had failed to discharge the duties bestowed on them by the company with due care and diligence when they approved the financial reports for the mentioned property trusts Centro Properties Ltd, Centro Property Trust, and Centro Retail Trust for the 2007 financial year.
The regulator alleged that the financial reports they approved had material misstatements with one having close to Australian Dollars 1.5 billion of interest bearing liabilities that had been classified as non-current liabilities instead of current liabilities.
According to the set accounting standards , AASB 101 – Presentation of Financial Statements, there is need for executives in the company the CEO and the CFO need to approve the financial reports in writing, which the directors ignored and gave their approval for the reports.
Assertion on the financial reports is significant and is requisite by law for those companies that have been listed as per section 295A of the business Act. the case it can also be noted that it was the first where section 295A was considered in relation to the directors having approved financial reports lacking written declaration from CEO and CFO as required under section 295 (Du Plessis 2011, p. 59).
According to the regulator, the non-executive directors of the company had no business missing on some most important financial accounting practices such as the wrong entry of huge amounts of current liabilities which had been entered as non-current liabilities and this is credited to misleading the investors and the public at large.
ASIC also proved that the non-executive directors were liable and ought to have been charged for having relied only on advice given to them by professional auditors, who were involved in the making of the financial reports. In addition, those involved in the audit committee, the ASIC recommended they be charged for having recommended the financial reports be approved (Schwab 2011, p.96).
The regulator claimed that the actions of the non-executive director might have been their way of avoiding being liable for taking information with out carrying out independent assessment. The regulator was successful in proving they did this out of ignorance since they needed to have seen the obvious signs in that the financial report was not in order.
The regulator argued that the non-executive directors had no excuse for their actions since they are mandated to investigate and follow up on any professional advice they receive regarding financial reports. The ASIC proved that the y had acted carelessly in not seeking further advice and had breached the duties bestowed to them by the company owners.
It was clear though during the case that it gets hard to prove or gauge on which times a board should rely on information and professional advice without necessarily having to initiate further investigations or seek further advice. This was so in the case, since there had by no means been a case before where the Act, which guards the executives from liability when they relied on counsel from others (Euromoney Publications 2011).
It is evident from the case directors of a company are responsible and mandated by law to disclose each item on the balance sheet appropriately. As the judge in the case said in the ruling, ‘A director is an essential component of corporate governance.. The higher the office that is held by a person, the greater the responsibility that falls upon him or her. The role of a director is significant as their actions may have a profound effect on the community, and not just shareholders, employees and creditors.’ (Mathers 2011)
From this, we can see there was gross negligence on the part of the directors and their subordinates. They went contrary to accounting standards, AASB 101 – Presentation of Financial Statements and approved financial reports with out written declaration from the CEO and CFO.
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This case should teach other corporate directors to be diligent and careful while undertaking their responsibilities at the helm of companies. If they fail to follow the law action should be taken and they be charged in the courts for their gross misconducts (Mathers 2011 p.142).
Du Plessis, J. (2011) Principles of Contemporary Corporate Governance. Cambridge: Cambridge Univ. Press.
Euromoney Publications. (2011) Asiamoney. London, UK: Euromoney Publications
Mathers, K. (2011) ASIC wins case against Centro Directors. Australia: Australia publishers
Schwab, A. (2011) Pigs at the Trough: Lessons from Australia’s Decade of Corporate Greed. Richmond, Vic.: John Wiley & Sons.
Tomasic, R. (2002) Corporations law in Australia. Leichhardt, NSW: Federation Press