Importance of Due Diligence in Disclosing Financial Statements for Company Directors

Directors have a lot of responsibilities, and one of the most important ones concerns the financial statements of a firm. They have to disclose and file returns of the company and will have to face criminal sanctions if there are errors in their reports. In this article, we look mainly at why directors should be very much diligent while doing their duties.

Why is Due Diligence Necessary?

Due diligence refers to ‘becoming careful’. In other words, it means taking the necessary steps to avoid committing a tort or an offence. These days, when a company faces a controversy, directors are in question, and they need to face the public and the law. Thus, it isn’t only about getting criminal charges. If you aren’t careful while working with financial statements, you will also create a negative impact on the people. This will directly impact your brand positioning.

Specific Requirements for Directors on Financial Statements

Directors of a company are responsible for the safekeeping and maintenance of accounting, bookkeeping, and related records. These statements would then explain the transactions and the current financial position of the firm. Furthermore, they have to make sure that the accounting has been done in accordance with the accounting standards in Malaysia.

In Malaysia, an Annual General Meeting (AGM) has to be held each year. In the AGM, the director should prepare a report in accordance with a resolution of the board which presents the current financial position of the company, including the profit and loss and the current affairs. This has to be done along with presenting the audited profit and loss account and the balance sheet.

Furthermore, every balance sheet and profit and loss account needs a statement and a statutory declaration by the director. Again, the statement needs to be in pursuant with the accounting standards and should give an accurate representation of the financial position of the company, including profit and loss. The director should ensure the correctness of the official documents, including the profit and loss account and the balance sheet.

How Important is Financial Due Diligence While Submitting Reports in Malaysia?

Very important. Financial Due Diligence is more essential to directors than any other people.

Let us take an example.

Once, the Bursa Malaysia (Malaysian Stock Exchange) decided to take action against a CEO and two directors of a listed public company for being late to submit financial reports. Even if the CEO defended saying that the day to day business was overseen by an audit committee, internal and external auditor, and a CFO. He was still liable according to the law. The High Court verdict was that relying upon auditors for detecting a defect in financial statements wasn’t an excuse for directors to forget their duties.

All this says is that even if financial statements have been prepared by others in the firm, directors should be able to analyse the statements and supervise them. With legal sanctions in place, inadequate financial statements are going to be hazardous. This means financial statements compilation in Malaysia should only be done by experts.

What About Non-executive Directors?

There is no difference between an executive and a non-executive director, at least in terms of the law. You see, it is actually very difficult for lawmakers to differentiate between the former and the latter, given that non-executive directors have different kinds of responsibility across various businesses. Thus, creating a standard for each different one of them isn’t possible.

So, instead of that, every director is taken as the same in Malaysia and despite the difference in skills, everyone should have the same responsibility when it comes to the breach of duty.

Finally, even if the directors are not differentiated, it is likely that the court will impose different sanctions in the case of a breach. However, this depends on the nature of the case.

Characters Needed to Become a Director

A company director should always abide by honesty and good faith. They should be always ready to inquire about the relevancy of information given to them. At any time, the minimum requirement for a director is to know about the latest financial affairs of a company. The good ones are also able to create an opinion based on the data given to them.

Having at least a basic knowledge of accounting and finance is a must for directors in Malaysia. Well, they play very important roles while disclosing financial statements. The accounting and finance understanding has been specified as a duty for both executive and non-executive directors.

Conclusion

If something controversial happens to a company, it’s usually the director who needs to answer to the law and the public. Thus, they should be very careful while disclosing financial statements to the firm at the AGM and at other places like the court. Furthermore, if someone else is compiling the financial statements, they should be as capable, or more capable than the director. Finally, directors and non-executive directors should have at least a basic understanding of accounting and bookkeeping.