Centro Judgment: The dawn of the new Australian Director

Overview

The qualification process for the Directors Club just got a whole lot tougher. The comfy board seat is a thing of the past, now it’s time for Australian company directors to take stock, raise their game, or get out of the boardroom.  The recent judgement by Mr Justice Middleton of the Federal Court in the Centro case is more than just journal filler. If you are a Director, or Non Executive Director (NED), of an Australian company then print out this judgement today and ensure that everyone on your Board has a copy.

By way of background, a change to the accounting processes within Centro in 2007 resulted in the incorrect disclosure of short and long term liabilities in the company’s annual reports (discrepency of approximately US$2 billion). The disclosure of these reports was overseen by some big boardroom heavyweights including Peter Wilkinson (Coles/ Myer) and James Hall (BHP) –all ‘intelligent, experienced and conscientious people’  but, importantly, a breach nonetheless.

ASIC alleged that the directors had breached their duties under sections 180 and 344 of the Corporations Act and, amongst other things, the board had not ensured that the CEO and CFO had provided the declaration of compliance required by section 295A.

As the regulator sharpened its knife, the ‘Centro eight’ offered some desperate defences, including the reliance on the advice given to them by PWC and executive management, as well as the complexity in shifting from one financial reporting methodology to another.

These were considered but ultimately discarded by Justice Middleton, whose 128 page judgement included the following key findings:

  • The buck starts and stops with the board. So ask the simple questions, take a diligent and intelligent interest in the information available to you and apply an enquiring mind to the responsibilities placed upon you as a company director.
  • Directors should have sufficient knowledge of conventional accounting practice and apply that knowledge based upon the information that they have, or should have, if director responsibilities are carried out adequately. If there is a shortfall in knowledge here then it needs to be addressed immediately.
  • Duties and liabilities cannot be distinguished or transferred by simply relying on a tick of approval from a suitably qualified auditor, accountant or your management team.
  • If you are faced with a report, document or presentation of ‘voluminous material’ from your management team then ask for more time to understand it. The complexity and volume of information that you receive in your board packs cannot be an excuse for your failure to properly read and understand financial statements, or any documents put to you for that matter.

What next?

The expected standard of care and diligence that the courts will apply when assessing the duties and responsibilities of Australian company directors has increased to a level of ‘almost perfection’. It is anticipated that many directors, especially, NED’s, will either refuse to take board seats, or pay greater attention to the compliance frameworks that exist within these entities before taking up each position.

However, many have argued that if the GFC or numerous high profile corporate collapses was not enough to increase the competency levels of Australian directors, then judgements such as these could, and should, raise the boardroom bar. 

UK Bribery Act and its implications for Australian businesses.

Fraud, corruption and bribery scandals are making daily headlines in the newspapers at the moment (minus one famous UK tabloid red head). The ‘beautiful game’ has been one of the biggest sources of murky deals with FIFA leading the line.

Bryan Robson, the former England International and current Manchester United Ambassador, went from Captain Marvel to Captain Corruption in an undercover interview sting, whilst Bernie Ecclestone, the head of Formula One, can now add allegations of bribery to the ‘controversies’ section of his Wikipedia page.

It is perhaps timely then that the UK Bribery Act came into effect at the beginning of the month and will have implications for Australian businesses that operate in the UK, or UK companies that have employees or agents within Australia.

Under the Act, a company will automatically be guilty of an offence of ‘failing to prevent bribery’ if any employee or agent who performs services for that company commits a bribery offence. The only defence is the demonstration of ‘adequate procedures’ to prevent bribery.

What are these procedures? Well, applicable Australian companies should be able to satisfy themselves that they can demonstrate the following:

  • Proportionate procedures – start by implementing clear and practical policies and procedures that all of your employees, and agents, have access to.
  • Top-level commitment – the board must create a culture in which bribery is never tolerated. As the UK Parliamentary Commission told Rupert Murdoch last week- the buck stops at the top. Remember, culture is not “what we do around here”, it’s “what we do around here when nobody’s looking.”
  • Risk assessment – as part of your enterprise risk management program, include an assessment of the bribery risks that your company faces through your employees, agents and/or service providers.
  • Due diligence – make sure that any identified bribery risks are treated with adequate controls, including staff training on your specific policies and all service providers being made aware of their obligations under your policy. The implementation of a whistleblowing program is also a critical part of an effective program.
  • Communication – ensure all staff, agents and third party service providers are aware of your policy or program.
  • Monitoring and review – don’t just write a policy and put it in your top drawer. Consider ongoing training, staff surveys and ad-hoc audits.

ASIC proposal to improve unlisted property scheme disclosure

This month ASIC has released Consultation Paper 163 Unlisted Property Schemes: Update to RG 46 (CP163) to assist retail investors to understand the risks associated with unlisted property schemes.

These proposed changes have been brewing since a review of the area in 2008 where the regulator identified several disclosure concerns across the industry, such as insufficient detail around scheme projects and the omission of certain key risks, such as currency hedging within the scheme portfolio and the risks associated with potential valuation shortfalls or discrepancies.

The CP 163 proposals include:

Benchmark Disclosure: The proposed disclosure model sets a benchmark across six risk areas for how a product issuer should address certain risks in establishing its business model and compliance procedures. Crucially, in a similar fashion to ASX regulated entities, an issuer will be required to state in their PDS and other disclosure material whether it meets the benchmark, on an if not, why not basis.

Form of Disclosure within the PDS: Expect changes to the format and presentation of unlisted property PDS documents as ASIC attempts to bring these documents in line with CP 155: Prospectus disclosure: Improving disclosure for retail investor. These changes will include a structured investment overview section as well as reductions in the length of the PDS.

The deadline for comments on these proposals is the 6th September 2011, with the proposed commencement date for the benchmarks and revised disclosure principles being 1 July 2012.

AML/CTF Update – New Customer Identity Verification Procedures

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 has been consolidated to incorporate the amendments introduced as a result of the Combating the Financing of People Smuggling and Other Measures Act 2011, which came into force on 1 July 2011.

The revised AML/CTF Act primarily incorporates a variety of changes to the way the remittance sector is governed and registered. In addition, section 35A, Division 5A, will now enable Reporting Entities to disclose certain personal information to credit reporting agencies for identity verification purposes.

This method of identification is subject to certain procedures being followed by the Reporting Entity, including:

  • Disclosures to the Individual subject to the process, including the reasons for making the request;
  • Retention of verification information; and
  • Access to verification information.

Under sections 35H, 35J and 35K of the Act, an offence will be committed if verification information is accessed without authorisation, access to verification information is obtained by false pretences, or disclosure of verification information is made without authorisation.

AFSL Executive Workshop

If you are an AFS license holder, you must ensure that your responsible managers and representatives receive ongoing training.

CompliSpace’s “on-the-go” workshops are designed to keep you up-to-date with all the latest changes and fast track the development of new knowledge and skills. The next workshop will be held in Sydney on 24 August 2011, for more information on the event click here.

If you would like to know more about any of the topics covered in this blog or how CompliSpace can assist, please feel free to contact one of our compliance consultants on (02) 9299 6105 or contactus@complispace.com.au.