Directors don’t need to be finance experts for financial statement reviews

While a company’s finance department deals with generating financial statements, a corporate advisory partner stressed that company directors must ensure the statements are correct to avoid potential severe penalties.

HLB Mann Judd corporate advisory partner Katelyn Adams stressed that it is part of their duties to review and approve year-end company reports.

They must “exercise independent judgement, assess the information presented to them, and satisfy themselves that the financial statements provide a fair and accurate representation of the company’s position,” Adams said.

While company directors may be worried that their lack of financial background may impede their ability to properly assess company accounts, Adams said that from a governance perspective, directors must ensure that they are confident that the reports have been properly prepared, and approve them accordingly.

This requires the directors to review assumptions behind the figures, assess whether the reported results are consistent with board expectations, and identify where any changes may require an explanation or further inquiry, Adams said.

In addition, Adams said that directors must ensure that they scrutinise internal controls and the compliance framework used to generate financial information.

Directors who raise these questions are not impeding the reporting process, but fulfilling their responsibilities and duties as a director.

Further, Adams said that directors could do research on items subject to management judgment such as asset valuations, provisioning methodologies, and revenue recognition policies – as external auditors often have areas of focus.

“It can be tempting to focus on the numbers, but the words and footnotes of the report often contain the most useful insights. It includes related party transactions, changes in accounting policy, and going concern considerations, which are often matters that shareholders and institutional investors are likely to be most interested in,” Adams said.

It could also be beneficial if directors approach disclosures in the company’s financial statements from the perspective of shareholders – to ensure the disclosures meet the needs of investors.

“Directors who engage with year-end reporting – challenging the accounts, assessing internal controls, interrogating audit findings, and reading beyond the headline figures – are well placed to meet their duties and requirements,” Adams said.

“In an increasingly complex and scrutinised operating environment, effective oversight of financial reporting is not simply a compliance exercise; it is a cornerstone of good governance and long-term business success.”