Academic Publications, Research

Getting it right: directors’ assessment of information

Ignorance is not an excuse, and courts are not sympathetic to executives who fail to ask questions. Being a board member is not just an opportunity to wear a nice suit and be a figurehead.  Every individual director is legally obliged to understand all aspects of discharging their duties, and to ask questions if they do not.

When directors sign corporate documents and approve disclosures, they had better know what those documents and disclosures mean, and what the contents really say, or risk huge fines, being banned from boards, and even jail.

In this paper, we offer a simple solution – it’s only limitation being that it requires emotional maturity.  The suggested solution is therefore certainly worth a try.

Abstract

Purpose: The Centro case judgment highlights, directors’ decisions are held to increasing standards of due care and diligence. In Centro, there were two central issues in the 2007 annual reports: current liabilities were classified as long term and guarantees entered after the balance sheet date were not disclosed.
Design: This is a conceptual paper, drawing upon archival material, including statute law, case law, regulatory guidance material and media releases in Australasia.
Research Implications: We assess the probability and impact of the misstatement of current liabilities on shareholders. We evaluate some potential biases that may have shaped the decision making by experienced directors. We draw upon the audit literature to shape the understanding of professional scepticism. Two elements of professional scepticism are identified: process scepticism and sceptical behaviour. We present arguments that both process scepticism and sceptical behaviour are important to directors to meet the growing expectations of “an enquiring mind
Practical Implications: Directors do have a different role to that of auditors; incorporating scepticism can enable directors to fulfil their responsibility to shareholders. By applying information and process scepticism, directors of companies can reduce the likelihood and magnitude of litigation costs and out of court settlements.
Novelty: Whether a director has exercised an appropriate level of reasonable care and skill and/or due diligence has been a matter for courts to decide. Such retrospective analysis leaves directors vulnerable to the uncertainty of whether their individual interpretation of diligence matches up to that of the presiding judge.
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To read the full-text peer reviewed journal article, visit:
Kerri O’Donnell , Barry Hicks , John Streeter , Paul Shantapriyan , (2015) “Getting it right: directors’ assessment of information”, Managerial Auditing Journal, Vol. 30 Iss: 2, pp.117 – 131, DOI: http://dx.doi.org/10.1108/MAJ-08-2014-1077
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3 thoughts on “Getting it right: directors’ assessment of information”

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