Directors must avoid Ostrich Syndrome

New companies act: Directors responsible for financial reporting

Bury your head in the sand
When it comes to the financial reporting and legal compliance oversight roles of the board, many directors opt to stick their heads in the sand, relying on others to perform these duties. However, this “ostrich syndrome” is increasingly risky in the light of the new Companies Act, says Linda de Beer, an independent director, member of the King Committee and a facilitator for director training programmes at the Institute of Directors in Southern Africa (IoDSA).

“The ostrich syndrome can, for example, be identified when directors tend to rely solely on the audit committee when approving financial statements; when directors are willing to accept overly technical explanation by the finance people on the financial statements even though they don’t understand the terminology or the logic; when directors don’t have a handle  the company’s compliance risk areas; or when a director is unaware of the most prominent legislation with which the company must comply,” De Beer says.

Another example of the syndrome relates to the solvency and liquidity test required in terms of the Companies Act - directors who do not know what solvency and liquidity test entails, when the board is required to perform such a test, or when these are merely left to the audit committee or the financial director.

“The Companies Act makes clear that financial reporting is the legal responsibility and liability of all directors. Finance is too important to leave to the accountants; every director has a duty to know and understand enough to ask appropriate questions and see red flags,” De Beer observes.

Fail to do so, she stresses, and the Act holds directors liable for any loss, damages or costs sustained as a direct or indirect consequence of the director having signed, consented to or authorised the publication of any financial statements that were false or misleading in a material respect. “Simply put: if you are a director, you should have an appropriate level of financial knowledge, even though you might have been appointed to the board on the basis of other skills,” she warns. 

Financial acumen isn’t the only prerequisite for today’s directors; knowledge of the legal framework is also required. De Beer says the legal governance duty of directors is dealt with in King III, which states that the board should ensure that the company complies with applicable laws and considers adherence to non-binding rules, codes and standards.

In order for directors to understand compliance, they should have a working understanding of the effect of applicable laws, rules, codes and standards on the company and its business. “Compliance risk should form an integral part of risk management processes. The board should understand how risk management, and specifically compliance risk management, is structured in the company,” De Beer explains.

It is far from sufficient to offload such responsibility to a compliance officer. “Compliance is only successful if there is buy-in at an executive level and if every line manager takes responsibility for compliance in his or her area. A compliance officer can only add value if the executive team gives the role support, respect and time,” she points out.

De Beer says those directors who believe finance and law are best left to experts are opening themselves up to significant consequences and legal liability. “As directors it is necessary to get our heads out of the sand and make sure we are not exposing our companies or ourselves.  We therefore need to take the time to understand the issues and discharge our obligations, instead of only reacting when something goes wrong.”

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