Financial Literacy for Lawyers Directors and Investors
THE CENTRO CASE REINFORCES THE NEED FOR DIRECTORS TO BE FINANCIALLY LITERATE
The strong imperative for company directors to be financially literate has been unequivocally reinforced by the Federal Court’s decision in the Centro case handed down in 2011.
The Court found that the defendant directors of Centro had failed in the performance of their duties to properly read and understand the financial statements and to apply the knowledge they had or should have acquired to perform that task. Although the Court found that they had not acted dishonestly, each director was aware or should have been aware of the relevant accounting principles which would have alerted each director to the apparent error in the financial statements relating to short-term debt. It was simply not enough for the directors to rely solely on management and their advisors.
Financial Literacy for Lawyers, Directors and Investors deals with how Financial Statements are put together, the key Financial Statements (what they reveal and can’t reveal), the balance sheet, profit and loss account, analysis of cash flow and key accounting concepts. It also covers the difficult area of “cosmetic accounting” with descriptions of many common approaches taken to present company results in the best possible light and suggestions of where and how to search for the “unknown unknowns.”
The book is essential for all directors, particularly those without an accounting background. The authors are Andrew McRobert, who has been teaching and writing on financial statements for more than 30 years, and Ronnie Hoffman, a journalist experienced in the areas of finance, business and management. Published in September 2010, the book deals with the Australian standards and requirements.
- The three key financial statements: their interdependence, what they reveal and what they cannot reveal
- Historic financial statements, and their reliability as estimates of a company’s future performance and position
- The key accounting concepts, which are the bedrock of financial statements, explained in accessible terms and their relevance made clear to lawyers
- Creating reality from the bedrock statement:
- Notes to the accounts: why they are equally crucial in the presentation of a complete picture of a company’s health and prospects
- Cash flow analysis: why is it so much more important than profit-and-loss analysis in understanding a company’s true financial performance and position
- Cosmetic accounting: how to detect deliberate attempts to mislead, and how to combat deceptive and misleading accounting.