ASIC v Godfrey - Risks for directors and senior executives of companies who fail to comply with the Corporations Act 2001 and Accounting Standards
ASIC regularly alerts directors and officers of their obligations regarding the financial reporting requirements of the Corporations Act 2001 and the Accounting Standards. Directors and officers ignore these obligations at their peril because a failure to comply may have civil and criminal consequences, and result in reputational damage. ASIC v Godfrey is a case in point.
Mr Godfrey was the former managing director of the Banksia Financial Group. Banksia Securities Limited (BSL) was one of the entities in the group. BSL’s primary business involved raising money from the public through the issue of debentures, and advancing those funds to third party borrowers for property investment and development. For various reasons, receivers were appointed to the assets and undertaking of BSL in 2012, and in 2014, BSL was placed into liquidation.
ASIC brought civil proceedings against Mr Godfrey in the Federal Court, alleging he had failed to take reasonable steps to ensure that BSL complied with various provisions of the Corporations Act 2001 (Act) relating to BSL’s annual financial report (provisioning for bad and doubtful debts) for the years ended 30 June 2011 and 2012, and the half year financial report for 31 December 2011. ASIC alleged that the provisioning was inadequate.
ASIC also alleged that Mr Godfrey:
- Failed to have a sufficient understanding of AASB 139 (replaced by AASB 9 from 1 January 2018) for the recognition and assessment of impairment of financial assets, including mortgage investments
- Failed to appreciate that BSL’s policies and procedures were inadequate for the purpose of identifying and dealing with impairment and fair value issues, and
- Failed to bring these matters to the attention of his fellow directors.
ASIC’s case related to four loans that it alleged had been under-provisioned as required by AASB 139, resulting in the inaccurate reporting of profit/loss in the relevant years.
Mr Godfrey and ASIC presented a Statement of Agreed Facts to the Court and Mr Godfrey agreed to the Orders sought against him by ASIC. In a judgment handed down on 22 December 2017, the Court made declarations that Mr Godfrey had breached the Act as alleged, disqualified him from managing corporations for five years, and imposed a pecuniary penalty of $25,000. The pecuniary penalty was at the lower end of the scale because of the length of the disqualification order, there was no dishonesty, Mr Godfrey cooperated with ASIC and admitted liability at an early stage, the losses to debenture holders were relatively limited, Mr Godfrey considered that AASB 139 had been appropriately considered and applied, and there was no evidence of any previous wrongdoing.
In a warning that all directors and senior executives should take particular note of, the Court held that none of the steps that Mr Godfrey should have taken to discharge his obligations in the circumstances “was an obligation that could be abrogated by reliance on the management of BSL, its internal Audit and Corporate Governance Committee or its external auditors.” (BSL was audited).
Lessons for Australian companies, directors and senior executives
This case is a timely reminder to Australian companies, their directors and senior executives of their responsibilities under the Act with respect to all aspects of financial reporting including maintaining proper financial records (section 286), ensuring that financial statements comply with Australian Accounting Standards (sections 296, 297, 304 and 305), ensuring that the annual directors’ report is accurate and complete (sections 298 to 300B) and for CEO’s and CFO’s of listed companies, that they do not make the required declaration where its accuracy may subsequently be called into question (section 295A). For listed companies, financial statements that do not properly state the company’s financial position may result in a breach of the continuous disclosure rules.
Directors also need to be mindful of their directors’ duties, (sections 180 to 183) and their obligation to take all reasonable steps to ensure compliance with financial reporting obligations (section 344). A failure to do so may result in the imposition of a pecuniary penalty (maximum $200,000), an order disqualifying them from managing corporations, and a compensation order. Criminal charges may be laid where a director acts recklessly or dishonestly (section 184) and if found guilty may face a fine of up to 2,000 penalty units (currently $420,000) or five years’ imprisonment, or both. A civil breach of section 344 attracts the same range of penalties as apply to a breach of directors’ duties, and where the contravention of the section is dishonest, attracts the same penalties as may be imposed under section 184.
Apart from the legal consequences associated with ‘problem’ financial reporting, reputational damage to the individuals and the entities involved almost always ensues once the media becomes aware of the facts. This is inevitably compounded if ASIC becomes involved, as it regularly issues a media release where an entity adjusts its financial statements as a result of ASIC’s intervention.
BDO’s IFRS advisory team stresses the importance of boards being well versed on Australian Accounting Standards, Corporations Act duties and ensuring that their companies have effective internal controls. If you require any assistance in this regard, please contact one of our IFRS Advisory team members.
Written by Stephen Newman, General Counsel, BDO East Coast Partnership