DIRECTORS: CAN THEY BE HELD LIABLE FOR ACCOUNTING IRREGULARITIES IN APPROVED FINANCIAL STATEMENTS?
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Authors: Hermanus Johannes Moolman
Keywords: financial statements, directors, liability, accounting irregularities, fraud
Abstract: An investigation into South Africa’s biggest corporate fraud case, namely the Steinhoff International Holdings case, found that some of the company’s executives recorded fictitious or irregular transactions of about $7.4 billion over a period of nine years from 2009 to 2017. Although it is clear that directors committing accounting fraud can be held liable for losses suffered, the position of directors not involved in the accounting irregularities is more complicated. This study investigates whether directors of companies can be held liable for damages suffered by stakeholders who relied on an approved financial statement containing accounting irregularities and misrepresentation. By means of a black letter law methodology, the South African statutory and common law position are compared with that of Australia and Canada. Section 76(3)(c) of South Africa’s Companies Act imposes a duty on the directors of the company to exercise their powers and perform their functions with care, skill, and diligence. One of their duties relates to the annual financial statements of a company. In terms of section 30(3), the annual financial statements of a company must include a report by the directors with respect to the companies’ state of affairs and its profit or loss. Furthermore, the financial statements must be approved by the board and signed by an authorized director. Directors cannot merely rely on the opinions of auditors and accountants when approving financial statements. Although it is not expected of directors to be accounting experts or bean counters, directors should have sufficient and current knowledge of the accounting principles and practices to perform an effective review of the financial statements. In the alternative, directors should seek assistance and/or attend training to obtain these competencies.