FAF3
Syllabus A. The Context And Purpose Of Financial Reporting A5. Duties and Responsibilities of Those Charged with Governance

A5b. Duties and responsibilities of directors in preparation of financial statements 2 / 2

Syllabus A5b)

Describe the duties and responsibilities of directors and other parties covering the preparation of the financial statements.

Board of Directors

The most prominent group of actors in corporate governance are the company’s directors. They can be either executive or non-executive directors (NEDs).

The UK Companies Act sets out seven statutory duties of directors. Directors should

  1. Act within their powers

  2. Promote the success of the company

  3. Exercise independent judgement

  4. Exercise reasonable skill, care and diligence

  5. Avoid conflicts of interest

  6. Not accept benefits from third parties

  7. Declare an interest in a proposed transaction or arrangement.

Directors' considerations

  1. The consequences of decisions in the long term

  2. The interests of their employees

  3. The need to develop good relationships with customers and suppliers

  4. The impact of the company on the local community and the environment

  5. The desirability of maintaining high standards of business conduct and good reputation

  6. The need to act fairly between all members of the company

Directors’ Responsibility for the Financial Statements

The directors are responsible for preparing the annual financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year and such financial statements must give a true and fair view.  Hence, the directors are required to:

  • select suitable accounting policies and then apply them consistently;

  • make judgments and estimates that are reasonable and prudent; and;

  • state whether they have been prepared in accordance with IFRSs.

Directors are responsible for the internal controls necessary to enable the preparation of financial statements that are free from material misstatement, whether due to error or fraud.  They are also responsible for the prevention and detection of fraud.

Financial statements of companies are usually audited.  An audit is an independent examination of the accounts to ensure that they comply with legal requirements and accounting standards.  The findings of the audit are reported to the shareholders.