13th June 2013

Prepared by the Financial Reporting Council (FRC)
September 2012

Follow up actions for the survey's findings for the 13 June 2013 FRC meeting

Recommendations and responses

Many respondents suggested the development of a range of education courses targeted specifically at directors, such as 'Accounting 101 for directors' and 'The things I should watch out for and the questions I should ask on the audit committee'.

The AUASB worked with the AICD and the Institute of Internal Auditors to revise and reissue the 2nd edition of 'Audit Committees - A Guide to Good Practice'. This document was extensively reworked by AUASB in particular, in order to include legislative change, recent case law and current good practice. The Guide was launched in Sydney in September 2012 by the then Parliamentary Secretary to the Treasurer, the Hon. Bernie Ripoll, MP and attracted some media interest.

Some respondents did not appear to appreciate that these types of courses already exist, which suggests to the FRC that the organisations providing these courses could do more to market their availability and that perhaps they should partner with ASIC to develop an information page on the ASIC website listing the names of these organisations, with their contact details and links to the pages on their websites with information about the courses they provide.

ASIC has developed a webpage on financial literacy for directors at ASIC's Webpage which has links to webpages of appropriate course providers. Connecting pages have been developed by ICAA, CPA Australia and AICD that focus on financial literacy for directors, providing links to training and/or relevant resources.

Some respondents acknowledged that these courses do already exist but said that they were too expensive, were not easily accessible (especially for directors located in remote areas or overseas), were often pitched at the wrong level (some too simple, others too detailed) and in some cases required too great a time commitment for busy directors.

Quite a few suggested that the best form of training would involve online interactive courses provided free of charge or at low cost, but that of course begs the question as to who would fund the development of these courses and keep them up to date.

A number of respondents noted the importance of having a diverse range of skills among the directors of a company and that this necessarily meant that not all directors would have the same level of accounting or financial acumen. They also noted the important role that companies (particularly listed companies) can play in addressing this issue, such as:

verifying the financial credentials of directors as part of the recruitment process and arranging for additional training for directors who may benefit from it;

including in the board induction process a briefing from internal/external auditors on accounting policies and issues of particular significance to the company's business;

having the internal/external auditor run periodic board workshops on specific accounting issues relevant to the company's business;

having the external auditor present an annual accounting update to the entire board prior to them signing off on the year-end accounts; inviting all directors as observers to meetings of the audit committee so that they can learn from the directors with accounting/audit expertise; and

inviting non-executive directors as observers to analyst and investor presentations so that they can hear directly from market professionals on the accounting and financial issues of concern to them.

A number of respondents noted the recent Centro decision and the finding of the Federal Court that it is the duty of every director to read the financial statements carefully and to consider whether what they disclose is consistent with the director's own knowledge of the company's affairs.

Some respondents mentioned that, in light of Centro, the ASX Corporate Governance Council's Corporate Governance Principles and Recommendations might usefully be amended to recommend that listed entities disclose:

in their corporate governance statement, the steps they undertake to ensure that their directors have the accounting knowledge needed to understand and sign off on the company's financial statements;

in the section in their annual report setting out the biographies of their directors, the accounting/finance qualifications and experience of the directors and, for those who do not have an accounting/finance background, the additional training that they have undertaken to enable them to understand and sign off on the company's financial statements.

In August 2013 the ASX Corporate Governance Council released its consultation paper on a proposed 3rd edition of the Corporate Governance Principles and Recommendations. The Council's consultation package is available at ASX Webpage.

ASX has separately released a consultation paper on governance related changes to its Listing Rules and to Guidance Note 9. The ASX consultation package is available at ASX webpage.

There is a new recommendation 2.6 in the third edition of the Principles and Recommendations that picks up on the work of the taskforce and recommends that a listed entity should: (a) have a program for inducting new directors and providing appropriate professional development opportunities for continuing directors to develop and maintain the skills and knowledge needed to perform their role as a director effectively; and (b) disclose a summary of the main features of that program.

The IPA offers an Executive Certificate of Corporate Governance; a structured program of five online interactive sessions addressing changes to accounting standards, corporate regulation, compliance, the Fair Work Act and risk management.

The Australian Prudential Regulatory Authority (APRA) intends to develop an information pamphlet for distribution to new (and current) Board members. It will give a concise and plain-English view of what APRA expects of board members in their oversight of prudential matters.

One respondent suggested that listed companies should consider a mentoring program teaming directors with financial expertise with those who might benefit from working closely with someone with that expertise.

Many respondents also suggested:

compulsory accreditation for all directors requiring them to have passed an exam or otherwise demonstrated a minimum level of financial literacy before they can act as a director;

compulsory continuous professional development requirements for all directors, requiring them to keep up to date with developments affecting directors, including changes in financial reporting laws, accounting standards and regulatory expectations.

The AICD has introduced new continuing education requirements for member directors.

Some other suggestions made by respondents to improve the level of financial literacy of directors in Australia included:

to assist directors of smaller companies, ASIC could prepare a basic fact sheet or brochure on the duties of companies to have proper books and records and of directors to understand the company's accounts (such as those prepared by the Australian Taxation Office (ATO) on the role and responsibility of SMSF trustees), which it sends electronically to all new companies as and when they are registered and which it also makes available on its website for accountants to print out and give to their clients.

ASIC's new webpage on financial literacy for directors includes information on maintaining proper books and records, and directors' duties to understand the company's financial report. The information is available at ASIC's Webpage.

Someone (e.g. ASIC, AICD, the accounting bodies or training organisations) should develop a short, free, online 'test your accounting knowledge' app for directors to self- assess whether they need more accounting training. (A director who does the 'test your accounting knowledge' app and is advised he/she could benefit from more accounting training could be referred to the list of training providers on the ASIC website).

The ICAA, CPA Australia, AICD and ASIC have formed a joint working group to explore the feasibility of a 'test your knowledge' tool. Progress is currently being made by the joint working group on development of the content for such a tool. It is anticipated that the tool could be released by the end of 2013.