Directors’ obligations to comply with Accounting Standards

Directors are personally liable for ensuring their company operates in accordance with corporate governance and accounting standards.  Obligations contained in part 2M.2 and 2M.3 of the Corporations Act 2001 (Cth) (Corporations Act) outline obligations for companies to keep financial records and prepare annual financial and director’s reports.^[1]  Sections 180 and 344 of the Corporations Act require that directors act with care and diligence and ensure that compliance and financial reporting standards are met.^[2]  Failure to comply can expose directors to civil penalties, disqualification, or even criminal liability in serious cases.

Directors’ statutory personal obligations

Directors have a duty of care and diligence under both common law and section 180 of the Corporations Act.^[3]  Section 344(1) of the Corporations Act provides that:

“An officer of a company must take all reasonable steps to comply with, or to secure compliance by the company with, Part 2M.2 and Part 2M.3.”^[4]

Part 2M.2 imposes the obligation to keep financial records while Part 2M.3 governs how and when companies must prepare financial reports.

Section 295 specifies the necessary contents of annual financial reports for corporations and includes a ‘Director’s Declaration‘.  This document must declare that:

• the financial reports comply with accounting standards;
• the financial reports give a true and fair view of the company’s financial health;
• there are reasonable grounds to believe the company will be able to pay its debts; and
• the financial statements have been made in accordance with the Corporations Act.

This declaration need not be signed by all directors within a company, however, all directors are answerable for its contents and for ensuring the declaration is made. 

Section 344(1) makes clear that financial recording and reporting obligations are not solely corporate obligations, rather personal obligations of directors and other officers, who must ensure the company complies with the statutory requirements.^[5]  Directors must ensure that their company keeps adequate financial records to correctly disclose and explain transactions and the company’s financial position and performance.  A failure to comply with any of the standards discussed will entail personal legal liability.^[6]

The Centro Principles

The Federal Court decision in Australian Securities and Investments Commission v Healey [2011] FCA 717 (Centro) is a leading authority on the nature and scope of director’s responsibilities under sections 180, 344, part 2M.2, and part 2M.3 of the Corporations Act.^[7]  ASIC also pleaded that the Directors were negligent.  In Centro, eight (8) directors approved financial statements that misclassified over $1 billion in current liabilities due to several significant errors.  Consequently, the Australian Securities and Investments Commission (ASIC) alleged that each individual director breached sections 180(1) and 344(1) of the Corporations Act.^[8]

The Court was required to determine the extent of the Centro director’s responsibility for “signing off” on proposed financial statements.^[9]  The Court found the Centro directors breached their statutory duties, for failing to take reasonable steps when discharging their financial obligations.^[10]  The Court emphasised that while directors may rely on others to prepare financial records, this does not discharge their responsibility.^[11]  A failure of this duty is not excused merely because of the large quantities of information that may be contained in financial statements or the degree of accounting expertise required to understand it.^[12]

The Court explained that the duty under section 344(1), in conjunction with the general duty of care and diligence under section 180, requires directors to:

• read and understand the financial statements they approve;
• bring a basic level of financial literacy to bear on those statements; and
• identify and question matters that are apparent on the face of the documents.^[13]
•  

The Court repeatedly described these obligations as “irreducible requirements” of responsibility that cannot be delegated.  The obligation to comply with statutory accounting standards is therefore not a technical matter to be left to accountants, but a non-delegable legal obligation for which directors are personally accountable.^[14]

Where a small proprietary company is directed to prepare financial statements under part 2M.3 of the Corporations Act, the Centro principles apply without exception.  The fact that a company is small, closely held, or lacks complex financial affairs does not diminish the statutory standard.  Once a reporting obligation is enlivened, directors must take all reasonable steps to ensure that financial statements comply with accounting standards and that reports are prepared and lodged on time.

The Court in Centro did note, however, that a mere mistake or genuine oversight would not automatically amount to a lack of due care as the compliant discharge of directors’ obligations “does not require perfection“.^[15]

The reasoning in Centro has been adopted many times since 2011, most recently in April of this year in the case of ASIC v Green County Pty Ltd [2025] FCA 367, which found directors of a company personally liable for errors in financial statements, even where this information was derived from fraudulent representations made by their clients.^[16]

Enforcement against directors

The personal nature of the section 344(1) obligation means that enforcement is available even against an individual level.  ASIC has standing to commence these proceedings and investigate proactively or in response to concerns.^[17]

Enforcement by ASIC

Pursuant to section 1317E of the Corporations Act, ASIC may prosecute directors for breaches of sections 180 and 344(1).  Dishonest failure attracts criminal liability and up to fifteen (15) years imprisonment, while other contraventions are strict liability offences.^[18]  Once a declaration of contravention is made, ASIC also has standing to seek pecuniary penalty orders^[19] or disqualification orders.^[20]

Court-ordered compliance

Under section 1324 of the Corporations Act, a shareholder or other affected party may apply for an injunction compelling directors to comply with financial reporting obligations contained in part 2M.2 of the Corporations Act.

Derivative actions

Where directors persistently fail to fulfil obligations, shareholders may seek leave of the Court to bring proceedings on behalf of the company for contraventions of financial reporting obligations or breaches of directors’ duties.^[21]

Oppression remedy

Failure to provide proper financial transparency, especially in response to a valid shareholder direction according to section 293 of the Corporations Act, may constitute oppressive conduct, opening further avenues for relief.^[22]

The Centro principles reinforce the seriousness of directors’ responsibilities.  Directors of all companies must accept that financial reporting compliance is a core duty, enforceable by regulators and shareholders.

Conclusion about financial reporting obligations

For directors, lawyers, and corporate advisers, the key takeaway is that accounting standards are not technicalities.  They are legislative instruments with binding force, embedded in the Corporations Act.  Failure to comply has repeatedly led to personal liability for directors, ASIC enforcement, and in serious cases, criminal prosecution.

Ultimately, accounting standards are how the law measures the adequacy of financial disclosure.  They matter not only because they are legally enforceable, but because they give practical content to the duties of directors and officers, and to the rights of investors.  Compliance is therefore as much a legal and governance issue as an accounting one.

Links and further references

Legislation

Corporations Act 2001 (Cth)

Cases

Australian Securities and Investments Commission v Green County Pty Ltd [2025] FCA 367

Australian Securities and Investments Commission v Healey [2011] FCA 717

Other links

ASIC, ASIC’s Approach to Enforcement (August 2023)

Further information about corporate law

If you need advice on compliance with accounting standards or directors’ obligations, contact us for a confidential and obligation free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Corporations Act 2001 (Cth) pts 2M.2, 2M.3.

[2] Corporations Act 2001 (Cth) ss 180, 344(1).

[3] Corporations Act 2001 (Cth) s 180.

[4] Corporations Act 2001 (Cth) s 344(1).

[5] Corporations Act 2001 (Cth) s 344(1).

[6] Corporations Act 2001 (Cth) s 344(1).

[7] Corporations Act 2001 (Cth) ss 180, 344(1).

[8] Corporations Act 2001 (Cth) ss 180, 344(1).

[9] ASIC v Healey [2011] FCA 717 at [24].

[10] ASIC v Healey [2011] FCA 717 at [505].

[11] ASIC v Healey [2011] FCA 717 at [142].

[12] ASIC v Healey [2011] FCA 717 at [229].

[13] ASIC v Healey [2011] FCA 717 at [255].

[14] Corporations Act 2001 (Cth) s 296.

[15] ASIC v Healey [2011] FCA 717 at [180].

[16] ASIC v Green County Pty Ltd [2025] FCA 367 at [354].

[17] ASIC, ASIC’s Approach to Enforcement (August 2023)<https://www.asic.gov.au/about-asic/asic-investigations-and-enforcement/asic-s-approach-to-enforcement/>.

[18] Corporations Act 2001 (Cth) schedule 3.

[19] Corporations Act 2001 (Cth) s 1317G.

[20] Corporations Act 2001 (Cth) s 206C.

[21] Corporations Act 2001 (Cth) s 236.

[22] Corporations Act 2001 (Cth) s 232.

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