Duties and Responsibilities of Those Charged with Governance

Objective A: Explain What Is Meant by Governance

In the broadest sense, governance refers to the system of rules, practices, and processes by which an organisation is directed and controlled. In the specific context of the ACCA FA syllabus, governance relates to the oversight and accountability mechanisms that ensure financial statements are prepared accurately, completely, and in accordance with applicable accounting standards and legal requirements.

Those charged with governance are the persons or bodies responsible for overseeing the strategic direction of the entity and its obligations related to accountability. In a limited liability company, this typically means the board of directors. In smaller entities, it may be a single owner-manager. The key point is that governance is about accountability — someone must take responsibility for the quality and integrity of the financial statements.

Governance in financial reporting encompasses several dimensions. First, there is the legal dimension — company law in most jurisdictions requires directors to prepare financial statements that give a true and fair view. Second, there is the ethical dimension — directors have a moral obligation to present information honestly and not to mislead users. Third, there is the practical dimension — directors must establish systems and processes (such as internal controls, accounting policies, and review procedures) that enable the production of reliable financial statements.

Good governance builds trust between the entity and its stakeholders. When investors, lenders, and other users know that competent, accountable individuals are overseeing the financial reporting process, they are more likely to rely on the financial statements and make informed decisions. Poor governance, by contrast, can lead to financial scandals, loss of investor confidence, and even corporate collapse — as demonstrated by high-profile failures such as Enron and Wirecard.

Objective B: Duties and Responsibilities of Directors

Directors of a limited liability company have specific duties and responsibilities in relation to the preparation of financial statements. These duties arise from company law, accounting standards, and the general fiduciary obligations that directors owe to the company and its stakeholders.

The key duties include:

1. Preparing financial statements: Directors must ensure that financial statements are prepared for each financial year. These statements must give a true and fair view of the company's financial position and performance and must comply with applicable accounting standards (e.g., IFRS Accounting Standards).

2. Maintaining adequate accounting records: Directors must ensure that the company keeps proper books of account that are sufficient to show and explain the company's transactions, disclose with reasonable accuracy the financial position of the company at any time, and enable the directors to ensure that the financial statements comply with the relevant legal framework.

3. Selecting appropriate accounting policies: Directors must choose accounting policies that are consistent with IFRS Accounting Standards and that result in information that is relevant and faithfully represented. Once chosen, policies should be applied consistently from period to period unless a change is justified.

4. Making reasonable judgements and estimates: Many items in the financial statements require judgement (e.g., the useful life of an asset, the recoverability of a receivable). Directors must ensure that these judgements are reasonable, well-documented, and based on the best available information.

5. Ensuring the financial statements are prepared on a going concern basis (unless it is inappropriate to do so): Directors must assess whether the company will continue in operation for the foreseeable future. If there are material uncertainties about going concern, these must be disclosed.

6. Preventing and detecting fraud and error: While directors cannot guarantee that no fraud or error will occur, they must establish internal controls and oversight mechanisms that minimise the risk. If fraud or material errors are discovered, directors must take appropriate action.

It is crucial to understand that these responsibilities cannot be delegated. Directors may employ accountants, engage auditors, and use accounting software, but the ultimate responsibility for the financial statements remains with the directors. If the financial statements are misleading or non-compliant, it is the directors — not the accountants — who face legal consequences.