It Is An Inescapable Duty Of A Director To Understand Accounts Isn’t It?

It is an inescapable duty of a director to understand the accounts isn’t it? Whilst directors do not need to be accountants the answer to the question is, yes, directors do need to understand the accounts.

Have a look at Section 393(1) of the Companies Act 2006:

(1) The directors of a company must not approve accounts for the purposes of this Chapter unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and profit or loss—

(a) in the case of the company’s individual accounts, of the company;

What Does Company Law Say About Directors And The Accounts?

Company law says a director must not approve accounts unless they are satisfied with their accuracy. It is unacceptable for a director to sign accounts they do not consider to show a true and fair view.

It is therefore not good enough for a director to say they hired an accountant. It may of course go a long way to help a director to say this but any accountant can only produce a set of accounts based on information and instructions they are provided with. Garbage in equals garbage out.

So company law has director duties that are not confined to the fiduciary duty of acting in good faith, ensuring a company prospers and loyalty etc but that a director does understand the accounts they sign.

Can You Understand The Accounts Without Being An Accountant?

It is not unknown for a director who is asked about the accounts to say in response ‘I am not an accountant’. 

However, understanding the accounts is not the same as understanding how to assemble the accounts. 

Accounts are prepared using a technique known as double entry bookkeeping and applying the accounting standards. A director is not being asked to create accounts but merely understand what they are responsible for signing.

Accounts have a balance sheet, profit and loss account and notes to explain the numbers behind those displayed in the balance sheet and profit and loss account. The balance sheet is a statement of wealth. The profit and loss account is the trading numbers for a given period.

The top half of a balance sheet details headline figures for the assets and liabilities. The bottom half of the balance sheet details how a company has accumulated those assets and liabilities by setting out its capital and trading profits figures.

The link between the trading profit and loss accounts and the balance sheet profit and loss reserve is simply that the reserve is the accumulation of all trading periods. 

For many SMEs, the accounts will be made up predominantly of transactions that have passed through a company’s bank account. 

What Are True And Fair View Accounts?

True and fair view accounts are those that have been assembled using accounting policies that are appropriate, consistently applied, and adequately disclosed. 

A director must sign a declaration in which they acknowledge their responsibilities for complying with the Companies Act 2006 concerning preparing accounts.