What are The Financial Responsibilities of Directors

Statement of Director Responsibilities

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The directors are responsible for preparing and approving the directors’ report and the financial statements in accordance with applicable law and regulations.

This FRS is a single financial reporting standard that applies to the financial statements of almost all companies that are not applying IFRS reporting standards. It also applies to many entities that are not constituted as companies; even those that are not profit-oriented.

The latest review was completed in March 2024. Its main impact will be to bring UK accounting standards into line with IFRS 15 and 16. These deal with the Recognition of Revenues on Long Term Contracts and Lease Accounting. These changes will become effective on 1 January 2026.

Company law requires all Board Directors to understand their own accounts and holds the Directors collectively responsible for the validity of the annual financial accounts. The law demands a good knowledge of finance from directors as does success in business. Directors must not approve their financial statements, unless they are satisfied that they give a true and fair view of the state of affairs of the company and of its profit or loss.

Neither the job titles, nor the job functions of the individual directors can eliminate or reduce their individual or collective responsibility for the validity of their internal accounts and of their annual year end accounts. Legally the directors cannot argue that they are not their responsibility, nor can they rely on the fact that the auditors have not flagged any problems in their audit opinion.

In preparing their financial statements that will be submitted to Companies House, all the directors are collectively required to:

    • Select suitable accounting policies and then apply them consistently,
    • Make judgments and estimates that are reasonable and prudent,
    • Prepare the financial statements on the going concern basis unless it is inappropriate
    • Keep adequate accounting records,
    • Safeguard the assets of the company,
    • Take reasonable steps for the prevention and detection of fraud

    These Director Responsibilities are different to the General Duties of Directors, which are seven specific statutory director duties contained in the Companies Acts 2006, CA 2006. The General Duties are applicable to all Board decisions and all Director activities within all UK companies.

    Please click here for more information about the General Duties of Directors under the Companies Acts.

    Statement of Directors Responsibilities

    The Statement of Director Responsibilities essentially codifies, within a financial context, the implications of the General Duties for all Company Directors. The result is a standard “Statement of Directors’ Responsibilities” that should be included within every Directors’ Report contained within the Annual Accounts. These Director Responsibilities for finance apply to all directors, irrespective of whether or not the standard “Statement of Directors’ Responsibilities” has actually been included in the Annual Accounts.

    The published Statements of Director Responsibilities are fundamentally the same for all companies, apart from minor variations of grammar and word sequencing. It would be against the law for any director to approve their own annual accounts without having a reasonable basis for that approval. The law has clarified what would be required to constitute a reasonable basis for that opinion. The result is the Statement of Directors Responsibilities. The components of which and their implications, are individually discussed below.

    The directors are responsible for preparing the directors’ report and the financial statements in accordance with applicable law and regulations
    This means that the directors are collectively responsible for ensuring that the annual directors’ report and the financial statements are submitted on time to Companies House. If they are not submitted, or are not in compliance with the law. Each and every director is jointly and severally liable for any breaches. They cannot simply assume that it is the sole responsibility of the Finance Director or of the auditors.

    The directors must not approve the financial statements unless they are satisfied that they give a true and fair view
    This requires directors to be sufficiently familiar with the company and its overall financial performance to know whether the financial figures agree with the operational results the management accounts. This in turn requires the directors to genuinely engage with and question the accounting systems of the company.

    The directors must select suitable accounting policies and apply them consistently
    To do this the directors must understand the accounting policy options available to the company and know which accounting policies have been selected and how those selections were made. This requires the directors to fully understand the fundamental accounting concepts of Matching, Prudence and Accruals. They would also need to know how these fundamental accounting concepts had been applied to the accounting functions of the company, in order to decide if they were suitable and consistently applied.

    Make judgments and estimates that are reasonable and prudent
    To understand whether the judgments and estimates used are reasonable and prudent. Every Director would need to know what those estimates were and how they related to the financial numbers put before them.

    The directors must prepare the financial statements on the going concern basis, unless it is inappropriate
    To decide that the going concern basis is appropriate the directors would at least need to refer to realistic cash flow and profit forecasts. They would need to consider any material risksid any facing the company and its clients. Any contingent liabilities would also need to be considered. These are critical activities to flag at the earliest possible stage, any budding insolvency issues.

    The directors are responsible for keeping adequate accounting records
    These must be good enough to show the financial position of the company at any time throughout the year.

    The directors are responsible for the prevention and detection of fraud
    This is mainly about making the directors realise that they are solely responsible for preventing and detecting fraud. They cannot escape liability by putting any blame on the auditors or the Finance Director.

    Many directors mistakenly believe that the prevention and detection of fraud is the sole responsibility of the Auditors or of the Financial Director. This is most definitely not true. A careful reading of any Audit Report would establish that the Audit simply confirms that based upon the schedules shown and the statements made to the Auditors by the Senior Management; the accounts present a true and fair view. That is very different to saying that the accounts are correct. This approach arise from the fact that the schedules shown to the Auditors and the statements made could have been deliberately misleading or factually incorrect.

    That is why the Companies Act makes it clear that legally these responsibilities rest solely with the Board of Directors (collectively).

    The Director Responsibilities include ensuring that there are suitable internal controls in place to prevent fraud and to ensure that the accounts truly reflect the actual position of the company at any point in time.

    The General Duties requirements for Directors to exercise “Independent Judgement” and “Reasonable Care, Skill and Diligence” would in any case, prevent the Directors from simply accepting the assurances of third parties, even their own staff, that the accounts are correct and that the company assets are safe from fraud and other irregularities.

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