Lack of financial records linked to company failure

John Price, Commissioner

This article was submitted to the Australian Institute of Company Directors for publication in the Company Director magazine in March 2017

Our review of externally administered companies for financial year 2015/16 raised a concern for ASIC when external administrators reported, for the first time, "poor financial control, including lack of records", as one of the top three reasons nominated for cause of company failure. Of further concern is a consistent allegation that external administrators make that, in 42% of failed companies, directors breach the Corporations Act by failing to keep proper books and records.

Each year, ASIC publishes a report presenting statistical data about externally administered companies. We extract the data from initial statutory reports that external administrators lodge with ASIC reporting possible misconduct. An external administrator's role includes investigating company failure and reporting both to creditors and ASIC. ASIC uses external administrator reports in its work including in reporting to the market on corporate insolvency. In 2015/16, external administrators lodged 9,465 reports citing the major causes of failure as:

  • Inadequate cash flow or high cash use in (4,318 or 46% of reports)
  • Poor strategic management of business (4,315 or 46% of reports); and
  • Poor financial control including lack of records (3,183 or 34% of reports)

Characteristics of externally administered companies 

Our report shows small to medium size corporate insolvencies again dominated external administrators’ reports where:

  • 86% had assets of $100,000 or less;
  • 79% had less than 20 employees; and
  • 46% had liabilities of $250,000 or less.

In this group, 97% of creditors received between 0–11 cents in the dollar, reflecting the asset/liability profile of small to medium size corporate insolvencies.

Report 507 Insolvency statistics: External administrators’ reports (July 2015 to June 2016) supplements the monthly insolvency statistics that ASIC publishes on its website. Details provided include: size of company; profile by industry and state/territory; causes of failure; amount of available assets; number and amount of unsecured creditors; number of employees and amount of unpaid entitlements; amount of unpaid taxes; estimated return to creditors; and possible misconduct. 

Maintaining adequate books and records

Although the Corporations Act does not require small proprietary companies to prepare financial statements, unless requested by ASIC or shareholders, all companies are required to keep financial records.

Financial records are valuable for managing your company, monitoring its progress and assessing its financial position. They can assist if you seek to raise finance and can help ensure you meet your director's duty not to trade whilst insolvent.

ASIC Information Sheet 76 - What books and records should my company keep? helps company directors and officers understand the requirements to keep financial records.

The Corporations Act states that a company must keep written financial records that:

  • correctly record and explain its transactions and financial position and performance; and,
  • would enable preparation and audit of true and fair financial statements

Financial records are defined as including:

  • invoices, receipts orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers
  • documents of prime entry, and
  • working papers and other documents needed to explain:
    • the methods by which financial statements are made up, and
    • adjustments to be made in preparing financial statements

Directors must keep financial records for seven years. Directors must also keep a register of charge details for the relevant years up until the Personal Property Securities Register commenced on
30 January 2012.

A company may keep financial records electronically. The market provides numerous accounting software packages for this purpose. If you keep electronic financial records, they must be convertible into hard copy. Hard copy must be available within a reasonable time to a person entitled to inspect the records. If a company maintains its financial records on a computer owned and operated by a third party, (e.g. your company's accountant), it remains your responsibility, as a director, to provide a hard copy. 

Directors should note that failing to keep books and records is an offence under the Corporations Act and can lead to fines of up to $4,375 or 6 months imprisonment. 

What matters

Our report is not only a timely reminder to directors of their legal obligations, but also how essential financial records are in operating a successful commercial enterprise. If your record keeping is not up to scratch, make it a priority such that you may improve your enterprise's prospects of success.

More information about financial reporting obligations, guides for directors facing insolvency and ASIC's insolvency statistics can all be found at www.asic.gov.au.

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Last updated: 04/04/2017 09:22