Compliances

Directors’ Responsibility Statement – Obligation Of Directors

A corporation must provide an accurate and fair representation of its financial position in its financial statements for each fiscal year. Accounting standards that must be followed when generating these financial statements have been announced. The financial statements are presented to the company’s shareholders for approval, and the auditors’ and the board of directors’ reports.

The directors are expected to be accountable for the company’s financial statements under the Companies Act 2013^[1], the main piece of law governing the operation of companies in India. Consequently, the financial statements must be accompanied by the board of directors’ report. A Directors’ Responsibility Statement must be included in this report, among other things.

Directors’ Responsibility Statement

The 1992 Cadbury Report is where the directors’ responsibility statement first appeared. The Cadbury Report recommended that a company’s director’s report and accounts include a formal statement from its directors stating that the board of directors is responsible for preparing the accounts and that this statement should be placed next to an audit firm statement in the auditors’ report. The statement’s goal is to clearly define the directors’ areas of duty as separate and independent from those of the company’s auditors.

According to Section 134(5)of the Act, the Directors’ Responsibility Statement must include, and the Directors’ Responsibility Statement referred to in clause (c) of sub-section (3) shall state the following: 

• The appropriate accounting rules and explanations relating to substantial departures were followed in producing the annual accounts.
• In order to present an accurate and fair picture of the situation facing the company at the end of the financial year, as well as of the company’s profit and loss for that period, the directors had chosen such accounting policies, applied them consistently, and made judgements and estimates that were reasonable and prudent.
• The directors followed the Act’s provisions for safeguarding the Company’s assets and for preventing and detecting fraud and other irregularities in maintaining adequate accounting records.
• The annual accounts were created by the directors using a going-concern methodology.
• In the event of a publicly traded firm, the board had established internal financial controls that the firm was to follow and that these internal financial controls were sufficient and functional. “internal financial controls” refers to the policies and practises implemented by the company to ensure the orderly and efficient conduct of its business, including adherence to company policies, asset protection, the prevention and detection of errors and frauds, the completeness and accuracy of the accounting records, and the timely preparation of reliable financial information.
• The directors had established a suitable system to guarantee adherence to all applicable laws and that such mechanisms are sufficient and functioning properly.

Obligations imposed on Directors

As suggested by the name, the Directors’ Responsibility Statement is an affirmative statement made by the directors regarding the subject matter. In this sense, the directors collectively have a responsibility to: 

• Use their judgements and choose accounting principles.
• Utilise their discretion when putting SOPs in place to prevent and detect fraud and other irregularities in the company’s administration.
• Apply their discretion in putting SOPs in place to protect the Company’s assets.
• Utilise your judgement when choosing internal financial controls (for listed companies).
• Utilise their common sense to create a suitable system to ensure the Company complies with all relevant laws (collectively called ‘Statutory Obligations’).

Board’s report

A board report is crucial for assessing a company’s success within a specific fiscal year. It assists the shareholders and other stakeholders in determining if the business is profitable and whether it will foster future expansion and success. A report from the Board of Directors must be included with the financial statement, according to Section 134(3) of the Act. According to Section 134(6), the report must also be signed by the following:

• The Chairman of the board and, in the event that he is not entitled to do so, at least two other directors, one of whom must be the Managing Director. 
• However, if there is only one director, he will need to sign it. 

Directors’ obligation versus shareholders’ rights

The directors have a complete and unequivocal duty to uphold the directors’ responsibility statement. The shareholders have no voice in this matter. The shareholders are free to reject the accounts when they are presented to them at an annual general meeting. Still, they do not have the authority to in any way prevent the directors from carrying out their statutory duties.

At this point, it is crucial to remember that the items on the list above are obligations placed on the directors to make decisions regarding specific issues, as opposed to the powers of directors, which are enabling and may be restricted by clauses in the company’s articles of association, or charter document.

It is customary for shareholders to consent to a wide range of issues, sometimes referred to as “reserved matters,” for which their positive vote would be required for the passage of a resolution. The idea of “reserved matters” is not problematic. However, it could be argued that any reserved issue that affects statutory obligations is invalid.

For instance, “change in accounting policies” falls under “reserved matters” most of the time. There is a case to be made that the directors must exercise judgement when choosing accounting policies. Hence the shareholders shouldn’t have a say in the matter.

The distinction between “management” and “ownership” exists for a reason, and the directors are held accountable under the Company’s legislation. The shareholders who own the company have the final say because they choose the directors who will run it. The directors are responsible for managing the company. It does not, however, grant the shareholders the authority to interfere with the directors’ while discharging their duties.

Penalty in contravention of Section 134 of the Act

If a firm violates Section 134’s rules, all of the responsible officers will be held accountable. A fine of three lakh rupees will be imposed as a penalty for the company. Each negligent officer will be required to pay fifty thousand rupees. This penalty is imposed in accordance with Section 134(8) of the Act. 

Conclusion

The financial statement, accompanied by a board report and the director’s statement, is one of the most significant documents because it summarises a company’s performance and its records of profits and losses. At the conclusion of each fiscal year, every firm must prepare its financial statement to keep track of expenses and other pertinent information about its operations. Therefore, every company must provide an accurate financial statement of the year on time, together with all other required statements, and there must be no violations of the above rules.

Read our Article: Role of the Independent Directors in India