|Book||Financial Literacy Lawyers, Directors and Investors||12/11/2010||9780864606839||$56.80|
**THE CENTRO CASE REINFORCES THE NEED FOR DIRECTORS TO BE FINANCIALLY LITERATE**
The strong imperative for company directors to be financially literate has been unequivocally reinforced by the Federal Court’s decision in the Centro case handed down on 27 June.
The Court found that the defendant directors of Centro had failed in the performance of their duties to properly read and understand the financial statements and to apply the knowledge they had or should have acquired to perform that task. Although the Court found that they had not acted dishonestly, each director was aware or should have been aware of the relevant accounting principles which would have alerted each director to the apparent error in the financial statements relating to short-term debt. It was simply not enough for the directors to rely solely on management and their advisors.
It is this very issue that Thomson Reuters’ book Financial Literacy for Lawyers, Directors and Investors is designed to address.
The book deals with how Financial Statements are put together, the key Financial Statements (what they reveal and can’t reveal), the balance sheet, profit and loss account, analysis of cash flow and key accounting concepts. It also covers the difficult area of “cosmetic accounting” with descriptions of many common approaches taken to present company results in the best possible light and suggestions of where and how to search for the “unknown unknowns.”
The book is essential for all directors, particularly those without an accounting background. The authors are Andrew McRobert, who has been teaching and writing on financial statements for more than 30 years, and Ronnie Hoffman, a journalist experienced in the areas of finance, business and management. Published in September 2010, the book deals with the Australian standards and requirements.
Lawyers and Directors will not usually prepare their company's financial statement, but they do need to understand them. Investors also need to be able to understand financial statements in order to be able to invest wisely. Financial Literacy for Lawyers, Directors and Investors will give them this knowledge.
Financial Literacy for Lawyers, Directors and Investors addresses the following:
- The three key financial statements: their interdependence, what they reveal and what they cannot reveal
- Historic financial statements, and their reliability as estimates of a company’s future performance and position
- The key accounting concepts, which are the bedrock of financial statements, explained in accessible terms and their relevance made clear to lawyers
- Creating reality from the bedrock statement:
a. the role of accounting policies
b. how and why they vary,
c. how directors and lawyers need to understand the reasoning behind specific accounting policies d. how alternative policies can present a completely different picture of a company’s financial position and performance
- Notes to the accounts: why they are equally crucial in the presentation of a complete picture of a company’s health and prospects
- Cash flow analysis: why is it so much more important than profit-and-loss analysis in understanding a company’s true financial performance and position
- Cosmetic accounting: how to detect deliberate attempts to mislead, and how to combat deceptive and misleading accounting.
The lessons from the Centro decision, couched in terms accessible to company directors and non-accountants, are explained in another Thomson Reuters' book, Financial Literacy: Lessons from Centro, authored by Andrew McRobert and Ronnie Hoffman.
Financial Literacy for Lawyers, Directors & Investors can be purchased as a single book, or you can purchase it with Financial Literacy: Lessons from Centro as a value bundle, Financial Literacy Package
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From: Published by Thomson Reuters
Reviewed by: Brian Morgan
Not so many months ago I had to give some pointed advice to a client that his company was trading whilst insolvent. He did not agree with me, and pointed to his balance sheet for support. It quickly became evident that, although a very successful businessman, he had no idea how to read a financial statement. By my providing this warning, the company was able to regain its solvency. I suspect that his accountant was telling him the same story but, because of his personal lack of understanding, the client felt able to ignore both the advice and reality. When the advice was reinforced by an outsider, it was, fortunately, heeded.
Financial Literacy picks up on what I suspect is a common problem, namely, the inability of lawyers and lay people to understand the books of account of a company.
Some years ago, I read a book which explained the various terms used by accountants, for the benefit of a small business operator. At the time, I thought it a pity that there was not an accompanying book which dealt with companies. This gap has now been nicely filled.
Have you ever looked at and tried to understand a balance sheet of, say, a Japanese company or for that matter, a U.S. Company? Accounting standards, that is, the method used to prepare a balance sheet, can have a profound impact on its appearance.
That statement is obvious. The authors give an example of a company announcing a cost saving measure of retrenching a large number of employees. However, the company actually transfers the employees to an affiliate company. Would we be astute enough to pick up such a stratagem by examining the accounts? Do we know how to winkle information out of those comparisons with the previous year’s performance to uncover such a move? Have we ever thought why those previous year’s figures are there?
Does every reader of Hearsay understand the fundamental basis of double entry accounting as traditionally used in Australia?
When presented with a financial statement, do we really understand it? Do we know what questions to ask to properly enlighten ourselves?
Financial Literacy has the potential to change the answer even as the reader is discovering that the level of understanding was depressingly lower than we had imagined.
Financial Literacy is presented in three stages. The first identifies the accounting methods applied to preparation of books of account. The second actually looks at a number of financial statements, identifies what to look for and what they mean and explains the importance of the accompanying notes. The third stage is a type of guide, by which, by comparison, one can more readily understand what the accounts of a company actually mean.
The final part of the book contains the 2004 published accounts of a large Australian Publicly listed company. Many aspects of these accounts are referred to as demonstrating the way things should be done, whilst explaining the meaning of them.
There is also a particularly fascinating discussion of the balance sheet of Enron during the three years prior to its collapse. This discussion reveals an excellent example of “profitless growth” with obvious warning signs which were, alas, ignored by almost every regulator and financial journalist who saw them, almost all of whom should have done much better.
Financial Literacy is not a book whose contents can be absorbed in one simple scan. Rather, it is a keeper, a book to which one may profitably go back to, especially, when the “boring parts” of a brief are before us. Who knows? Those pages of accounts may not be quite so boring if we actually manage to extract useful forensic information from them.