COMPANY LAW 2.3 FINANCIAL STATEMENTS AND AUDITS
Indicate the way a company is being run. It is advantageous as it enables directors, shareholders, and other concerned parties to take decisions and plan based on information contained therein. To assess the performance and viability of a company. The CAMA, ISA, Financial Reports Council Act 2011 provide certain regulations in this regard.
Financial Reporting Council (set up by the Financial Reporting Council Act 2011) is empowered under Section 11 and Section 8(1K) FRCA2011 to review the financial statements and reports of public interest entities which include (From the interpretation of Section 77 FRCA) any government entity e.g. NPA, NIMASA, etc. Section 59 mandates reports and financial statements to conform with the standard set in the Act.
Just note the following:
Section 331(1) mandates every company to keep financial records which should sufficiently and honestly show the financial position of the company-Section 331(2)
Furthermore, Section 334 provides; (1) In the case of every company, the directors shall in respect of each year of the company, prepare financial statements for the year.(2) Subject to subsection (3) of this section, the financial statements required under subsection (1) of this Section shall include‐ (a) statement of the accounting policies; (b) the balance sheet as at the last day of the year; (c) a profit and loss account or, in the case of a company not trading for profit, an income and expenditure account for the year;…(d) notes on the accounts; (e) the auditors’ reports; (f) the directors’ report; (g) a statement of the source and application of fund; (h) a value‐added statement for the year; (i) a five‐year financial summary; and (j) in the case of a holding company, the group financial statements
Section 335 mandates such statements to comply with the provisions of the Act and those of the Accounting Standards. Section 335(2) mandates that the balance sheet shall give a true and fair view of the state of affairs of the company as at the end of the year;
Section 336 mandates that a holding company which has subsidiaries should prepare a group financial statement which discloses the financial position of both the holding and group company-This was also considered in Union Foods Case. Also Adams V Cape Industries Ltd.
The combined interpretation of Section 343 and 345 is that the balance sheet and related documents should be signed by the BOD, laid before the company in general meeting and delivered to the Commission.
Section 344 provides that a copy of the Financial statement should be delivered (at least 21 days before it is presented to the GM) to every member of the co, every holder of the company’s debentures and other persons so entitled.
Section 357 provides for the appointment of independent external auditors to confirm the veracity of the information contained in the financial statement prepared by the Company and make an “auditor’s report” in that regard. They are granted wide powers in performing their research and investigation. Information should not be withheld from them else they would “qualify” their report. This mean that they are saying that the report may not be a fair one. Such representation would scare investors.
Note that the company also has their own internal auditors and audit committee to check the financial statement and state of affairs of the company. This time rather than for regulatory but for planning and strategic purposes. These internal auditors can be removed in a similar way as directors discussed earlier see Section 362 for removal of auditors
BENEFITS OF PREPARING FINANCIAL STATEMENTS.
- It shows a true and clear view of the financial position of the co.
- It serves as an instrument for giving account of stewardship by the directors of the co.
- Shareholders are able to determine by reading the account, how the affairs of the co has been conducted by management and the board.
- It helps the creditors in the determination of whether or not the co is in a position to meet and respond to its obligation s to them. The creditors are looking at the
- It enables the Directors who are not involved in the day to day running of the company to assess the state of affairs of the company.
Negligence in Preparing Financial Statements: Woolf J. in JEB Fasteners Ltd V Marks, Bloom and Co and Lord Steward in Twomax Ltd V Dickson, Macfarlane and Robinson have noted that auditors and directors owed a duty of care in preparing the accounts. Hedley Byrne V Heller and Partners provides liability for negligent misstatements. Note however the decision of Caparo Industries V Dickman which tries to limit the liability to instances where it is reasonably foreseeable that a shareholder or an outsider would rely on the statement and suffer loss. This would usually be the case where the statement was knowingly made with intent to defraud.
From the interpretation of Sections 379-386 we would note that:
- The shareholders declare dividends at the general meeting (on the recommendation of the Board of Directors).
- A company can only declare dividend if it has made profit because doing otherwise would result in a reduction of the company’s capital. This restriction seeks to protect creditors of the company.
- If the directors knowingly declare dividend where no distributable profit have been made by the company the directors shall be jointly and severally liable-Section 386.
- The fact that a co has made profit doesn’t mean that it must declare dividend. The directors may deem it fit to plough the profit back into the business.
- Once the company has declared dividend, that dividend becomes a debt due to the shareholders enforceable by legal action.
- The co should publish the names of those that have not claimed their dividends and after 3 months, the co may do what it likes with the dividend-Section 382.
FOR FURTHER READING KINDLY CHECK THE CORPORATE LAW PRACTICE NOTE (WHICH IS THE LAW SCHOOL/PRACTICAL VERSION OF COMPANY LAW) ON OUR SITE.
 In practice, the Chief Financial Officer would be the one preparing. His role has been recognised by the Financial Accounting Practice.
 which is the overall statement of the financial position of the co. sets out all the assets of the company. They may include; physical assets (like land), Intangible assets (like intellectual property, trademarks, goodwill, patent) Short-term Assets (i.e. the working assets) and long-term assets (Like building).
 Two directors would sign on the BODs behalf.
 Provided in Section 579.
 Under Section 360 CAMA
 The BOD should recommend.