Posted: September 10th, 2015

CORPORATE LAW AND PRACTICE.

The Problem
Forever Insurance Ltd (Forever) is a medium sized general insurance company listed on the ASX. Its main business is conducted in Melbourne and surrounding regions and an important arm of this business is the insurance of houses, farms, cars and other vehicles against property damage. Forever has been performing poorly and the directors are hoping to interest other insurance companies in either merging with Forever or acquiring its business. For this to happen, Forever will need to show improving profit results in the year ending 30 June 2014. A meeting of the board is due to be held on 10 August 2014 to adopt the company’s financial report for 2014.

The directors have delegated the responsibility for preparing the company’s financial report to Peter, the Chief Financial Officer (CFO) who is also an executive director.
In preparing the company’s financial report, Peter is aware that he must consider the impact on current year profits of a large bush fire that swept through a large part of Victoria in February, causing extensive damage to many houses, farms and vehicles. In order to do this, Peter relies on the advice of Belinda, a senior property damage assessor and an old school friend of him engaged by Forever from Prestige Insurance Assessors Pty Ltd. Belinda is also aware of the company’s precarious position and unknown to Peter, chooses to disregard a large number of significant recent claims that fall within the current financial reporting period.

On 1 August 2014, prior to the scheduled board meeting, Peter meets with the board’s audit committee. Jane, Chair of the audit committee, is surprised to hear the relatively low impact of the bush fire damage on the company profits and asks whether Peter is taking into account the most up to date figures on damage claims. Other audit committee members were relieved to hear that the potential losses do not seem as significant as they had anticipated. In these circumstances, Peter does not feel it necessary to pursue the provision he has made in his report for future claims associated with the bush fire damage. He signs off on the final financial report.

Peter’s financial report is tabled at the board meeting on 10 August 2014. The figures in the financial report suggest that the company is able to return a small profit in the current year. Jane is still concerned whether the financial report takes into account the most up to date figures on damage claims. However mindful of the company’s difficult financial position, Jane endorses the report, relying on Peter’s response to her at the audit committee meeting.

In the light of Jane’s endorsement, the board resolves to accept and adopt the financial report. The board is dismayed to learn later that bush fire damage claims have been significantly understated and that Forever has in fact incurred a substantial loss in 2014. When the loss figures are revealed in the media, Forever’s share price plummets and shareholders are threatening a legal action against the company.

Question 1

What are the full legal responsibilities of Peter in preparing Forever’s 2014 Financial Report? Has he discharged these responsibilities?

Question 2

What are the full legal responsibilities of Jane in approving and endorsing Forever’s 2014 financial report prepared by Peter? Have she discharged these responsibilities?
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