In preparing this publication, the authors researched different parts of the Companies Act (Chap 386 of the laws of Malta) as well as international standards for auditing. This publications aims to provide additional information about the role of directors.
Since it customary for auditors to prepare the financial statements of private limited companies, directors question who is responsible for the financial statements? Is it the directors who are responsible or the auditors since they are being paid to provide such service?
The Companies Act (Chap 386) clearly states that the directors have the lions share of the responsibilities when it comes to the preparation of the financial statements. As a starting point, the Companies Act requires directors to prepare and present financial statements about their companies, which show a realistic position of the company as at year end.
Financial statements tend to consist of the Income Statement and Balance Sheet, Notes to the accounts, Auditors' report and accompanying schedules. Other variations and additional financial components may be required depending on the accounting financial framework being applied and the country in question.
The income statement provides information about the profitability of the company for the year under review whereas the balance sheet presents information about the company's assets and liabilities up till the financial year end. Apart from the information which is being reported in the income statement and the balance sheet, another striking difference is the time period which makes up both statements. The income statement only captures events which occurred in the year whereas the balance sheet presents all the assets and liabilities which are owned by the company, irrelevant when they were acquired.
The directors responsibilities does not stop here. Directors are also responsible for the contents of the financial statements. The financial statements should be prepared in such a way as to show continuity (the technical term being Going Concern Basis) unless there are events which suggests otherwise.
The policies applied in generating the financial statements are also subject to a number of judgement calls and estimates. All of these are the responsibility of the directors.
One of the most important responsibilities of the directors is to implement controls which deters and detects fraud and errors. All of these responsibilities ultimately help directors safeguard a company's assets.
The directors' responsibilities are of such paramount importance that it is customary for financial statements to have a section which clearly lists down the directors responsibilities. An example of this is shown hereunder. The below is applicable for financial statements which satisfy the GAPSME small criteria: -