We breakdown the key financial and accounting duties of a director. Here’s what you need to know.
What does the law say about companies and directors?
As a company only exists in law in a register, it requires people known as Directors to act on its behalf. All companies are required by law (section 154 of the Companies Act 2006) to have at least one director and a public company must have two.
What’s the exact definition of a director?
Although an exact definition is somewhat vague, the Companies Act states that the term ‘director’ includes “any person occupying the position of director by whatever name called”. This is deliberate so that it can capture as wide an audience as needed for those involved in a running a Limited Company.
What are the key finance and governance obligations of a director?
Whatever they may be called within the business, the role of “Director” comes with a number of responsibilities with respect to Finance and Accounting. “It is extremely important that Directors understand their statutory obligations and duties, especially on finance and governance” says Andrew Coulson, founder of Dolfinblue.
“These obligations include acting in the best possible way to promote the company for the benefit of all shareholders and to protect stakeholders, as well as filing statutory accounts on time, submitting annual confirmation statements, registering for relevant taxes such as PAYE & VAT on time and ensuring they pay taxes on time. The penalties for missing deadlines can be severe.”
What are Directors’ responsibilities in regards to accounting?
The short answer is that the Directors are responsible for maintaining proper accounting records and preparing company accounts. However, there are sub-levels to these obligations depending upon the size of business.
The 2 key obligations are:
- Accounting Standards – most small companies (SMEs) can use an abbreviated version of the much larger, more complex UK GAAP or IFRS accounting standards. These special rules make the preparation of accounts much simpler than fully listed companies.
The simplest of all are micro entity accounts. To qualify as a micro entity, you must meet at least 2 of the following criteria:
- Turnover of no more than £632,000
- Assets that are no more than £316,000
- 10 employees or less on average
If you do not qualify as a micro entity, a company may still qualify as small by meeting at least 2 of the following criteria:
- Turnover of less than £10.2 million
- Assets that are no more than £5.1 million
- 50 employees or less on average
By doing so, a company can choose to apply the small companies regime which means disclosing less information than medium-sized and large companies.
In addition to being able to prepare simpler accounts, both micro and small companies also qualify for an audit exemption and can prepare abridged accounts as long as they have the consent of all members of the company.
2. Directors Report – only very basic information is now required if at all for small companies. As you grow however, the content of this report will become more relevant and important.
The accounts must be then be filed and become a public record for all to review including potential investors and credit reference agencies. Where these accounts are found to be defective, the Act requires the Directors to correct and re-file with both sets staying on public record.
What other key responsibilities and duties do directors have?
There are other duties that may arise based on the regulatory environment that the business operates in. But more specifically, the Companies Act includes other key responsibilities directors must follow:
Section 172 of the Companies Act 2006: Directors to promote the success of the company.
This means that directors must make decisions with regards to the interests of employees, shareholders, stakeholders and even consider the impact it might have on the environment. Directors must also consider the need to maintain the reputation of the company and the likely consequences of any decision in the long term.
Section 174 of the Companies Act 2006: Directors must exercise reasonable care, skill and diligence.
This means that directors must act based on the general knowledge, skill and experience that may reasonably be expected to have based on the work they carry out for the company, as well as the general knowledge skill and experience the director has.
For example, a director with professional qualifications in his field of work is expected to show a higher level of skill and care than a director without.
Section 175 of the Companies Act 2006: Directors must avoid a situation in which they have a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.
Conflicts of interest can commonly arise when directors have multiple business interests. For example, a director proposing to sign a contract with a company that he or a family member has a beneficial interest in.
The Companies Act states that Directors must not get involved in situations that may give rise to a conflict of interest. However, conflicts can be overlooked if the matter has been authorised by directors. In these cases, it’s important to understand the constitution of the company (sometimes called the articles of association) so Directors can ensure such authorisations are allowed and by what means they can be approved.
What is best practice to ensure you stay compliant?
Whilst the accountability and responsibility for being a Director rests with the individual, many of these duties can be outsourced for execution to a qualified professional, like a Chartered Accountant. The extent to which you choose to outsource is a personal preference but typically comes down to:
- The amount of free time the director is able to sacrifice to ensure compliance
- The skill-set of the director and the confidence they have in their abilities to stay compliant.
By now, you should understand the key responsibilities and duties you must carry out as a director. Whatever route you choose, Directors remain obligated to carry out the required activities in an accurate and timely manner.
The specific responsibilities and options that apply to you as a Director will ultimately depend on the scale and complexity of the business. Because of this, you may have some additional questions. If so, we’d love to hear from you.
Dolfinblue can support you with your financial and accounting duties as a director. We offer a wide range of services to SMEs including profit improvement, cashflow forecasting, growth planning and technology reviews with the option to combine these with a virtual Chief Finance Officer (CFO).
Drop us a line using the form below we’ll help you assess your options.