Our review of externally administered companies for the 2015-16 financial year raised concern when, for the first time, external administrators reported “poor financial control, including lack of records”, as one of the top three reasons nominated for cause of company failure.
Of further concern is a consistent allegation that in 42 per cent of failed companies, directors breach the Corporations Act 2001 by failing to keep proper records.
Each year, the Australian Securities and Investments Commission (ASIC) publishes a report presenting statistical data about externally administered companies. We extract the data from initial statutory reports that external administrators lodge with ASIC reporting possible misconduct.
An external administrator’s role includes investigating company failure and reporting both to creditors and ASIC. ASIC uses these reports when reporting to the market on corporate insolvency. In 2015-16, external administrators lodged 9,465 reports citing the major causes of failure as:
- Inadequate cash flow or high cash use (46 per cent of reports).
- Poor strategic management of business (46 per cent of reports).
- Poor financial control (34 per cent of reports).
Our report shows small-to-medium (SME) sized corporate insolvencies again dominated external administrators’ reports:
- 86 per cent had assets of $100,000 or less.
- 79 per cent had fewer than 20 employees.
- 46 per cent had liabilities of $250,000 or less.
In this group, 97 per cent of creditors received between 0-11 cents in the dollar, reflecting the asset/liability profile of SME corporate insolvencies. Report 507 Insolvency statistics: External administrators’ reports (July 2015 to June 2016) supplements the monthly insolvency statistics that ASIC publishes on its website. The size of company; profile by industry and state/territory; causes of failure and amount of available assets are just some of the details provided.
Although the Corporations Act does not require small proprietary companies to prepare financial statements – unless requested by ASIC or shareholders – all companies are required to keep financial records.
Financial records are valuable for managing your company, monitoring its progress and assessing its financial position. They can assist if you seek to raise finance and can help ensure you meet your director’s duty not to trade while insolvent.
ASIC Information Sheet 76: What books and records should my company keep? helps company directors and officers understand the requirements of keeping financial records.
The Corporations Act states that a company must keep written financial records that:
- Correctly record and explain its transactions and financial position and performance.
- Would enable preparation and audit of true and fair financial statements.
Financial records are defined as:
- Invoices, receipts, bills of exchange, cheques, promissory notes and vouchers.
- Documents of prime entry.
- Working papers to explain financial statements.
Directors must keep financial records for seven years and keep a register of charge details for the relevant years up until the Personal Property Securities Register commenced on 30 January 2012.
A company may keep financial records electronically, but they must be convertible into hard copy and available within a reasonable time to a person entitled to inspect the records. Directors should note that failing to keep books and records is an offence under the Corporations Act and can lead to fines of up to $4,375 or six months imprisonment.
Our report is a timely reminder to directors of their legal obligations, but also of how essential financial records are in operating a successful commercial enterprise. If your record keeping is not up to scratch, make it a priority. You may improve your enterprise’s prospects of success.