Feltex case sounds 'warning bells' for directors

The Feltex trial will sound warning bells for company directors, who could feel they are putting their reputations on the line when they join a board, a business governance specialist says.

Professor Martin Devlin from Massey University's Master of Business Administration says many directors will be concerned that they could, individually, find themselves in court on similar charges to those faced by the Feltex directors - even after relying on experts for guidance.

Feltex's directors successfully argued that although they signed off on accounts that did not disclose the fact the company in breach of conditions around a A$100 million bank loan or that the loan was on call, they believed the statements were in order before they endorsed them.

They were found not guilty of Financial Reporting Act charges in the Auckland District Court this week.

Judge Jan Doogue said the directors were entitled to rely on the advice from auditors Ernst and Young that the accounts complied with accounting standards.

Devlin says even given the verdict, other company directrors would feel they were putting their own reputations on the line when they joined a board.

The challenge would be to ensure that a director did not become over-reliant on external expertise and that every effort was made to ensure such advice was correct, via a second opinion.

Devlin says the Feltex case also shows an increasing focus by regulators on the activities of governance bodies, which he says is long overdue.

Meanwhile the university's head of executive education - Dr James Lockhart, says the findings also raise the likelihood of investors pursuing third party providers in cases of corporate failure.

"Law firms, mostly with near unlimited liability, will find this uncomforting while accounting and business advisory firms, who often have tight and well specified levels of liability, could be expected to pull their shroud even tighter."

- NZ HERALD