Trust Issues: How Directors Can Actually Know What’s Going on with Company Finances

In a world where every other headline screams financial misconduct, dodgy dealings, and regulatory crackdowns, sitting on a board is starting to feel less like "making strategic decisions" and more like "walking a financial tightrope over a canyon filled with auditors." If you’re a director, you likely spend sleepless nights wondering whether the figures you're shown bear any resemblance to the truth or if they're a creative writing project by your CFO. So, how can you be sure the information you're getting is accurate?

As a director, you're technically responsible for ensuring the financial integrity of the company, but you're at the mercy of the executive team, who may or may not have read the memo about “accurate reporting.” Here’s how you can actually get a grip on the numbers and avoid finding your company on the front page (and not in the good way).

1. Diversify Your Sources – Think Beyond the CFO

If the CFO is your only source of financial truth, you might as well be reading tea leaves. To make sure you’re not getting a sugar-coated version, put in place:

• Internal Audits: Set up an internal audit team that answers directly to the audit committee, not to the CFO. This separate line of sight acts as an independent review of the company’s financials, effectively letting you keep tabs on what’s happening without relying on one executive’s perspective.
• External Audit Independence: Make sure your external auditors aren’t too cosy with the CFO. A truly independent audit should be just that – independent. Ask yourself: are the auditors really grilling your CFO, or have they gone soft?
• Outside Perspectives: Forensic accounting firms can be an eye-opener. Bring in an outside firm to check into specific areas like revenue recognition and cash flow now and again, especially if you’ve noticed your revenue graphs looking suspiciously cheerful.

2. Use an Audit Committee That Knows Its Stuff

An audit committee filled with people who understand accounting can be your first and last line of defence. They don’t just skim over reports but get into the details that reveal creative bookkeeping.

• Specialised Members: Financial expertise on the audit committee is essential. These people should know what’s standard practice and what’s “suspiciously optimistic.”
• Direct Access: Give the audit committee access to finance staff without having to go through the CFO. This way, they can get an unfiltered version of events rather than a carefully constructed story.
• Variance Analysis and Trends: Insist on regular reviews of trends and variances in financials. If expenses consistently come in below budget or revenue numbers are consistently rosy, it could be because someone’s playing with projections rather than presenting reality.

3. Encourage Whistleblowing – Without Retaliation

An anonymous whistleblower programme lets employees flag suspicious activity without fearing for their jobs. But it’s not just about having a programme in place; it’s about actively encouraging its use and ensuring that the board, not the CFO, oversees it.

• Direct Oversight: Reports from the whistleblower system should go straight to the board. The CFO shouldn’t have the opportunity to screen out any unpleasant revelations.
• Periodic Reports: Insist on regular updates on what’s been flagged – and don’t just wait for something big to happen. The minor complaints can sometimes signal where major issues are brewing.

4. Routine and Spot Financial Reviews – Keep the Finance Team on Their Toes

Monthly reporting cycles may feel like overkill, but the more often you look at the numbers, the harder it is for anyone to smooth out rough patches or embellish the details.

• Frequent Reporting: Monthly, rather than quarterly, reports let you catch patterns or anomalies sooner. It also reduces the time available for anyone to “polish” the numbers.
• Spot Checks on Key Metrics: Surprise checks on revenue recognition, expense timing, or asset valuations can be revealing. If people know spot checks are coming, it’s harder for them to game the system.

5. Broaden Your Engagement – Talk to People Outside of Finance

If you only hear from the finance team, you’re missing half the picture. Talk to department heads in sales, operations, HR – anyone who has a stake in the financial figures.

• Cross-Verification of Data: This approach is all about getting corroborating stories. If the sales head is saying one thing and the CFO is saying another, you’ve found your red flag.
• Comparing Financial Data with Operations: A CFO telling you revenue is strong while sales figures are dismal? Time to ask questions. Finance should tell the same story that operations is telling – if it doesn’t, someone’s bending the narrative.

6. Get Tech-Savvy with Data Analytics and Benchmarking

Incorporating data analytics tools is about as close as you’ll get to real-time financial insight. These systems can raise alerts when something is off, whether it’s an odd trend or an industry anomaly.

• Automated Monitoring Systems: AI and data analytics can help spot patterns that humans might miss, flagging unusual trends for a closer look.
• Benchmarking: Compare your financial metrics against industry standards. If your company’s ratios are drastically different from peers, it’s time to ask why – and how – this is happening.

7. Reinforce a Culture of Transparency and Accountability

Set the tone from the top. Make it clear that you expect financial transparency and ethical reporting. Directors who regularly engage with the CFO – and encourage open discussion about the financials – create a culture where issues come to light sooner.

• Expectations and Accountability: Regularly remind the executive team that you value accurate reporting above all else. This isn’t just about keeping the board happy; it’s about ensuring the company’s long-term stability.
• Open Dialogue with the CFO: Regular one-on-one conversations with the CFO can reveal the bigger picture. Encouraging the CFO to discuss challenges – rather than expecting rosy projections – makes it easier to get an honest account of the business’s financial state.

The Bottom Line

Directors may never be able to eliminate financial misreporting entirely, but these steps offer some control over the situation. By implementing independent audits, deep-dive variance analysis, cross-verification across departments, and fostering a culture of transparency, you can spot issues early – before the regulators do. Consider it a form of self-preservation. After all, the last place you want your name appearing is in an ASIC investigation headline.