Corporate Directors and Financial Literacy
MANILA, Philippines - Among the important issues that were raised in the analysis of the Asian financial crisis, the Enron debacle, and the derivatives disaster was the finding that in many cases, companies that succumbed to the cataclysmic disasters, were those that failed in oversight and monitoring. In most cases, this governance weakness could be traced to directors having little or no financial literacy.
Accounting information is necessary to both internal and external users of such financial data. External users are those who would wish to evaluate a company for various reasons: They may be current or potential investors in the company, or current and potential lenders to the company, suppliers, customers, government regulators, as well as competitors.
Internal users are basically the company's management team comprised of operations staff, administration staff, and general management. Thus it is quite important that the company's directors should be able to read and interpret financial data that go up to them as basis for decision-making.
To start with, an understanding of the basics of accounting, starting with a succinct description of the basic financial statements - namely, the balance sheet or the statement of a company's financial position as of a particular date; the income statement which shows the results of the company's money-making activities over a specified period (usually a year); the cash flow statement which provides information on how cash is generated and spent; and the statement of changes in equity, which reflects the increase and decrease in the net assets of the business and the reasons for such - is necessary.
Likewise, the various accounting rules and conventions that Philippine business must adhere to and how to understand the external auditor's reports by describing the audit process which leads to an audit opinion (unqualified, qualified, adverse, and disclaimer of opinion) and the reasons for such opinion, as well as how to interpret notes to the financial statements are important.
Because directors have to understand their finance-related roles, as do senior management, they must be aware of their various responsibilities - the Board is responsible for governing the company through broad policies and objectives while Management is responsible for the company's operations - and the reporting hierarchy. …