Ask someone why their business failed and you'll rarely hear them say that it was because of information mismanagement. Yet the lack of record making and keeping is often present in failed businesses.
The extent of legally required record keeping obligations continues to grow. Hundreds of statutes in Australia now dictate the length of time certain documentation must be kept. Yet there is no statute which integrates the times, let alone the requirements.
The takeaway for this post is that information mismanagement sinks companies and careers.
The best time to prepare is within legal deadlines, ie the law's compliance periods. Survival requires that you and your colleagues find ways to make record keeping a habit and to empty "too hard baskets" for keeping financial and other records.
As there are legal risks unique to companies and as the topic of required record keeping is very broad, this post touches on corporations law financial record keeping requirements and the risks of failing to keep financial records.
The Australian Securities and Investments Commission (ASIC) recommends that company directors seek professional advice if they are in doubt as regards keeping financial records. Accounting and law firms accept this business.
Section 286 obligations for keeping financial records
Company financial records must be retained for seven years after the transactions covered by the records are completed.
The records include asset registers, invoices, cheque butts, contracts, debtors ledger and job or customer files. As a catch-all provision, section 286 of the Corporations Act 2001 (Cth) obliges a company to keep written financial records that correctly record and explain its transactions and financial position and performance, and would enable true and fair financial statements to be prepared and audited.
Importantly, strict liability applies to breach of these corporations law obligations. Also, under the ASIC Act, ASIC may inspect the records.
As is usual with law, the Corporations Act stipulates what you must do, but not how you do it or the system or templates for it.
Information mismanagement sinks businesses
The section 286 requirements become acute when a company is under financial or legal pressure and enquiries arrive from the Australian Taxation Office (ATO), ASIC, other regulatory authorities and insolvency professionals. Both the company and its directors may then be exposed.
For the affected company, one of the risks is that when company directors cannot produce proper company records liquidators use the deemed insolvency provisions in the Corporations Act. On the appointment of a liquidator the effective management of the company falls into the hands of the liquidator and directors may be influenced to help but not get in the way.
For affected company directors, a cascade of legal problems can often then arise as insolvency administrators and their lawyers examine company financial records (or the lack of them). Company directors may then become personally exposed to legal action by a range of litigants, including from the insolvency people who have influenced (to put it politely) the directors to help but not get in the way.
Our legal compliance tool
In our firm we develop and implement document retention policies and procedures for clients in a wide variety of industries.
Send me an email and I'll supply a short table of dates and deadlines for record keeping compliance requirements under law in Australia. It has an easy to follow layout setting out record keeping obligations.