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IAI Actuarial Core Principles · Business Management · Separate legal personality, directors' duties, shareholders and partnerships

A director of Lotus Auto Ltd signs the company's annual financial statements, knowing that a large liability has been left out to improve apparent profits. Which statement best describes the director's potential liability?

The director may face personal liability, including statutory penalties, because directors are responsible for accounts that give a true and fair view. Knowingly approving statements that omit a large liability is a serious breach, and the auditors' failure to detect it is no defence.

  1. ALiability is only to the company, never to anyone else
  2. BNo liability arises if the auditors did not detect the omission
  3. CLiability arises only if the director sold shares in the company
  4. DThe director may face personal liability, including penalties under company law, for knowingly approving misleading statementsCorrect
  5. Liability arises only for the company chairman, not for other directors

Explanation

Directors are responsible for the true and fair presentation of the accounts and may face penalties for knowingly approving misleading statements. Auditor failure is not a defence for a director who knew. Liability is not limited to the chairman or to share sales.

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