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IAI Actuarial Core Principles · Business Finance · Ethical responsibilities of owners and managers

The board of a company is told by its chief financial officer that a large contingent liability, likely to crystallise, could be omitted from the annual report to keep the share price steady. Which statement best describes the directors' ethical position?

Directors must make sure the accounts give a true and fair view, so a likely material liability has to be provided for or disclosed now. Concern about the share price, the auditor's silence or competitors' practice does not justify withholding it from shareholders.

  1. AThey may omit it if the auditor has not specifically asked about it
  2. BThey may omit it if disclosure would cause the share price to fall temporarily
  3. CThey may omit it if competitors do not disclose similar items
  4. DThey may omit it provided they disclose it in next year's report
  5. They must ensure the financial statements give a true and fair view, so the item must be properly disclosed or provided for despite the effect on the share priceCorrect

Explanation

Directors are responsible for accounts that give a true and fair view. Material obligations must be provided for or disclosed whatever the market effect. Auditor silence, peer practice or later disclosure does not excuse concealment, as users rely on the current report.

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