The Importance of Keeping Accurate Books and Records: A Guide for Directors

Running a commercial enterprise, such as a company comes with numerous responsibilities, but one of the most critical—often overlooked—is maintaining accurate and complete business records. In Australia, directors are legally required to ensure their companies keep financial and corporate records that are clear, organized, and up-to-date. Failing to do so can result in serious financial and legal consequences. Let’s explore what this entails and how directors can meet these obligations effectively.

What are your responsibilities?

Under the provisions of the Corporations Act 2001 (“Act”), a company is required to keep written financial records for a period of seven years (7) after the transactions covered by the records are completed. These records should accurately reflect the company’s financial transactions and position, enabling the preparation and audit of true and fair financial statements. This responsibility falls on the company’s directors and trustees face the same obligations.

ASIC, Australia’s corporate regulator, treats breaches of record-keeping obligations with significant seriousness. Directors can face hefty penalties, including fines and disqualification, if they fail to meet these requirements. More concerningly, in the event of insolvency, inadequate record-keeping may expose directors to personal liability for company debts.

For example, if a company enters liquidation and the records fail to provide a clear picture of its financial health, directors may struggle to prove they took reasonable steps to prevent insolvency. This underscores why maintaining proper records is not just a compliance task—it’s a safeguard for directors.

What Records Should Be Kept?

At a minimum, companies’ officers should retain records in following three critical areas to comply with their statutory obligations:

1. Financial Records:
   • general ledger;
   • general journal;
   • register of assets;
   • invoices and statements received and paid;
   • creditors ledger;
   • financial statements, like profit and loss accounts, balance sheets, depreciation schedules and taxation returns (for income tax, group tax, fringe benefits tax, business activity statements and all supporting documents);
   • bank account statements, bank reconciliations and bank loan documents;
   • cash records, including the cash receipts journal, bank deposit books, cash payments journal, cheque butts and petty cash books;
   • records for sales and debtors, including the sales journal, debtors ledger, list of debtors, invoices issued, statements issued and delivery dockets;
   • records for work in progress, including job/customer files, stock listings, creditors records; and
   • unpaid invoices, including correspondence, annual returns and forms for ASIC and records for wages and superannuation.
2. Corporate Records
   • Companies constitution
   • shareholders’ agreement
   • registers for members, options, debenture holders, prescribed interests, charges and unclaimed property · minutes of directors’ meetings
   • minutes of members’ meetings
   • deeds of trust, debentures, contracts, agreements
3. Employment & Legal Records
   • employee personal information, such as their name, address, tax file number, and employment eligibility verification · employment contracts, including copies of signed employment agreements or offer letters
   • payroll records, such as documentation of wages, taxes withheld, and benefits provided
   • performance evaluations, records of employee performance assessments and feedback
   • licences, permits, to operate your business legally

Why are these records important?

Record-keeping is more than a legal obligation—it’s a vital tool for business success for the below reasons:

• Financial Insights: Accurate records enable directors to monitor their company’s performance, track profitability, and identify potential issues early.
• Efficient Operations: Organized records make it easier to apply for financing, attract investors, and manage audits or regulatory checks.
• Compliance: Meeting legal requirements avoids fines, penalties, or other enforcement actions by regulators like ASIC or the ATO

What happens if records aren’t adequate?

Failing to maintain proper records can lead to serious consequences, especially if the company faces financial trouble or insolvency. Key risks include:

1. Insolvent Trading Liability: Directors could be held personally liable for debts incurred after the company became insolvent if records do not provide a clear financial picture.
2. Reduced Credibility: Missing or disorganized records can damage a company’s reputation and its ability to secure financing or partnerships.
3. Legal and Financial Penalties: Directors may face fines, disqualification, or worse if ASIC determines they’ve breached their obligations.

How Can Technology Help?

In today’s digital world, technology makes it easier than ever to manage records.

1. Financial Records: Tools like Xero, MYOB, and QuickBooks help automate financial record-keeping, ensuring accuracy and compliance.
2. Corporate Records: Similarly, DocuSign and other document management platforms allow for electronic storage of contracts, agreements, and other corporate records.
3. Employment & Legal Record: Many companies also use cloud-based human resources software to manage payroll, performance evaluations, and employee records. These systems not only save time but also reduce the risk of losing critical documents.

Transitioning to digital record-keeping systems is an investment in efficiency and compliance that every director should consider.