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Getting it right: directors’ assessment of information

Kerri O’Donnell (Tasmanian School of Business & Economics, University of Tasmania, Hobart, Australia)
Barry Hicks (Accounting and Corporate Governance, University of Tasmania, Hobart, Australia)
John Streeter (Tasmanian School of Business and Economics, University of Tasmania, Hobart, Australia)
Paul Shantapriyan (Tasmanian School of Business and Economics, University of Tasmania, Hobart, Australia)

Managerial Auditing Journal

ISSN: 0268-6902

Article publication date: 2 February 2015

Abstract

Purpose

The purpose of this paper is to explore the increasing expectation against two concepts, information and process scepticism. In light of the Centro case judgement, directors’ decisions are held to increasing standards of due care and diligence.

Design/methodology/approach

This is a conceptual paper, drawing upon archival material, including statute law, case law, regulatory guidance material and media releases in Australasia. The authors review the statutory duty of care, skill and diligence expected of non-executive directors.

Findings

Whether a director has exercised an appropriate level of reasonable care and skill and/or due diligence has been a matter for the courts to decide. Such retrospective analysis leaves directors vulnerable to the uncertainty of whether their individual interpretation of diligence matches up to that of the presiding judge. The authors provide directors with a framework to apply scepticism to information and processes provided by those on whom the directors may rely.

Research limitations/implications

Two concepts are identified: reasonable reliance on others and the business judgement rule. The authors present arguments that challenge us to understand reasonable reliance, judgement and actions of directors in light of processing and information scepticism.

Practical implications

Directors do have a different role to that of auditors; incorporating scepticism can enable directors to fulfil their responsibility towards shareholders. By applying information and process scepticism, directors of companies can reduce the likelihood and magnitude of litigation costs and out-of-court settlements.

Originality/value

This paper provides a framework to apply scepticism to information and processes provided by people on whom the directors may rely.

Keywords

Acknowledgements

The authors would like to thank the anonymous reviewers and the discussants for their comments and views at the CSEAR Conference 2012 at the University of Wollongong.

Citation

O’Donnell, K., Hicks, B., Streeter, J. and Shantapriyan, P. (2015), "Getting it right: directors’ assessment of information", Managerial Auditing Journal, Vol. 30 No. 2, pp. 117-131. https://doi.org/10.1108/MAJ-08-2014-1077

Publisher

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Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited