9. Influence of IFRS on the financial management duties of the board of directors

1. Principles

It is clear that the accounting regulations as per CO cannot serve as a basis for due decision-making by the board of directors. This means that a different standard must be applied as part of current legislation. The doctrine is rather open and indeterminate in relation to this standard of diligence. The starting point here is Article 716a, Section 1 of CO listing the non-transferable and irrevocable duties of the board of directors as a committee. Among these core tasks is financial responsibility, which includes structuring of the accounting system, financial control and financial planning. Based on Article 725 CO, the board of directors must furthermore take remedial measures if half the capital stock and statutory reserves are no longer covered, submit an interim result if there is justified concern of overindebtedness, and finally file a bankruptcy petition if the interim result shows that the company is over-indebted both in terms of going-concern and liquidation values. The key figures to be determined in this regard are the result of a well-structured accounting system and part of appropriate financial control.

Available consequently are two points of linkage for the responsibility of the board of directors in the financial area. Firstly, based directly on Article 716a, Section 1, Item 3 CO in a healthy company; secondly, based indirectly on Article 725 CO in a company which finds itself in a crisis. The board of directors is therefore obliged to monitor the enterprise’s financial situation at all times. The related intensity depends on the equity capital’s amount and structure.

IFRS accounting is recognized to provide a better decision-making basis for management than CO accounting. This raises the question of whether IFRS offers specifications which can be consulted as a benchmark for the financial management duties of the board of directors. The objective here is early detection of risks and error prevention. IFRS better depicts an enterprise’s financial reality, thus raising the question of whether a board of directors which aligns its financial reporting with the requirements of IFRS can also fulfil its duties of supervisory financial management. Synchronization of accounting with financial reporting could lead to simplifications in the enterprise and antiquate internal shadow balance sheets (which are pure management tools).

2. Existent research

There are many opinions on the procedures to be employed by boards of directors when exercising supervisory financial management. However, these opinions tend to describe objectives rather than dealing with specific regulations. In this regard, it is acknowledged that the board of directors must create a system which ensures appropriate, complete, accurate and timely numerical registration of business transactions. This must permit continuous determination of the financial position serving as a basis for all subsequent decisions. The board of directors is responsible for suitable organization and monitoring, as well as determining procedural and substantive requirements, but not for particulars or details. Furthermore, it needs to establish a control organization customized to the enterprise’s size and structure. Though it need not perform control personally, it is responsible for ensuring that the system is appropriately designed and functional. The more effective the system and the wider its coverage, the more the board of directors is relieved of individual examinations. There are few opinions on the applicable standards of accounting; it is anyhow recognized that commercial regulations are inadequate; even if currently applicable law prescribes no cash flow statement, for example, this is nevertheless absolutely necessary to exercise correct financial control. The board of directors must remain oriented with liquidity developments, in particular, by means of a cash flow statement. So far, there have been no specific investigations of whether Swiss law, by applying IFRS, would also permit a fulfilment of internal financial management duties. This is not surprising, because the topic is new and very few authors have so far treated IFRS with regard to Swiss company law.

3. Method

To be examined for this purpose is how and whether IFRS standards are suitable as a benchmark for financial management, and whether the objectives and requirements for financial management are met through bookkeeping aligned to IFRS rules. To be investigated is whether IFRS provisions can be consulted as an internal standard of diligence for the duties of the board of directors with regard to how the board should (internally) register and control its risks. Also to be examined is whether it is at all correct to use two separate standards for financial reporting and financial management. The function of accountability is strongly favoured if decisions by the management board and board of directors are documented not only internally, but also in the publication of accounts (for shareholders). There is moreover the question of whether an accounting standard which consistently reveals the financial impact of management errors leads to more cautious management. An interesting paradox is to be investigated in this context. Transparent accounting tends to result in higher valuations and is therefore considered imprudent. On the other hand, it unsparingly discloses management errors and thus causes the management to proceed more cautiously.

4. Dissertation: Influence of IFRS on the financial management duties of the board of directors

The research results are to be published in a dissertation on the influence of IFRS on the financial management duties of the board of directors.