I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART A: THE CONTEXT AND PURPOSE OF FINANCIAL REPORTING 

 

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5

   Governance 

Those charged with governance of a company are responsible for the preparation of the financial 

statements.  

 

Corporate governance is the system by which companies and other entities are directed and controlled. 

Good corporate governance is important because the owners of a company and the people who manage 

the company are not always the same, which can lead to conflicts of interest.  

The board of directors of a company are usually the top management and are those who are charged 

with governance of that company. The responsibilities and duties of directors are usually laid down in 

law and are wide ranging. 

5.1 Legal responsibilities of directors 

Directors have a duty of care to show reasonable competence and may have to indemnify the company 

against loss caused by their negligence. Directors are also said to be in a fiduciary position in relation to 

the company, which means that they must act honestly in what they consider to be the best interest of 

the company and in good faith. 

In the UK, the Companies Act 2006 sets out seven statutory duties of directors. Directors should: 

 

'act within their powers; 

 

promote the success of the company; 

 

exercise independent judgement; 

 

exercise reasonable skill, care and diligence; 

 

avoid conflicts of interest; 

 

not accept benefits from third parties; and 

 

declare interest in a proposed transaction or arrangement.' 

 

 

 

 

 

 

 

 

 

 

 

(Companies Act 2006, 

Sections 171–177) 

An overriding theme of the Companies Act 2006 is the principle that the purpose of the legal