Time to close the financial year - on liability and supervisory board members

By Anna Wyrzykowska, Co-Head of Company Law & Corporate Governance Practice & Łukasz Czekański, Counsel at Tax and State practice, WKB Wierciński, Kwieciński, Baehr

In case of most companies, June is the month for approval of financial statements and management reports.

While the management report is prepared by the management board, financial statements are typically prepared by external accounting firms, and the role of the management board is to review (in general) and sign them, based on trust in the competence of professional accountants. However, only a few know that both members of the management board and members of the supervisory board can be held liable for any damage resulting from presenting incorrect financial statements. Practice shows that the most frequent incorrect or inappropriate presentation and disclosures within the financial statements consist of so-called “creative bookkeeping,” or failure to disclose events of material importance to the company which may, in the future, result in tangible financial losses.

According to the Accounting Act, members of the management board, and members of the supervisory board are obligated to ensure compliance of the entity’s financial statements and management report with the applicable law. Furthermore, they are jointly and severally liable towards the company for any damage caused by any action and/or omission that may constitute a breach of the above obligation.

As a rule, it is the member of the management board who is responsible for performing accounting duties, also if they are assigned to another person with the latter’s consent (e.g. to the chief accountant). If the management board is composed of several members, and the person responsible for keeping accounting records has not been designated, the responsibility lies with all the members of the management board (even those who do not handle the company’s financial affairs).

Thus, it is to be remembered that assigning another person to prepare financial statements does not automatically discharge the management board from liability for damage, in case of them being incorrect. Members of the company’s management board are held jointly and severally liable, together with members of the supervisory board, which means that the company may demand that its claims be satisfied, on request, by all members of the management board and the supervisory board jointly, by some of them, or by only one person.

Importantly, the occurrence of the underlying liability for damage may, at the same time, be connected with the risk of members of the management board and supervisory boards being held criminally liable under other provisions of the Accounting Act. More details on liability of members of management and supervisory boards, based on Accounting Act and on other acts, can be found in the recently published book by the authors of this article, entitled “Liability of members of authorities of capital companies.”