The board does not produce the accounts. The CFO and finance team do. The external auditor reviews them. The audit committee oversees the review. The board approves the result. But governance of the financial dimension requires meaningful understanding. A board that approves accounts it does not comprehend has abdicated.
The trusteeship framing
The most useful framing: the board is the trustee of the company's capital. The shareholders provide the capital; the board's job is to ensure it is deployed productively, not lost through negligence or fraud, that returns are reported honestly, and that capital is preserved for the long term.
What every director must be able to do
A director does not need to be an accountant. But every director must be able to:
Read the income statement — understand revenue quality (recurring vs. one-off), margin trends, and the difference between reported and underlying profit.
Read the balance sheet — understand the capital structure, liquidity position, quality of assets, and off-balance-sheet commitments.
Read the cash-flow statement — understand where cash comes from, where it goes, and whether the company can fund its operations from internally generated cash.
Three questions for every set of accounts
1. Are the revenues real? Revenue recognition is where most accounting manipulation occurs.
2. Are the margins sustainable? Or inflated by one-off items, cost deferrals, or aggressive capitalisation?
3. Is the cash flow consistent with the reported profit? If profit grows but cash doesn't, ask why.
The warning signal
A listed company reported steady profit growth for five consecutive years. But cash flow from operations had been declining for three of those years. The gap was explained by "working capital timing" — receivables growing faster than revenue. Investigation revealed the sales team had been offering extended payment terms to pull forward revenue. The practice was not illegal but was aggressive — and the board had not been told.
Profit without cash is a warning signal. Directors who read the cash-flow statement as carefully as the income statement catch problems earlier.
This article is adapted from The Director's Craft by Peter Burchardt. Read the full chapter in the book →