View from the House - Incorporation can't be an excuse for poor

Sir Adrian Cadbury’s code on corporate governance clearly placed responsibility for ‘a balanced and understandable’ assessment of a listed company’s position on the board of directors.

In order to achieve this purpose, the board would be required to maintain ‘an objective and professional’ relationship with its auditors. It should establish an audit committee on which at least three non-executive directors should sit.

Sir Adrian reiterated directors’ responsibility under section 221 of the 1985 Companies Act for maintaining adequate accounting records.

In its policy statement on corporate governance, the US pension fund TIAA-CREF recommended that a board of directors should ‘foster and encourage’ a corporate environment with strong internal controls, fiscal accountability, high ethical standards and compliance with laws and regulations.

In the US and the UK, it is the board of directors which is responsible for a company’s accounts, for their being accurate and giving a true assessment of a company.

It is for institutional investors to hold them to account based on the Cadbury code of best practice in terms of the financial aspects of corporate governance and based on the Greenbury code in terms of remuneration packages.

It is surprising, therefore, that one institutional investor – British Steel Pension Funds, with some $6.5bn of their participants’ money under management – should vote against KPMG as auditors of a listed company because it has incorporated its audit practice.

The investment manager of the funds feels that auditors ought to improve the quality of their work and thus avoid litigation rather than seek incorporation.

He also feels that institutional investors have not been consulted sufficiently.

The Financial Times reported (7 September) that Smiths Industries was to drop its auditors, not one of the Big Six, and replace them with Price Waterhouse, which is. According to the Financial Times: ‘The exit of the medium-sized firms from auditing the very big companies is nearly complete.’

This means that almost all listed companies where institutional investors have placed their participants’ funds will be audited either by accountancy firms which are incorporating within this country or are considering incorporating off-shore.

Actions will always be possible for negligence against any accountants, whether they are incorporated or not, and the fact that an action in future might be against a company rather than a partnership should not concern an institutional investor.

Any view that auditing standards will decline because an audit practitioner may sleep at night, rather than lying awake from worry on unlimited liability, is not common sense. And it belittles the accountancy profession to suggest standards would be lowered because liability is limited rather than unlimited.

Institutional investors owe it to their participants to ensure Cadbury and Greenbury are adhered to. A focus on greater compliance with these codes will provide a useful impetus to ensure enhanced shareholder value within the stakeholder economy.