The English ICA's submission to the Hampel committee on corporategovernance broadly favours the status quo although, as Martyn Jones says,the institute also recommends a greater role for non-executive directorsand audit committees.Martyn Jones is national audit technical partner with Deloitte &Touche and chairman of the English ICA audit faculty working party.
The corporate governance initiative has reached a cross-roads. While some of the responses to the Hampel committee’s recent consultation period have called for more governance requirements to be loaded onto the corporate sector, others are firmly of the ‘thus far and no further’ view.
Indeed, there are those who are asking for a significant relaxation of the public reporting requirements.
The English ICA’s submission to the Hampel committee maintains a positive attitude towards the current arrangements and emphasises the crucial importance of independent non-executive directors and effective audit committees.
The institute has developed this position in a new Audit Faculty booklet issued last week. Audit Committees – a framework for assessment notes that boards of directors are beginning to recognise the benefits a properly constituted audit committee can bring to their discussions in providing a focus to the whole area of business risk.
Companies will never be in a position to make profits without taking risks, and executive directors, who are busy with the day-to-day decision-making, are increasingly delegating a degree of risk and control oversight to their audit committees. Such delegation rightly goes beyond areas which are traditionally considered as ‘financial’. Indeed, it could be argued that some committees are facing a ‘board expectations overload’.
In such circumstances, some audit committees may wish to take the opportunity to have a time-out and assess the priorities and effectiveness of their operation.
The English ICA’s booklet may help them in this task. It identifies key questions which such committees might wish to discuss in the context of their organisation’s own particular circumstances. Such questions are relevant, not only to listed companies, but to public sector bodies, charities, and all other entities which are concerned with effective governance.
While the emphasis of the institute booklet is clearly on the basic questions, ‘picking lists’ serves to illustrate good practices which have been identified with the assistance of directors. The approach deliberately sets out to be non-prescriptive.
The audit committee is regarded as an organ of the main board of directors – a forum in which risk and governance issues can be discussed and recommendations subsequently developed for the consideration of the full board. The booklet’s appendices reproduce specimen terms of reference and, interestingly, an example calendar. Specimen agendas envisage a situation in which the committee meets only four times in the year.
Such an approach demands the existence not only of a strategic attitude and effective, high-level progress reports from internal and external audit, but committee members who, as non-executive directors, participate in the more frequent meetings of the main board.
Chapters on ‘Business risk and internal control’ and ‘Role, remit and relationships’, stress the importance of a sense of perspective and effective liaison. The committee is viewed as part of the board’s own system of control. It serves to ask the right questions and probe into the answers at the earliest possible opportunity. It then acts not only to highlight bad risks, but to help identify internal control performance gaps.
Such a vision offers advantages to all involved. The committee understands and listens to the concerns of internal and external audit and assists them in representing such concerns at main board meetings and in improving the overall quality of their product.
At the same time, it ensures, on the board’s behalf, that proper planning and reporting manages to avoid unpleasant surprises and also reflects good value for money.
More importantly, it provides a pointer to the future – putting an emphasis on improved performance. Governance should not descend into mere box-ticking.
We believe the booklet’s positive attitude to improving the effectiveness of corporate governance should win it friends. Yve Newbold, the chief executive of Pro-Ned, the non-executive director headhunters, has caught our intention exactly when she writes in her foreword: ‘Long may the institute continue this essential work.’
