Flint told to avoid section 404 approach

HSBC director Douglas Flint has been given a stark warning that the UK must avoid following the route taken by the US when deciding how to improve guidance on internal controls.

Link: Bodies warn against US-style internal control

Responses to the Flint-led consultation on the effectiveness of the current Turnbull guidance indicated a strong desire to avoid the box-ticking approach favoured by section 404 of America’s Sarbanes-Oxley Act.

Members of the profession and users of financial statements told the consultation group that many did not want future guidance to focus solely on financial controls, like Sarbanes-Oxley. The benefits of a public statement on the effectiveness of such controls were also questionable.

ACCA chief executive Allen Blewitt said: ‘Turnbull’s principles-based approach has been more successful than the prescriptive line we have seen from the US.

‘We believe that the FRC review must retain a broad spectrum of internal controls, as opposed to Sarbox’s sole focus on matters which affect external financial reporting. But boards must not become too risk-averse -ð risk management should be about seizing opportunities presented by the unexpected, as well as managing the downside.’

Blewitt added that market pressure would deliver more meaningful disclosures on internal controls than the suggested assertions of effectiveness. The soon-to-be introduced operating and financial review was put forward as the ideal place for such disclosure.

Charles Tilley, chief executive of CIMA, agreed that ‘the current approach of a high-level principles and risk-based approach is the correct one’ and that the report ‘should cover all controls, not just the financial ones’, but that there were several ‘practical issues’ surrounding public reporting of the controls.

The review of the Turnbull guidance came as part of the Financial Reporting Council’s combined code on corporate governance.