Making responsible provisions

The Auditing Practices Board has recently published Bulletin 1998/10, which encourages auditors of listed companies to describe their responsibilities towards different elements of the annual report.

Once, the audited financial statements and the directors’ report were the annual report. Today, the accounts typically make up less than 40% of the reports of larger listed companies. Operating reviews, chairmen’s statements, remuneration and corporate governance reports form most of the pages.

Auditors have different responsibilities for the different aspects of the annual report. Understanding what auditors do on corporate governance is perhaps the greatest challenge. Currently, this is not explained in the annual reports of many listed companies. The responsibilities statement will fill this gap. Although useful, this will, I fear, only go part-way to help users appreciate what auditors can realistically do in relation to corporate governance.

When the Cadbury Code was incorporated into the Listing Rules, an obligation was placed on auditors to review compliance with those aspects of the code that were capable of objective verification. At the time, this amounted to 11 out of 19 provisions – a reasonably high proportion. Yet, since then, this has changed to only 7 out of 45 provisions.

Auditors have generally indicated that they would prefer the requirement to review the seven provisions of the Combined Code to be dropped. Shareholders and companies, however, have indicated that they saw some benefit in the review, especially in relation to internal financial controls.

In 1999, we can expect guidance on directors’ responsibilities regarding the expanded Hampel definition of internal controls. Inevitably, there will be an active discussion regarding the level of assurance auditors can provide in relation to the expanded definition of control and what companies will be prepared to pay for. The outcome of this debate may cause the value of the current regime to be reappraised.

Jon Grant is technical director of the APB

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