By the time it was published at the end of last month, the Combinedhe APB has already launched a counter-attack. Code produced by Sir Ron Hampel’s committee on corporate governance had been debated at such length, by so many commentators, that few people took much notice.
The Auditing Practices Board was a notable exception.
The ‘supercode’ and accompanying changes to the Stock Exchange’s listing rules take effect for financial years ending after 31 December. From then, companies will be required to report on how they are applying the code, and to confirm whether they have complied with all its provisions.
In spite of an energetic campaign by the APB, the Stock Exchange rules will require auditors to vet their clients against 7 out of the code’s 49 provisions – those that are seen as being verifiable from objective evidence.
Within a week of the supercode’s publication, the APB launched a counter-offensive in the form of a consultation document proposing that the Exchange drops corporate governance audit requirements from its listing rules.
APB chairman Ian Plaistowe argued that due to the difficulties associated with reporting on only portions of the Combined Code, and because auditing standards already required auditors to read the entire annual report and act on any inconsistencies, the new checks were redundant.
‘The APB does not believe that it is desirable for these responsibilities to be dealt with through increasingly complex drafting of the introductory paragraph of the audit report on the financial statements,’ said Plaistowe.
The APB’s concern was to close what it calls ‘the expectation gap’. When scandals such as the Maxwell and Barings collapses occur, external auditors are the first to be hit by writs from irate shareholders.
Critics such as Essex university academic Prem Sikka say that, while the APB continues to try to keep corporate governance and internal controls a private matter between auditors and directors, they will never be able to close the expectation gap. The consultation document, said Sikka, was another attempt by the APB to wash its hands of any responsibility for preventable corporate failures and scandals.
The board’s current guidance, in SAS 600: ‘Auditors’ reports on financial statements’ sets out a recommended wording that explicitly states that external auditors are not responsible for vetting corporate governance provisions.
If the APB cannot convince the Stock Exchange to drop the specific supercode checks on corporate governance, it proposes retaining the statement: ‘Auditors do not perform the additional work necessary to express any opinion on the effectiveness of the company’s system of internal financial control, or its corporate governance procedures.’
For Plaistowe, the SAS 600-style wording is ‘unattractive and very negative’.
In its place, the APB proposes an explanation of what auditors are supposed to do, which is to read the information in the annual report and draw the shareholders’ attention to any inconsistencies in the directors’ reviews that conflict with the audited financial statements.
Howard Evans, financial director of IT company Misys, takes a relaxed view of the new formulation.
‘The auditor’s responsibility boilerplate is not really there for the companies that buy the auditor’s services,’ said Evans. ‘Whenever we get a set of signed-off accounts we know what the auditors are responsible for and what they’re commenting on. I’m very clear on that.’
But when auditors are asked to comment on issues aside from their figures, ‘they’re dealing with opinions, not facts’, warned Evans.
A similar view was voiced by Mike Propert-Lewis, technical officer at the Institute of Internal Auditors. The Combined Code, he said, will be more onerous for internal auditors, who will have to audit its ‘softer’ provisions.
‘But how do you audit ethical issues, for example compliance with disability laws or fair employment policies?’ asked Propert-Lewis. ‘There’s a feeling that some companies are merely going through the ritual. If you are a well run company, you probably don’t need to be told to do these things.’
Although he sympathises with the APB’s stance, Misys’ Evans is losing interest in the corporate governance debate, which he says is becoming ‘boring and repetitive’.
There are indications the government may be thinking along similar lines.
Having waited so long for the Combined Corporate Governance Code and Stock Exchange rules, it seems unlikely it will respond enthusiastically to the APB’s call to amend them before the ink has even dried.
The board has given all interested parties until the end of July to comment on its proposals. Cogent though its arguments may be, the ASB could also find its campaign bulldozed by something bigger – the government’s long promised review of company law.
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