The collapse of the Independent Insurance Company has raised a host of questions to which answers are needed as soon as possible. It has also raised issues beyond the regulation of insurance companies and might, regrettably, stimulate further and more intense debate about the whole issue of the audit of listed companies in particular.
Many professional firms will be actively seeking new insurers to replace cover they thought they had with Independent.
However, the speed with which the collapse occurred, from a profits warning to liquidation, raises a raft of questions.
Shareholders and those insuring with Independent have every right to ask what the following were doing: the ICAEW, the Financial Services Authority, the auditors, the actuaries, the finance director and chief executive at Independent, as well as the board of directors and the various insurance brokers still promoting Independent to the end. Add to this list the credit rating agencies on whom some of the foregoing may have relied.
Clearly a number, if not all, of the above will be looking closely at what happened during their relationship with Independent.
What is alarming is that one would have thought the FSA, with its 2,500 staff, should have known what was going on at Independent, and taken action.
Does the FSA for example, ‘tick and bash’ as a way of conducting its review procedures, or does it use rather more intelligent methods of reviewing its ‘herd’?
A second question arising out of all of this is concerns whether or not there are any other insurance companies which are in the same boat as Independent.
Have any insurance companies, for example, suffered negative cash flow in any of the last three years? If negative cash flow arises, that alone should set alarm bells ringing.
Is it not time to overhaul the whole issue of the appointment of auditors and the criteria and basis for their reporting? Would it not be appropriate to establish an independent audit appointment body to oversee the appointment of auditors to listed companies and simultaneously prevent auditors from conducting other work for the same client? That way, credibility and transparency could be more easily established, giving confidence to shareholders, directors and the general public.
– David Turnbull, chief executive of the UK 200 Group of Practising Chartered Accountants.
SHAREHOLDERS MUST BE PROACTIVE
As company law stands in the UK, there is a direct relationship between auditors and shareholders and another between directors and shareholders.
Auditors report to shareholders on whether the accounts give a true and fair view. Directors report to shareholders on their stewardship. If anything goes wrong then the shareholders have an absolute right to hold the directors and the auditor accountable.
Bringing in an independent third party to appoint the auditor on behalf of the shareholders would do nothing to improve their lot. Indeed, for both directors and auditors, it would be a marvellous excuse to pass the buck to some third party.
In the past, auditors have been open to criticism for being too much in the pockets of those directors who – in reality – appoint them and set their fees. But that is much less of an issue with the rise of sophisticated corporate governance and, in particular, the now prominent role of non-executive directors.
Auditors have improved their technical and ethical standards over the past few years, and the corporate governance regime has helped directors – especially non-executive directors – to re-assess their role for the good of shareholders. Anyone who has been involved in tendering for the audit of quoted companies knows how hard auditors try. Yes, they compete on price but they also compete on demonstrating understanding of their would-be client and the industry sector.
How could an independent appointment agency replicate the knowledge and experience the directors have to chose the best auditor? They couldn’t.
Instead, they would use the tried and trusted method of Buggin’s turn, which would lead to a decline in the standards that exist in today’s competitive audit market.
Rightly or wrongly, the role of the regulator is always open to criticism.
In the financial services sector, the Financial Services Authority and the Bank of England can always be slammed for acting precipitously or not fast enough. Why introduce another regulator that would attract similar barbs?
If there is one weakness in the director-auditor-shareholder triangle then it lies with shareholders.
Shareholders – especially institutional shareholders – are too timid until things at a company have gone seriously wrong.
It is up to shareholders to take a more active part in holding those responsible up to scrutiny. This will not be achieved by having some regulator acting as surrogate shareholder.
– Peter Williams is a freelance journalist and chartered accountant.
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