The Debate: – Shifting blame to directors

Don’ blame the messenger

By Bill Connell

From the furore surrounding Enron, it is tempting to lay the blame solely at the door of the auditors.

Taking this view misses the point. Auditors can check and double check that the company’s accounts and management processes are in order.

But it is company directors who determine the way a company is run. And it is to directors that we must look to find a solution to our current problem.

The key is to ensure that company directors understand fully their responsibilities and are equipped to fulfil these responsibilities. At a non-executive level, shareholders need to know that their representatives are fully committed, trained and able to carry out their responsibilities.

This does not mean bringing in rafts of new rules and legislation. Indeed, the absence of a legislative governance framework sensibly allows companies the scope to use common sense in applying corporate governance principles.

Nor do accounting standards need to be drastically changed – the UK’s principles-based ASB and the IASB which requires financial statements to reflect the substance of a transaction, are preferable to the prescriptive approach that exists in the US.

Rather, we must look to the common sense and judgement of directors and shareholders.

Non-executive directors need to act as the ‘conscience’ of the company, and for this they need training in the specific skills required to perform this role.

This investment in the quality of directors should be openly disclosed to reassure all stakeholders of good corporate governance. Placing the combined code alongside the listing rules and the requirement for companies to justify non-compliance has generally given it the necessary authority, but shareholders must share the responsibility of ensuring the suitability of directors when appointed and reappointed.

And a key question must always be: ‘does this person have the time to fulfil their responsibilities?’ CIMA believes that an appropriate group of relevant stakeholders including the FSA should agree a code of best practice for non-executive directors with respect to their roles.

We also believe companies should also be encouraged to widen the role of the audit committee to include a review of governance frameworks.

In addition we recommend that the full board should review progress against corporate governance on a regular basis.

  • Bill Connell is group director of risk management at the BOC Group, chair of FMAC and a CIMA council member.

What are we trying to hide?
By Gavin Hinks

Efforts to point the finger at company directors as being responsible for the failings underlying the spectacular scandal surrounding Enron and Andersen run a very real risk – complain too much about others and you start to look guilty yourselves.

In the rush to find the guilty parties in the Enron collapse attention fell upon Andersen, the firm’s document shredding and its ‘error in judgement’.

And ever since then the attention has been on accountants.

For a time there was little reaction from the profession but when it came, there was a stampede to say that when looking for fall-guys, regulators, investors and public alike should put company directors in the frame.

The rush to do so, and the constant repetition of that message, could start to look a little unseemly. Indeed there’s a risk that it could even become embarrassing. Simply put: it appears that accountants are deliberately avoiding any self reflection in favour of shifting the blame somewhere else. The refrain that ‘an auditor can only report on the documents he’s given’, begins to sound just a little jobs worthy.

So that’s the risk accountants and auditors are unwilling to deal with, the issues that affect them.

In reality that’s not the case but accountants should be aware that the perception is developing. Instead accountants and auditors should be willing to debate the issues arising from Enron and Andersen, dealing with them on a case by case basis. The government has called for a inquiry into the rules regulating auditors and the firms should show willing to engage in that too. Most of all auditors and accountants should be tackling the key issue of telling the world more about what they do. This range from general publicity through to statements in company report and accounts.

It surely can no longer be good for auditors to restrict their statements to saying broadly what their job was. It can have escaped no one, least of all investors, that there must be more that can be said without threatening commercial confidentialities.

Most of all rather pointing at others, accountants would emerge with more understanding, if they were to shift to proactive footing, making proposals for what they could change change about their own roles. In the end shifting attention to company directors will only get auditors and accountants so far. Say it often enough and people will start to ask what they’ve got to hide.

  • Gavin Hinks is news editor at Accountancy Age.

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