The Debate: Benefits of better corporate governance

Waste of time and money

By Timothy Copnell

The last 18 months have seen a wind of corporate governance change blow through UK boardrooms. Yet more change could be on the way if the Financial Reporting Council overhauls the guidance for directors on the assessment of internal controls.

Proposals to require UK-listed companies to certify the effectiveness of their internal controls are unlikely to be popular, according to a recent survey of audit committee members.

That’s not to say people are complacent. In a survey carried out at the Audit Committee Institute last week, only 35% of committee members were resistant to the idea of revising Turnbull’s internal control guidance in the light of international developments.

Nevertheless, there is clear nervousness about moving fully towards a strict US-style regime. Fewer than one in four audit committee members agreed that mandatory certification of the effectiveness of internal controls (like Sarbanes-Oxley section 404) would be beneficial for UK companies, while more than half believed such a step would be against the interests of UK companies.

There are clearly some benefits to the Sarbanes-Oxley approach – at a time when poor internal controls have contributed to a number of corporate scandals, it is hard to argue that a renewed emphasis on the propriety of such controls is a bad thing.

However, there has been a huge cost impact of compliance – in both management time and money – and it keeps increasing year on year.

Surveys in the US suggest that companies with revenue in excess of $5bn (£2.75bn) will spend an average of $4.7m per year to implement section 404 of Sarbanes-Oxley.

But the real cost is management time. Board members and senior executives are in danger of devoting less time to other activities. If this happens, then surely the balance between regulation and entrepreneurship will have moved too far towards regulation.

Whatever the answer, a way needs to be found of improving controls without the process becoming unduly prescriptive and formulaic.

  • Timothy Copnell is the director of the KPMG-sponsored Audit Committee Institute.

A step in the right direction
By John Brace

ACCA supports the principle of expanding auditors’ responsibilities, to bring them into line with what the public expects of auditors. We believe the FSA should have been bolder in its current proposals to require auditors to review internal controls.

The FSA says its proposals will ‘not impose incremental costs of more than minimal significance’. No-one supports needless increases in costs, but what we do not want is for any review to be cursory, to the extent that it would not help shareholders and might perpetuate the expectations gap, at a time when auditors should be asking themselves: ‘How do we extend audit to enable us to give increased assurance to a sceptical audience?’

The more stringent demands of Sarbanes-Oxley in the US have led to a rise in audit fees. But that may be no bad thing as reporting on internal controls is not straightforward.

Many in business will also question whether the combined code’s audit and accountability provisions should enjoy so much attention in the FSA’s proposals. ACCA research has shown that, despite the furore over the Higgs report, most UK listed companies still regard the code as a box-ticking exercise.

But the FSA’s proposals do represent an important development – and more should be anticipated. In future, audits are likely to take a more pro-active interest in fraud, ‘going concern’, risk management strategies and corporate governance. The future of audit may also incorporate the process-driven responsibilities such as those in the forthcoming mandatory operating and financial review.

But since auditors have been at pains to restrict their liability, why would want to take on this extra work?

If the government wants auditors to extend their responsibilities, it must address the problem of auditors facing unlimited liability. Proportionate liability is the way we would prefer to go.

ACCA passionately believes in the value of audit, and is campaigning against hikes in the exemption threshold. Robust audit is, and always should be, a crucial element in ensuring efficient capital markets.

Extending the scope of the audit to internal controls is a positive step.

  • John Brace is the new president of ACCA.

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