PracticeAuditSmith rules with an iron fist

Smith rules with an iron fist

At last, the storm that was the Higgs' report has finally come to an end. Blue sky has returned and chairmen and chief executives of UK plc are recovering from the threat of an unsolicited and almost universally unwanted takeover by their non-executive directors.

But such was the furore of the debate that another key report has been relegated to the sidelines.

I refer, of course, to the Smith report. Published alongside Higgs, it received only momentary, yet complimentary, attention from the press.

And so we come to Smith, a non-rules based approach that deals with the very same issues, but this time with the use of an iron fist rather than a velvet glove.

The spirit and the basic proposals are the same, but serious teeth have been added. In particular, it will now be up to the audit committee (made up wholly of non-executives) to recommend the appointment of the external auditor.

It will also be their specific responsibility to develop and implement policy concerning the supply of non-audit services, the key principle being that auditors should not audit their own work.

Faced with such clarity, directors who are members of audit committees will be gearing up for action. On reflection, with their increased responsibilities, non-executives are almost bound to prefer the more comfortable route of hiring independent advisers for non-audit services.

What issues is this likely to create in the board?

In short, relationships will change and there is plenty of room for conflict.

Communication will be key: given the lack of prominence of the report nobody should assume that board members as a whole will be familiar with its contents, or that they will treat them with equal reverence.

In conclusion, Sir Robert is a clever man. He has not had to resort to a hammer to crack a nut. But by forcing companies to look in the mirror and by strengthening the spirit of the combined code, the sound of silence will soon become a roar. Best practice will increasingly ensure that what is today a trickle will become a flood, and ‘independence day’ may yet truly arrive.

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