The Debate: What risks should auditors bear?

Directors need your protection

By Robert Bittlestone

If you steal from the company’s till, or fail unreasonably to prevent others from doing so, then you are likely to be culpable. It is rarer for justice to involve the future, and more worrying when it does.

That is all the more reason to take notice of the case of Sportsworld. The Financial Services Authority imposed its first fine (£45,000) on the director of a listed company when it found Geoffrey Brown, former chief executive of Sportsworld Media Group, guilty of failing to issue a profits warning in time last month.

The company apparently breached the listing rules by failing to notify the market of changes in its business performance and expectations as to its pre-tax profit until January 2002, despite having been aware of the situation since December 2001.

Sportsworld was reportedly hoping for a rapid turnaround in its bottom line that failed to materialise.

Andrew Procter, the FSA’s director of enforcement, said the delay could have led to investors and other market participants making decisions based on inaccurate information. Sportsworld shares crashed after the belated profits warning and the company went into receivership in April 2002.

The FSA is also seeking the power to disqualify directors when listing rules are breached. The tough line being taken by the FSA means that there could be other UK company directors exposed to this kind of risk. Presumably they look to their financially-qualified colleagues for advice.

That will require accountants to change their mind-set. Traditional management accounts are not enough, it has become as important to review the reliability of forward-looking data.

Those companies who still present a ‘wall of historic numbers’ to their directors shortly before each board meeting are not providing them with the ability to find out where there are high risks of something going wrong.

Directors need help from financial colleagues, who therefore need to think ‘outside the box’ if they are to protect board members from accusations that they have failed to discharge their fiduciary duty to shareholders.

• Robert Bittlestone is managing director of Metapraxis Ltd.

…and proportionate liability
By Michael Snyder

The imposition by the FSA of a significant personal fine on a plc director guilty of breaching listing rules has been welcomed as a step towards restoring accountability at the top.

Given that directors’ indemnity insurance policies, which the company pays for, will not cover fines or penalties for personal transgressions, this FSA ‘first’ should instil a measure of anxiety in the upper corporate ranks.

In future cases the net of culpability may well include external auditors, institutional advisers and other scapegoats – including audit committee members and non-executive directors.

The FSA’s initiative, which may well be extended to directors’ disqualification orders, is therefore to be seen in the context of the ongoing debate on liability reform, notably whether the liability of non-executives should more realistically be leavened. At present the law makes no distinction. In this environment should former prime minister John Major, in his role as a non-executive director of Mayflower, be plagued by sleepless nights?

In reality the most perceptive and experienced part-timer will never keep up with the daily manoeuvrings of full-time, hands-on executives who inevitably can only feed them information on a ‘need-to-know’ basis. Increasing corporate overview in the form of independent internal audit departments is acknowledged as one of the principal means by which companies and directors can be assured that no impropriety is occurring.

While the government is keen to be seen to be responding to public concerns over corporate governance failings, the hardening of the FSA’s approach is perhaps the clearest manifestation of this stance.

Nevertheless, the involvement of sensible and experienced non-executives will help to reduce scandals and resulting company failures. But there does have to be a reasonable reward ratio. The FSA as the government?s tool is merely the stick with which to beat transgressors after the event.

A much-needed proportional liability system would reflect the distinctive responsibilities of executives, non-executives and external auditors.

• Michael Snyder is senior partner at Kingston Smith