Creating business prosperity.

Creating business prosperity.

The company law review presents accountants with an opportunity to contribute to the modernisation of UK plc, says Roger Davis

After three years’ work, the final recommendations of the company law review are expected to be published soon. It is not the work of politicians, civil servants or think-tanks but of an independent steering group, many working parties and a consultative committee all made up of those who use, practice and depend on the law.

The proposals are important to the UK’s economic success and to the accounting profession’s contribution to creating prosperity.

The review was set in train because the Companies Act – government’s operating licence for British business – is hugely out of date. It is still based on Victorian business. For smaller companies particularly it is full of irrelevant and costly formality.

For larger companies it has been substantially supplanted by corporate governance codes, listing rules and accounting standards. While the UK should have a coherent framework of corporate governance to encourage enterprise, it is anything but that.

Like all laws, company law is necessary to set out the basic rights and wrongs of running a company. But laws themselves will not command business success. So the steering group’s approach has been based on reducing legal prescription of company policies and processes and instead concentrating on:

– Core responsibilities of directors. For the first time they will be codifed in the law.

– Adding to director accountability. The new operating and financial review (OFR) will require a structured account of value creation which cannot be read from the historical accounts, including relationships with the company’s various stakeholders.

To enhance this flexibility, the remit of the Financial Reporting Council (to be renamed a Companies Commission or similar) will be extended. Not only will substantially all the accounting rules now be removed from the law, but the new body will also have responsibility for corporate governance standards and for keeping the law under review.

The importance of the proposals to the economy, put simply, is that good corporate governance should mean good competitive performance.

Yet, the corporate governance codes have their origins as a response to failures of investor protection rather than wealth creation. That remains crucial to global confidence in the UK’s capital markets and to the role of the Financial Services Authority.

It is salutary to think that there is no single straightforward definition in the law and the codes of the respective responsibilities of directors, shareholders and auditors in corporate governance.

Without it, expectations may tend to be at the lower end of the range.

New questions have emerged in the law review about responsibilities for spurring business performance by:

– Non-executive directors. Yet many directors (notably non-executives) are voicing concern at the additional responsibilities the codes have introduced. Who is right and who is wrong?

– Institutional shareholders, as the de facto owners of British industry.

There is no mechanism to keep issues like this under review. The Cadbury, Hampel and Turnbull committees have come and gone. Hence the importance of the proposed new body modelled on the FRC.

I might add a new question about the role of auditors. Auditing regulation, such as auditing standards, also have their basis in investor protection.

Audit has indeed a crucial role in capital market confidence. But not much emphasis is given to the auditors’ contribution to economic prosperity.

The profession has so many bright people who see more of the business than non-executive directors that auditors’ boardroom advice needs to be at the fore.

Now is an opportunity for a rethink by the profession and not only because of the company law review. Labour’s business manifesto committed to greater transparency of the affairs of companies.

A role for the auditor is envisaged in the new OFR with its expanded range of information relevant to corporate value. The idea will be for the auditor to look at the processes for its preparation rather than second guessing company policies.

If the profession does not take the opportunity to be associated with this new era of accountability, the alternative will be for lawyers to take over the verification of the OFR, thus defeating the non-legalistic approach underlying the law review as well as reducing the standing of the accounting profession.

The law review has another proposal of great significance to the profession; to allow reasonable restriction of financial liability as a proxy for proportionate liability. This part of the package should encourage the profession not to hide behind increasingly technical concepts and legal language when giving advice to boards and audit committees.

For smaller companies, under a general tightening up of filing deadlines they will now be required to produce accounts in seven rather than 10 months. It is difficult to argue with the objective; after all, on average that is still 13 months since the transactions of the year took place, when accurate financial information is increasingly important to all businesses.

However, it will cause a problem for some practitioners because of the bunching of accounting and tax year ends and there needs to be a well thought through way of how the transition can be managed.

The important step now is for the government to find parliamentary time for legislation. Meanwhile, the accounting profession has an enormous opportunity to be associated with world-leading developments in the range and quality of financial and other information. We cannot afford to be described as the ‘same old you’.

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