By chance, on the day before the Department of Trade & Industry published its inspectors’ report on Mirror Group Newspapers, the Institute of Chartered Accountants published a guide entitled The Effective Audit Committee: A challenging role.
The Institute guide didn’t take ten years to prepare; nor did it cost #10m. And, at 17 pages, it does not compare with the 700-plus pages, including numerous appendices, of the DTI report. But, if Robert Maxwell hadn’t nicked those millions, then perhaps the guide, as well the DTI report, would not have been written.
The Maxwell scandal was probably the most notorious of a series of affairs which engulfed the City and the professions in the 1980s and 1990s. Afterwards, in a stroke of genius not usually associated with professional bodies, the Institute of Chartered Accountants took a leading role in asking Adrian Cadbury to chair a committee on corporate governance. The Effective Audit Committee is just the latest in a series of reports, codes, guides and initiatives which have followed his original report on corporate governance.
The beauty of corporate governance for the auditor is that when the corporate ship hits the rocks the responsibility – and the blame – is now more evenly shared between directors and outside advisors. Audit committees are seen as a first line of defence against top-level management fraud. The Effective Audit Committee says “effective audit committees are cornerstones of the public’s confidence in corporate governance and financial reporting”.
It rightly points out that the audit committee cannot prevent fraud, but it can play a valuable part in reducing the danger of it.
If there is a key to good audit committees it lies in the non-executive directors. The guide says: “If they are to be effective they need to probe and challenge management’s actions.” It then goes on to outline a series of challenging questions.
In essence there are two ways companies can approach corporate governance: the cynical company can treat it as a form filling exercise; or the board can view it as an essential element of risk management, including the risk to corporate reputation, which helps provide and protect shareholder value. The problem for outsiders such as shareholders and City analysts is that it may be hard to tell apart those who are paying lip service and those who have genuinely imposed the required culture. As the guide suggests “communication about the role of the audit committee should be encouraged … transparency will help to drive further improvement”.
The good news is that, according to the DTI report, the Mirror Group had an audit committee; the bad news is that it didn’t have any terms of reference and didn’t meet until well after the event. When Maxwell finally got his hands on Mirror Group Newspapers he held a board meeting in the middle of the night where he seized all the financial and management controls. In effect, he scrapped the unitary board, introducing in its place a two-tier form of corporate governance. He became the sole decision maker, and everyone else was simply there to do his bidding and rubber-stamp his decisions. The speed and ruthlessness with which he made his move was the business equivalent of a blitzkrieg.
Under the guidelines outlined by The Effective Audit Committee, such unilateral seizure of power could not, in theory at least, go unchallenged or unreported. Maxwell happened for a host of reasons. But one was that fundamentally honest, albeit possibly naive and greedy professional advisors, refused to stand up to one man and his blatantly unacceptable business practices.
Since the recession of the late 1980s and early 1990s, the benign economic conditions have ensured we have avoided a top level City scandal. Unfortunately, only a corporate collapse or two in the UK will really test how well audit committees work.
Corporate governance can’t guarantee to stop fraud and ineffective audit committees may not be able to stop autocratic chief executives. What corporate governance does is give audit committees, auditors – and, yes, finance directors – a framework around which they can wrap their business and ethical objections. It won’t give them the courage to stand up and be counted, but it could give them a reason for doing so.
FC EXPELLED FROM CIMA
Former financial controller Robin Sim Jenkins was expelled from CIMA having been found guilty of dishonourable conduct by a disciplinary committee. In 1996 Jenkins was found guilty of embezzling #176,525 from Barclays Stockbrokers in Glasgow. Jenkins said he had taken the money because he was underpaid and bonuses and pay rises he had been promised had not materialised. He was caught when a director found Jenkins was claiming hundreds of pounds in taxi fares on expenses.
KPIS CAUSE CHEATING
Chief inspector of prisons Sir David Ramsbotham accused the prison service of being “morally corrupt” because it encouraged graduate prisoners to take literacy and numeracy tests in order to boost performance figures. “Education is not (perceived to be) about the needs of individuals but about conforming to KPIs,” he said in a report on Ford Open Prison.