It is virtually impossible amid the current market turmoil to turn out a
monthly column without finding that, several weeks after writing, you have an
enormous quantity of egg all over your face. “Stick all your spare cash into
Iceland,” some misguided journalist might urge, imagining the frozen island a
haven from events elsewhere. And then, a few days later, find themselves
shouting: “Stop the press!” as they strive to insert the word “don’t” into their
copy. (Not that I would have done that.) An old contact of mine in the City has
been urging everyone to get their cash out of Iceland for almost a year now.
And, at any rate, Iceland seemed an odd place to put your money in the first
As you will have gathered, these are not good times to make short-term
prognostications. Better to look to the long-term. But the recurring thud of
failing banks hitting the deck hasn’t helped that approach much.
City bars are full of people starting conversations with: “Who would have
thought that…” But there is one issue that will be with us long after the
current troubles have quietened down. That old faithful, regulation.
There are two sorts of regulation: the traditional resort of politicians
the knee-jerk and the other sort, which is much more rare, and comes from the
experience of business. It is the latter which is effective, but no one gets any
headlines or much cash out of that.
You can refine the essence of regulation into two further classifications
based on the motivations behind their use. There is the type of regulation which
enables one sector of society to get its own back on another. And there is the
type of regulation which is created to help things run better. Sarbanes-Oxley is
a good example of the former; vindictive politicians making business pay for
making them look foolish for not understanding what was going on. The idea of
the operating and financial review, is an example of the latter with people in
business working for years to create a better way of getting useful and relevant
business information from companies to stakeholders. Needless to say, the
politicians set about sitting on it and then trying to dismantle it for no
You can see in which direction I am heading. Governments around the world are
going to feel themselves under pressure to play to the gallery of their
electorates and produce measures which are long on headlines.
They are also under another pressure. It has become obvious around the world
that politicians have, by and large, not really had much of an understanding of
what was going on. They have found this embarrassing.
And an embarrassed politician is a dangerous thing. The over-reaction to
prove they really are in control creates immense damage all around them.
If we are to learn from what is happening now, we have the relatively recent
efforts at regulation to instruct us. The mention of Sarbanes-Oxley tends to
result in eyes closing, followed by a thumping sound as foreheads hit desks. But
it is a very good example of what those who create and implement regulation need
to learn from. A recent research publication from the Institute of Chartered
Accountants of Scotland does a very good job in drawing our attention to what we
need to remember and understand.
The first is that, despite much calling for concerted global action on
regulation, this route tends to end in disaster. It is all down to different
cultures in corporate governance; comparing the Turnbull efforts in the UK and
the Sarbanes-Oxley efforts in the US, the study points out that the motivations
were totally different. In the US, it was the detection of fraudulent reporting,
while in the UK it was on requiring company boards to adopt best practice. No
wonder that Sarbanes-Oxley in the US was “a reactive response to perceived
limitations in corporate governance and reporting highlighted by financial
scandals”, whereas in the UK “internal control disclosure is seen as an
important defence against the imposition of more prescriptive regulation.”
The researchers’ final conclusion about these cultural differences should be
stuck under the noses of anyone attempting to create new regulations: “If
regulators and policy makers do not take account of these differences,
regulatory development, whether based on enforced legislative compliance or the
adoption of preferred behavioural norms via voluntary codes, may be
And that brings us back to the heart of the matter. We can be sure that any
new regulatory initiatives following this economic chaos will not have
effectiveness at their core. Creating and implementing effective regulation is
not something politicians would waste their time on. They need fireworks,
balloons, headlines. Then they move on whenever the next election comes around.
The rest of us, and business, are in this for the long haul. Unravelling the
coming regulatory binge will be the focus of corporate governance for years to
Reporting on Internal Control in the UK and the US: Insights from the
Turnbull and Sarbanes-Oxley Consultations, by Laura Spira and Catherine
Gowthorpe, published by ICAS, can be downloaded free from the
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