by Dina Medland in London
The accuracy of the numbers in company reports lies at the heart of the corporate governance of any business. Institutional investors and shareholders burnt by unexpected company revelations will have welcomed the news that the UK government has just launched an independent review of the accountancy watchdog the Financial Reporting Council (FRC), to be completed by the end of the year.
A statement said the review “aims to make the FRC the best in class for corporate governance and transparency, while helping it fulfil its role of safeguarding the UK’s leading business environment.” As such, looking at ‘conflict of interest’, that insidious situation that slips in again and again unchecked or wilfully ignored will surely be at the heart of it.
L&G chief to lead probe of ‘toothless’ accountancy watchdog read the Financial Times headline, in reference to both the appointment of Sir John Kingman to head the review, and the debacle of the Carillion collapse, following which a parliamentary hearing saw the FRC accused of being both “toothless” and “useless.”
The FRC responded last week in two stages. First, it announced that it would implement the recommendations of a 2017 sanctions review and the Big Four could now face fines of up to £10m for “seriously poor audit work” - reported in Accountancy Age. Then it said it would “enhance its monitoring of companies and review those in line for certain jobs in the industry.” Candidates for a board, head of audit or ethics role at KPMG, Deloitte, PwC, EY, Grant Thornton and BDO would now be assessed by the regulator reported The Telegraph in a piece headlined Under-pressure FRC steps up oversight of big auditors after beefing up fines.
But last month Grant Thornton, the UK’s fifth-biggest accountancy firm, said it would stop bidding for audit contracts from Britain’s largest listed companies, saying it was too difficult to compete. While its decision was taken as “telling” about the dominance of the Big Four in the audit market, Grant Thornton too has had its share of criticism – recently for its role in the BHS debacle. The nature of audit is under scrutiny in the UK as it hasn’t been before, and options that have been mooted were covered in a previous Governance Watch.
While the review of the FRC is a beginning, if the aim is to establish confidence in company reports, then it is a massive task. The FRC has said it is considering calling on auditors “to examine the entirety of companies’ annual reports and accounts in an attempt to strengthen shareholder confidence in auditing.”
A letter to the FT last week from David Herbinet, Global Head of Audit at Mazars responds to this idea, suggesting that if successfully implemented, it would “represent a bold move forward with more high quality information available to the capital markets.” But it asks some important questions about whether it is best embarked upon on a national or international basis.
In his letter Mr Herbinet notes: “If FTSE 350 companies had separate auditors for the narrative report and the financial statements, this could bring some much- needed competition and choice into this part of the audit market.” It prompted a response -another letter to the FT that you can access via the same link. Clearly, if there is to be real change, it is time for more conversation and input from stakeholders on the nature and value of the numbers in the company reports for best corporate governance.
There have been some high-profile demonstrations recently of the continued lack of attention paid to succession planning in some listed businesses. This appears to be particularly true where powerful personalities are involved.
When the Washington Post reported that Deutsche Bank’s CEO John Cryan was to be replaced by Christian Sewing, the institutional investors sat up and started asking questions.
“We welcome the clarity provided by the announcement following weeks of rumours, leaks and briefings around the position and succession of CEO John Cryan, and feel that Christian Sewing is a credible, internal candidate” said an engagement note from Hermes EOS.
But it added: “The chair, Paul Achleitner, now has questions to answer ahead of the AGM.
- He hand-picked John Cryan in mid-2015, after overseeing the previous co-CEOs for three years. The appointment of Christian Sewing thus means the third CEO change during his six-year tenure. Why was it necessary to appoint a new CEO at this point (Cryan’s appointment was scheduled to end in 2020)?
- He was closely involved in the development of Deutsche's current strategy. He has also overseen a number of strategic U-turns, not least regarding the bank’s retail business and asset management. What does the CEO change mean for the bank’s strategy, specifically the role of its Investment Bank, and its implementation?
- Moreover, during his tenure as chair, there has been unusually high turnover on Deutsche's supervisory board. Does the bank’s nomination process work adequately?”
These are clearly good questions.
When it comes to the goings-on at WPP however, where CEO Martin Sorrell has stepped down after more than three decades after recent allegations of personal misconduct he has denied, the shocked silence has not, at time of writing, yielded enough questions. WPP’s board has said it would not be publishing the outcome of the investigations into them by an independent law firm.
Silence as crisis management is never a great idea and you would think an advertising firm would know that.
We do know one thing – all smiles in this photograph in The Guardian story: Martin Sorrell stands to pick up £20m as WPP faces possible break-up.