Further memorandum from the Association of Chartered Certified Accountants
1. ACCA was pleased to provide evidence at the first public hearings held by the Committee on 9 April 2002. Since that meeting, we have reflected on the exchange of views which took place. We believe that the Committee may find it helpful if we comment further on a number of the issues which were raised. We are conscious that time did not permit a full exploration of each of the individual submissions made by the participating witness organisations.
COMPLIANCE FAILURE OR STANDARDS FAILURE?
2. The European Federation of Accountants (FEE) has commented recently to the effect that, in the event of a major failure or accident, the first response of the authorities should be to investigate the degree of compliance or non-compliance with the approved procedures and processes. There should not be an automatic assumption that the procedures themselves are at fault. The Committee may wish to bear this advice in mind when it comes to review the evidence presented at the public hearings.
THE NEED FOR GLOBAL MECHANISMS
3. While it is tempting to try to assess the UK position only, it is also appropriate to review the conclusions of non-UK groups such as the US SEC, the EC and groups further afield.
4. The US SEC position appears to be that a complete change of US auditor oversight arrangements is necessary, accompanied by (what seem to us to be some relatively minor) changes in the financial reporting and corporate governance systems. We note with some concern, however, that there appears to be no great support in the USA for a full transition to a financial reporting system based on International Financial Reporting Standards. Following the events of 11 September 2001, there seems to be a strong nationalistic mood in the US which could hamper convergence initiatives.
5. At the EU level, the Commissioners' Committee on Auditing appearsfor now at leastto have accepted that the newly agreed principles-based framwork of auditor independence should be given time to bed down. We note, however, that the issue of "cooling off periods" in respect of auditor/client staff transfers has been identified as an area for further review. We have also had discussions with representatives of the Australian Financial Reporting Council, currently on a world fact-finding mission. They reiterated their commitment to a regime of global financial reporting and auditing standards.
CAPITAL MARKET REGULATION
6. ACCA believes that local solutions should be based on principles-based approaches which are agreed at the global level. Natonal regulators and others will need to be prepared to give up a measure of control over their domestic activities in return for influence over global developments. In our view, this approach applies equally to corporate governance, financial reporting and auditing standards.
7. The recently published EC survey on corporate governance codes in EU member states concludes that there is little indication that the existence of different codes poses an impediment to the formation of a single European equity market. It points out that the various codes identified appear to support a market-driven convergence of governance practices. The report goes on to suggest that the Commission does not need to devote resources to the development of a single code to be applicable to all companies across the EU.
8. ACCA does not agree with this last point. The report is a study of codes; it does not review compliance with codes. Recent UK experience, as reported by the Pensions and Investment Research Consultants in its 2001 study of corporate governance in large listed UK companies, suggests that only 20 per cent are in full compliance with the Combined Code. Such a low percentage suggests that market regulators and enforcement agencies need to move towards convergence of codes and their enforcement with a greater degree of urgency than the authors of the EC study consider to be necessary.
9. Notwithstanding the decision of the EC Committee on Auditing referred to above, we believe that, in the light of post-Enron concerns, it is correct that issues relating to the appointment and subsequent independence of auditors should be kept under continuous review. We strongly recommend, however, that the principles-based independence framework of the International Federation of Accountants should be given time to demonstrate its effectivesness.
10. At the first session of the Committee's hearings, ACCA emphasised the importance of striking a correct balance between empowering non-executive directors to contribute to corporate wealth creation and competitiveness and, at the same time, asking them to take on a range of accountability functions in respect of main Board protocols. We believe that the various enquiries now under way should make this a key point in their investigations. Liability and remuneration of non-executive directors are only part of the issue. Of greater consequence is the question of whether or not the UK approach to board structure and governance provides greater safeguards than comparable systems operating elsewhere in the EU.
RISK AND THE STATUTORY OPERATING AND FINANCIAL REVIEW
11. The Committee was interested in the profession's view of the part which a statutory OFR might play in regard to accountability issues. An OFR is intended to enable users of financial statements to "look through the eyes of management" to gain a better insight into the strategic risks that a company faces and an improved understanding of the qualities and intangibles which create additional shareholder value. ACCA therefore welcomes the proposal to introduce a mandatory OFR statement, applicable to all companies of significant economic size.
12. The OFR is not intendedin itselfto be a pure financial accountability tool; this is the function of the primary financial statements, viz the balance sheet, profit & loss account and cash flow statement. Improved OFR disclosures may, however, assist in explaining the gap between net asset values as reported in the accounts and current stock market values. The profession is keenly aware that existing financial reporting standards do not address the issue of intangible assetssuch as innovation capabilities, brand equity and embedded intellectual capitalin any systematic way, and is moving to address the topic in the future standard setting programme.
13. As we explained during the oral hearings, we believe that the disclosures which are likely to be required in future relating to risk will necessarily be limited to fairly high-level generalities andfrom a wider accountability perspectivewill not replicate the depth and quality of disclosure to be found currently in even an average environmental, social or sustainability report. Hence our commitment to the Global Reporting Initiative route (described at paragraph 16 below).
14. The issue of assurance in respect of the views expressed in a mandatory OFR as recommended by the Company Law Review has yet to be fully explored. The Board of Directors should obviously carry primary responsibility for statements made in a mandatory OFR. In the course of the oral hearings, we pointed out that the current Directors Report is not presently covered by the report of the auditors and that the auditors only have a limited responsibility in respectof this document. Responses to the CLR consultations indicated that the profession is indeed ready to accept a wider assurance role, but argued that any extensions in reporting responsibilties should be accompanied by a corresponding reform of the liability regime.
[NB the CLR proposes that the auditor satisfies himself that the OFR has been "properly prepared" in accordance with the revised Companies Act. This will amount to a review of the process by which the OFR is prepared, not the information within it, except insofar as it refers to information which has been audited.]
WIDER DISCLOSURE AND ACCOUNTABILITY
15. The first session of the hearings did not permit sufficient time for this issue to be discussed. In a recent article in The Times (11 April 2002) ACCA commented that "the hidden victims of the Enron collapsethe employees, their families and their communitiesshould not be overlooked in the rush to strengthen financial market regulation. Transparency with respect to both corporate actions and corporate values needs to be improved."
16. ACCA's thought-leadership activities on the broader corporate accountability front have earned it the 2002 Queen's Award for Sustainable Development. ACCA's own awards for sustainability reporting, announced on Wednesday 10 April 2002, reflect the energetic but still emergent nature of environmental and sustainability reporting. The new guidelines on sustainability reporting issued by the Global Reporting Initiative (where ACCA is a Board member) on 29 March 2002 will provide a firm underpinning for future development and will go a long way towards re-establishing the credibility in corporate activity which was lost as a result of the Enron scandal.
17. ACCA believes that there is still considerable room for further development of corporate governance practice and reporting. We champion the extension of corporate reporting to the wider economic, social and environmental aspects of a business; investors and other stakeholders are entitled to know how businesses respond to wider risk issues.
18. We shall be very happy to develop the points set out in this noteor any other matters related to the Committee's studyif the Committee would find this to be helpful.
24 April 2002