Many investors will be disappointed to read the article titled “Backlash Fuels Dilution of Audit Reform” (Report, November 9). The reforms are supposed to restore confidence in governance and auditing. Sir John Kingman’s review pointed out that the best way to do this was to focus on “the interests of consumers of financial information, not producers”. So why is the government so influenced by it?
In submissions to the government, CFA UK, the Corporate Reporting Users’ Forum and representatives of retail investors all supported some form of UK ‘Sarbanes-Oxley’, the US federal law of 2002 that established auditing regulations. and radical financial for public enterprises.
This defines the requirements of an effective internal control system, validated by the managers of the company, the assessment of which is subject to an external audit. The government’s impact assessment cited evidence that the U.S. regime has resulted in more accurate financial reporting, more prudent accounting practices, and a decrease in fraud.
The cost – £ 2.3bn spread over 10 years – appears high, but is less than a tenth of a percent of the FTSE All-Share’s £ 2.6bn market value. The ongoing annual cost would be less than 0.004% of the index’s over £ 5 billion enterprise value. Debt holders also have a keen interest in the accuracy of financial information.
The solution left to investors is to put pressure on boards of directors to commission an external audit as part of the audit and assurance policy. It is to be hoped that a declaration by directors on the effectiveness of internal controls will be mandatory in order to make their responsibility for accurate financial information explicit and usable.
We support the government’s interest in fostering a healthy business environment and that is what the proposed reforms are aimed at. So why water down measures that would reduce the risk of fraud and inaccuracies? As usual, however, the UK looks set to fall back on the corporate governance code, which the good guys follow and the bad ones overlook.
Managing Director, CFA UK
Researcher, CFA UK
President, UK Shareholders’ Association