Directors are still not properly policing corporate dangers, study finds
Study of audit committees shows slow progress on monitoring accounts and risks
Tesco’s accounting issues have highlighted the role of directors in spotting problems Photo: Bloomberg News
By Marion Dakers, Financial Services Editor
8:15PM GMT 03 Jan 2015
Many company directors have struggled to get to grips with new rules that are supposed to help identify risks that firms could face, though some progress is being made, according to new research.
Despite high-profile examples of boards missing dangers, including accounting holes at the Co-operative and Tesco in the past two years, some companies’ audit committees are still producing “disappointingly sparse and generic” reports, the accounting firm BDO said.The corporate governance code was changed in 2012 to give the work of audit committees more prominence, in the hope that directors would keep a closer eye on the auditors of the firm and the risks on the horizon.
The audit committees of FTSE-listed firms were given a score of less than 2.5 out of 4 for their reports this year, down from 2.6 in the prior year in BDO’s annual review.
Some of the drop was because all listed companies now have to produce a stand-alone audit committee report, a task that was carried out voluntarily by just a third of firms two years ago.
“Simple common sense suggests that investment in high quality audit committee reporting is not an action that can be left to the longer-term.
Transparency is a concept whose time has come,” said James Roberts, business assurance partner at BDO.
“Companies must break the mould of compliance-driven generic disclosure and adopt a braver, more candid approach. Those companies that dare to be different will see the benefits.”
The information companies give on how they hire and judge their auditors was generally good, BDO said.
However, just one firm in the 90 included in the research told their investors how the relationship worked between their external auditors and internal audit teams.
Audit contracts can be worth tens of millions of pounds a year for the largest FTSE 100 firms, and the average blue-chip company has stuck with its current auditor for more than 25 years.
As well as signing off the external auditor, the committee is also supposed to identify risks on the horizon and issues that arise when putting together that year’s accounts, but many boilerplate statements are instead looking back at past committee meetings, BDO said.
There were some signs of progress, such as in whistle-blowing, where 80pc of companies now mention a policy for raising concerns within the business.