Non-executive directors must place ethics “front and centre” of their efforts to make sure financial reports present a true and fair view of a business, according to one of the UK’s most senior governance leaders.
In a major new paper for the Institute of Business Ethics, former Standard Life Investment head of governance and stewardship Guy Jubb has outlined the key aspects of governance required by board members in producing financial reports.
Although accounting and reporting standards are constantly updated and modified, the need for judgement in the financial reporting process is more important than ever, according to the paper Responsible Financial Reporting: doing the right thing.
“If a corrupt culture infects the financial reporting process, it is like a cancer that progressively undermines the true and fair view of the financial statements unless it is treated – and treated swiftly and effectively,” said Jubb.
The paper outlines six “hallmarks” of responsible reporting:
- Truthfulness and integrity
- Fair presentation
- Neutrality supported by prudence
“Self-interest is a frequent cause of material misstatements,” stated Jubb in the paper. “It can sometimes be difficult, especially for independent non-executive directors, to identify where self-interest may be festering but directors must be constantly vigilant and never ignore the risk and its consequences.”
Non-executive directors must use all the resources at their disposal in “seeking the truth” that is the foundation of responsible financial reporting, he added. They must challenge accounting policies and how they are applied, as well as the accuracy of the information used.
“The tone from the top must be fit for purpose and there must be an open culture that embraces integrity and the company’s values, within and without the boardroom.”
Neutrality supported by prudence, truthfulness and integrity are hallmarks that “are not negotiable” when it comes to presenting a true and fair view.
“Shareholders and stakeholders, including regulators, employees and consumers, expect independent non-executive directors to take a firm stand when it comes to responsible financial reporting and do the right thing.”
But when things go wrong with financial reporting, “the buck stops” with the board, not just the audit committee, stated Jubb.