Commentators often make great claims for what the public thinks about complex issues like audit, corporate reporting and governance. But rarely are the public’s thought processes put to the test—until now.
The Financial Reporting Council (FRC), a body facing reform under current proposals before government, decided that further change could not happen without knowing what the public thinks. Major research has now delved into the public view of reporting, governance and audit thanks to a series of “citizens’ juries”commissioned by the FRC and run around the country by consultancy BritainThinks.
The research revealed that when the public thinks of companies they tend to think “negatively”. That’s not to say they do not see the benefits of jobs, products and services and investment companies bring; it’s just that when first asked they often have “greed and misdemeanours” front of mind.
Company reporting is too difficult to understand for the layman and key information may be absent. They worry corporate governance is not enshrined in law and whether the independence of auditors can be guaranteed in practice.
Initial views were gathered from members of the juries during two-day deliberative sessions before being “workshopped” in smaller groups.
Holding companies to account
The citizens’ juries offered a number of insights. They were interested in the key concerns of consumers, employees and investors. But as citizens they wanted information “that would enable them to hold companies to account on issues including taxes, environmental policy and investing in their local area”.
Jurors were asked to consider a recent business buzzword: “purposeful companies”. The report says jurors considered the concept important. “However, there were concerns over the ease with which the principles of purposeful companies could be integrated into the day-to-day running of company.”
Jurors appreciated the benefits of corporate reporting, such as transparency on finance and topics like gender pay gaps. But they saw reports as “inaccessible”.
There were also problems with the scope of reporting. “Information jurors consider as important, including about environmental sustainability and company values, was not mandatory for companies to report on.” That will give regulators food for thought.
When asked about governance the majority of jurors revealed a lack of awareness and understanding. Though, once again, once it was explained they recognised the upsides.
However, the jurors also saw drawbacks to the UK Corporate Governance Code, frequently hailed as a world leader.
They worried the code is not enshrined in law, a factor challenging the regulator’s ability to hold companies to account. They also felt it lacked “definitive metrics and measures by which to determine levels of compliance”.
Citizens’ juries also had doubts about board members. “Jurors expressed concerns about the independence of non-executive directors, with few checks or processes in place to prevent the appointments of non-executive directors with potential conflicts of interest.”
There were concerns too about shareholders and whether they were able to hold directors to account properly through AGM voting.
The impact of corporate scandals
The FRC’s report said that a workshop raised some possible solutions to this.
“Customers and consumers are seen to have the potential to play an important role in holding companies to account, but jurors felt these stakeholders often don’t have the necessary information to do so.”
Audit too came in for some criticism, especially after corporate scandals, confirming that a certain amount of public trust in a key governance process has been undermined.
“While participants could identify benefits to the way in which audits are conducted,” the report says, “awareness of recent high-profile failures, including Carillion and BHS, severely limited confidence in how successful audits can truly be.”
Jurors were worried about the independence of auditors and the “limited” power of the regulator “to both encourage high-quality audits and sanction auditors and companies”.
Over the past year a great deal of work has been spent on reviewing the regulation of corporate reporting and audit, as well as the work and functioning of auditors.
The King Review has recommended replacing the regulator with a new body possessing new powers; the Competition and Markets Authority has proposed splitting auditors from their consultancy divisions.
Meanwhile, the Brydon Review will look at what an audit is supposed to do.
This latest research adds to the knowledge already amassed. When government will actually find the time to do anything with it, particularly legislate, is anybody’s guess.
The full FRC report is available here.