Companies that began work on new reporting responsibilities discarded by the government when they were just a few months old should consider keeping elements that “make a difference”, according to one of the country’s most senior audit committee chairs.
Andy Kemp, chair of the Audit Committee Chairs’ Independent Forum and chair of the auditcos at Berkeley Group and Irwin Mitchell, told a breakfast briefing hosted by Board Agenda and Diligent, providers of boardroom software solutions, that some of the work for new disclosures on which the government U-turned would be valuable.
Speaking to an audience of internal controls and internal audit specialists, Kemp said: “Think about what was going to benefit the company in terms of the work that has been done and preserve, nurture and promulgate it through the organisation as that cannot be wasted effort.” He added: “Keep the parts that make a difference.”
Last month, business minister Kevin Hollinrake shocked the audit sector by deciding to cancel regulations that would have seen companies produce new reports on risk and resilience, audit and assurance policies, counter fraud measures and distributable profits.
The new rules were key elements in the reform of audit and company reporting under way since the collapse of Carillion in 2018.
The decision caused an outcry in some quarters. One expert said the decisions made “little sense”. Others described it as a “missed opportunity”.
There was to be further disappointment when the government failed to include audit reforms in the King’s Speech that would have given statutory status, and potentially strengthened powers, to a new regulator: the Audit, Reporting and Governance Authority (ARGA).
However, the current watchdog, the Financial Reporting Council, has said it will push ahead with new provisions in the UK Corporate Governance Code that will ask boards to complete a “declaration” each year on the effectiveness of their internal controls.
The breakfast briefing heard that some companies recruited specifically for the ditched reporting regulations and would push ahead with all or some of them on a voluntary basis.
Panelist Carolyn Clarke, founder and CEO of the Brave consultancy, said: “Companies that genuinely want to be doing the right thing will continue with elements of this.
“We have a population of people for whom this is really distressing, who have been recruited on the basis that these requirements are coming and are now not sure about what their jobs mean and whether they still have one. There are real people at the heart of this.”
The loss of the resilience statement will have an impact in some quarters. Panelist Michael Rasmussen, a governance, risk and compliance consultant with an international reputation, said scrapping the resilience statements would be felt.
“Organisations want to be resilient,” he said; he noted he was working with one organisation that was in the process of rebranding its internal audit unit to become the “audit and resilience” department.
Internal controls measures in the corporate governance code have not met with open arms everywhere. Andy Kemp noted that companies had raised significant concerns about the code provisions, believing they would require disclosures not only on financial controls but also non-financial measures, too.
Kemp said many auditco chairs believe the new provisions “involved significant incremental effort,” requiring a “whole industry” to reach a position where boards are “comfortable” with reporting on internal controls.
Clarke also believes there are issues with the internal controls measures but thinks the key is how they are targeted. She said they should be “covering those control areas where there are commitments made”, such as a claim that a product is green.
The briefing also heard concerns about the “comply or explain” principle underlying the corporate governance code. Kemp suggested attitudes towards the principle may need changing among some players in the governance chain.
“The reality of ‘explain’ where you have not met requirements of the code brings you into trouble with proxy organisations with their checklist: ‘have you complied?’
“For the ‘explain’ bit to work properly we need a step-up from shareholders, who also bear responsibility for how this all works.
“If it really is ‘comply or explain’ and not ‘comply or get ready for a fight’, then there need to be changes. Whether that will happen, and with reliance on proxy organisations, seems unlikely.”
According to Rasmussen, the “trajectory” across many jurisdictions will be to continue with more reporting measures and more attention to resilience and risk, despite the recent change of heart in the UK.
He said legislation from Europe—the Corporate Sustainability Reporting Directive—and legislation in the US set the trend. He added that the “culture” of an organisation would be critical, quoting Apple TV’s popular comedy football coach Ted Lasso’s catchphrase: “Doing the right thing is never the wrong thing.”