A directors' game of Russian roulette
A report on the effectiveness of the internal control of auditing reveals many issues still to be resolved, writes Isobel Sharp
Wednesday 05 April 1995
When the Cadbury Report was published in December 1992, a three-fold recommendation on internal control matters was made stating that the accountancy profession, in conjunction with representatives of accounts' preparers, should take the lead in developing:
na set of criteria for assessing effectiveness;
nguidance for companies on the form in which directors should report; and
nguidance for auditors on relevant procedures and the form of their report.
The first recommendation has been met. In December 1994, aneight-page document, "Internal control and financial reporting", was published. Thus was the first misunderstanding created. The 1992 Cadbury Code required directors to report on "the effectiveness of the company's system of internal control". But what the December 1994 paper requires is less. The directors report on a subset of internal control and in terms that they have considered their effectiveness. However, there is no obligation to comment further on the results of that review.
The second misunderstanding was that the new guidance would be relatively easy to implement. Other recommendations of the Cadbury Report had been straightforward - for example, either the company had an audit committee or it did not. But internal financial control is proving more difficult to come to terms with. Matching a company's procedures with the 21 criteria set out in the guidance and then determining whether all the criteria have been met is proving a time-consuming process. And many directors are nervous about making public statements regarding the adequacy of the procedures, only to have to reportlater losses which might have been avoided if the system had been different.
With the benefit of hindsight, it is unfortunate that the working party that produced the December 1994 guidance did not also give an illustration of the form of report the directors should make - the second of the three Cadbury recommendations. While the report clearly sets out what the directors should state as a minimum, a picture of what is expected would communicate more quickly and effectively and might have avoided the misunderstanding that reporting on internal control can be handled as succinctly as other Cadbury-inspired disclosures.
But these are only starters. What this new paper from the Auditing Practices Board is set to demonstrate is that there are many unresolved issues on internal control reporting. The paper will be presumably written primarily for auditors, but, to meet the third recommendation, the issues will be equally important for directors now. For example, how many procedures must the company implement before it can say it has met any particular criteria? Do those procedures have to be applied throughout the group? If they are in operation worldwide, should they be observed with the same degree of diligence?
For a number of issues it is easy to suggest that the US study "Internal control - integrated framework", published by the Committee of Sponsoring Organisations of the Treasury Commission (Coso), provides guidance. But the UK report is more ambitious than its US equivalent; for example, it expects reporting on financial information used within the business and also that used externally while the latter deals solely with external information.
It is worth noting that the Coso report was published after a five-year study involving hundreds of individuals, including corporate executives, legislators, regulators, consultants, auditors and academics. The UK process was a David to that Goliath, but the consequence may be that a disproportionate burden is falling now on UK companies.
While the debate continues on internal control matters, attention is now being paid to the setting up of a Cadbury Mark II Committee. Agenda items are discussed widely. But attention should also be paid to the mechanics.
First, there has been a feeling over the past two or three years that there have been too many cooks each baking a tier on the same cake but not necessarily following the same recipe. While it is wholly appropriate that those with the expertise are involved in the process, there may be a case for clearer leadership on corporate governance matters.
Second, this committee should have, or have access to, better resources than its predecessor. Third, it should follow the policy of an incremental approach to improving governance, checking that proposals are achievable in theory and in practice and are wanted by those with a legitimate interest in corporate governance matters.
Otherwise, directors are being encouraged to play annually a game of Russian roulette.
The writer is technical partner at Binder Hamlyn, part of the Arthur Andersen worldwide organisation.
Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk
- 1 Rules on 5p plastic bags likely to lead to arguments at the check-out
- 2 Hulk Hogan wants to be Donald Trump's running mate in the US Presidential election
- 3 Blood Moon and Supermoon: September to bring brightest – and dimmest – full Moon of the year on same night
- 4 News agency criticised for describing Amal Clooney as 'actor's wife' in coverage of human rights trial
- 5 David De Gea to Real Madrid: Real finally get their man with £29m bid for Manchester United goalkeeper
Climate change: 2015 will be the hottest year on record 'by a mile', experts say
'Women only' train carriages: Jeremy Corbyn unveils radical move to tackle public harassment
Black holes are a passage to another universe, says Stephen Hawking
Tony Blair attacks Jeremy Corbyn's 'Alice In Wonderland' politics
Theresa May says migrants should be banned from entering the UK unless they have jobs lined up
Iain Duncan Smith 'should resign over disability benefit death figures', says Jeremy Corbyn
iJobs Money & Business
£25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...
£35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...
£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...
£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...
Day In a Page
In a sandbanks location, moments from the beach, this three-bedroom apartment has a large open-plan living area and a south-west facing balcony.
This four-bedroom home has an annexe accessed from the side of the house, with potential for improvement and conversion subject to the necessary permissions.
In the heart of the hamlet of Wardley, this five-bedroom period home offers countryside views and a stylish interior, with original features and open fireplaces.
Offering countryside views and landscaped gardens, this three-bedroom Grade II-listed lodge has a spacious conservatory and a large cellar that could serve as a workshop.
Set in approximately 1.5 acres, this four-bedroom home comes with a second, detached property that's currently used as an annexe.
In the hamlet of Newchurch, this former parish church is now a four-bedroom home complete with clock tower and eyrie.
Offering scenic views from a large balcony and sun terrace, this four-bedroom home has a wraparound garden and a heated swimming pool.
Offering views across the Humber and East Yorkshire Wolds from a glass panelled balcony, this four-bedroom barn-style home befits a life of leisure.
This four-bedroom home offers versatile accommodation with annexe potential; features include a hot tub, sauna and Norwegian BBQ hut.
Well-located for schools, colleges and the town centre, this contemporary thatched cottage offers flexible living space with six bedrooms.
Built in 1907, this four-bedroom Edwardian period home has been refurbished by the current owners, retaining many original period features.
Surrounded by landscaped gardens, this five-bedroom home offers living space across three floors.
This lovely country home in Burnham Market is currently run as a popular holiday cottage, with five en suite bedrooms and colourful gardens.
This three-bedroom 17th-century former village bakery is just a few miles from the East Sussex coast.
Set on a landscaped plot, this light and airy four-bedroom home comes with a log burner in the lounge, a fitted kitchen and an open-plan ground-floor layout.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Built on a former chapel site, this impressive four-bedroom home boasts balconies, stunning views and contemporary modern living.
This three-bedroom house is situated in a quiet mews and set over three floors. Features include glazed staircases and high ceilings.
A period townhouse set over four floors, this five-bedroom home was built in the 18th Century and retains many original features.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.