Accountancy & Management: Internal controls prove a headache - Roger Trapp tells how 16 drafts were thrown away before one was deemed fit for publication

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The Independent Online
IT ONLY merited a few lines in the Cadbury report. But the matter of internal controls has certainly made up in recent weeks for the lack of attention then.

Not only has the draft guidance from a working party of the Institute of Chartered EAccountants generated much excitement since its publication earlTHER write errorier this month. There was even heated debate within the body charged with drawing it up.

No fewer than 16 previous drafts were apparently ripped up before the present one was deemed appropriate for public consumption. And even that was delayed by the length of most of the summer because some in high places felt that accountants in business and public practice were so overwhelmed by reports and draft rules that they could not consider it.

Business, in keeping with its general prickliness about the extra 'burdens' that new rules bring, has accounted for a lot of the criticism, while the big accounting firms - sensing extra work, the cynics suggest - have generally welcomed the paper. But this is not the whole story.

A lot of the argument - both before and since the document's publication - stems from the fact that last year's Cadbury report gave so little space to the issue of internal control.

Michael Fowle, head of audit at KPMG Peat Marwick, said: 'It is easy in two to three lines to say there should be some internal controls. To work out what it means is rather more difficult.'

Consequently, far from being simple, the 67-page document is an attempt to forge a compromise between those keen to lay down no more than broad lines and the believers in strict control.

Essentially, the guidance points out directors' responsibility for setting up systems of internal control, discusses the main features of an effective system and gives assistance on how directors should report on this area.

There are also appendices offering detail on how the guidance should be used, and much space is devoted to definitions and interpretations of the details of a concept that can be broad enough to take in operational and complicance controls or limited to financial ones.

On publication day Paul Rutteman, the working group's chairman, acknowledged the difficulties of pleasing all sides when he said: 'The subject is complex and some aspects are controversial.'

But he insisted that an adequate system of financial control was vital if shareholders were to have confidence in the financial information provided by companies in which they have invested.

This is where the Institute of Internal Auditors starts to get hot under the collar. Its members are already smarting from the implication that this new issue is going to be the concern of external auditors - the larger firms - rather than insiders such as themselves. But they are also worried by the emphasis on financial controls.

'We think it should be broadened out,' said Andy Robertson, chairman of the institute's public affairs committee.

It is only fair to point out - as the draft guidance does - that, since the Cadbury committee was concerned with the financial aspects of corporate governance, it is reasonable to give particular emphasis to controls of this nature.

Nevertheless, the organisation is more impressed by a document issued earlier this year by the Institute of Chartered Accountants of Scotland that advocated greater use of internal audit, with external auditors acting more as assessors.

This way, goes the thinking, shareholders are not relying on annual 'snapshots' to the same extent.

Having been disappointed by the content of the Cadbury report and now this response to it, the internal auditors can be relied upon, says Mr Robertson, to 'continue the dialogue' by making some forceful comments before the consultation period ends on 28 February.

Broadness - though in a different sense - is also advocated by Touche Ross.

One of the big firms to rush out publications describing the ramifications of the draft guidance, Internal Control and Financial Reporting, it is in favour of less detail and more general methodology.

Martyn Jones, national audit technical partner at the firm, says: 'The difficulty is that every business is different. We are keen to see a process developed which is as sensible as possible.'

Pointing out that there should be more emphasis on disclosure rather than having an auditor's opinion on the internal controls inserted, he adds: 'We should encourage companies to describe what they do, because essentially Cadbury is all about good disclosure and letting the market decide where it wants to put its capital.'

However, there are many who are keen to help make these decisions easier for investors. After all, the paper is the second to be produced in response to the work of Sir Adrian Cadbury's committee. Draft guidance on Going Concern and Financial Reporting was issued in May this year.

In addition, last month the Institute of Chartered Accountants' financial reporting committee responded to a recommendation in the report that listed companies should expand their interim reports to include balance sheet information and consider the provision of details of cash flow.

Mr Fowle, for one, feels the internal control paper is 'a fair contribution to the debate'. And he is convinced that the most important thing is that there be a debate.

'People should treat it as what it is, which is a discussion document, and they should say what they think without getting excited,' he says.

Mr Rutteman's revelation that the institute had received prior to publication 8,000 requests for copies on top of those that were being distributed to listed and USM companies suggests that the ground is being prepared for a great debate.

It remains to be seen whether - as Touche's Mr Jones suspects - the weight of the tome will put many off.

But, if the vast differences of opinion over the Auditing Practices Board's discussion paper on the future of auditing are anything to go by, the chances are that there will have been a few harsh words by the spring.

(Photograph omitted)

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