An over-cosy relationship : CITY AND BUSINESS

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The Independent Online
AS WE report on page 1, more than a dozen of our largest quoted companies have breached the spirit if not the letter of Cadbury guidelines by installing executive directors on their audit committees. The offenders include blue chips such as GEC, E urotunnel, SG Warburg and BTR. Does it matter? Yes.

The purpose of audit committees is to make recommendations on the appointment and fees of the auditor, review the half-year financial statements, and discuss with the auditor the nature and scope of the audit. Above all, though, they are there to ensure that executives do not exert excessive influence on the auditors. Too often the supposedly "true and fair" accounts of public companies turn out to be anything but. Finance directors use a number of techniques to flatter the figures and so mislead shareholders, though I am not suggesting for one moment that any of the above are guilty of such "creative accounting".

Meanwhile, accountancy firms, reliant on hefty audit fees, are reluctant to upset managements - doubly so when they receive lucrative consultancy work on top, as most of them do. The pressure to put the most attractive gloss possible on accounts can be enormous.

A ban on executives on the audit committee can at least make it easier for auditors to voice their concerns. A similar rule has been in place for New York listed companies since 1978, and works well. There are disadvantages; but a complete ban is the price that needs to be paid for the over-cosy relationship that has developed in some companies between the auditors and executives.