Investors query executive presence on audit panels Concern mounts that breach of Cadbury spirit will influence accounting practice s

INVESTORS are increasingly concerned about companies that place executives on their board audit committees, believing their presence can lead to the use of flattering accounting techniques.

New research has revealed that 13 companies have breached the spirit of the Cadbury guidelines by having executive directors on their audit committees. They include BTR, Eurotunnel, GEC, Racal, SG Warburg and Next.

Graham Allen, head of the ICI pension fund and vice-chairman of the National Association of Pension Funds investment committee, said: "My view is that audit committee members should be non-executive directors only. They should almost be acting as policemen for the shareholders."

Alastair Ross Goobey, head of PosTel, which manages funds for BT and the Post Office workers, said: "I think it is preferable for auditors to have the opportunity to speak to audit committees without any executives being present."

Pensions Investment Research Consultants, a consultancy used by many large pension fund managers, analysed the 250 biggest quoted companies and found 13 had executives on the audit committee.

It said: "To have the executives responsible for [reviewing financial controls and reporting to the company] on the committee which is to review them is equivalent to marking their own examination papers."

John Rogers, secretary of the NAPF investment committee said: "It doesn't meet best practice as set out by Cadbury."

Some companies argue they comply with the Cadbury code because the ban on executives only appears in the notes to the code, not in the code itself, which confines itself to recommending at least three non-executives on the audit committee.

Next, the retail chain, has its executive chairman, Lord Wolfson, and its chief executive, David Jones, on the audit committee. Yet it claimed in its annual report that it "operated within the spirit" of the code.

Mr Jones defended his place on the committee. "I do think there can be an advantage. Topics occur where you have to have an executive present to explain day-to-day procedure.''

He had heard no complaints from shareholders. If his presence on the committee was deemed unconstructive by the rest of committee, he would resign from it, he said.

Robert Adamson, of Railpen Investments, which oversees the £10bn rail workers' pension funds, said he preferred to see companies adhere to Cadbury on this issue. But alone it would not be enough to make him protest. Railpen writes to about a dozen companies a year to complain about aspects of their corporate governance.

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