The new guidance, which would also require directors to describe the procedures in place, is a response to the heavy criticism of the original draft issued last October. This was drawn up by the working party established to decide how companies should comply with the recommendations on internal control in the Cadbury report. Companies and their auditors particularly attacked the plan to require directors to give an opinion on the effectiveness of the system of internal control.
Paul Rutteman, the Ernst & Young partner who chaired the working party, denied that the document had been watered down. 'It will probably be more useful in the way it will work,' he said, adding that it should focus directors' minds on their responsibilities. Others were sceptical of its effect, seeing it only as a stepping stone towards better monitoring.
Gerry Acher, head of UK auditing and accounting at KPMG Peat Marwick, said the replacement of a 70-page document with one of only seven pages setting out principles rather than detailed rules was welcome. But he was concerned that the paper still encouraged directors to give an opinion on the effectiveness of controls. He was also worried about the 'subjectivity' inherent in the recommendation that directors should disclose weaknesses that might lead to material loss.
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