A personal view Blow the whistle for governance time out Editorial

Friday, 01 August 2003


    When some sporting competitions become too overheated either team has the option of calling time out. 

    This sensible rule is aimed at calming frayed nerves, reworking strategies and giving respite both to participants and spectators.

    Blow the whistle for governance time out

    When some sporting competitions become too overheated either team has the option of calling time out. This sensible rule is aimed at calming frayed nerves, reworking strategies and giving respite both to participants and spectators.

    In the game of corporate governance between regulators playing catch-up for perceived failures and the corporate sector trying to keep abreast of new rules, regulations, guidelines, suggestions or innuendoes, there is a need to call time out.

    The problem is that too many people want to get into the game, no one knows how to score success or failure and the media mob on the hill wants the game to run forever as long as there is bloodshed.

    We currently have the new ASX Corporate Governance guidelines. The Australian Standards Association has also released a set of corporate governance rules. The UK has just finalised a new set of rules based on the Higgs report – but has quietly jettisoned some of the more ridiculous standards following feedback from the players.

    In the US, both Sarbanes and Oxley (the US Senators behind the Sarbanes-Oxley legislation) recently told the Wall Street Journal that perhaps the rules they came up with were too difficult to understand and comply with.

    Corporate governance has even become an industry in its own right with consultants sprouting from every consultancy, accounting and law firm.

    Institutional investors are being given checklists by trustees to measure the compliance of boards. There are corporate governance ratings agencies already operating or in the process of being set up.

    We are so eager to be seen to be doing the right thing that we are ready to punish directors and boards if they fail to apply international accounting standards to the options they have outstanding or plan to issue.

    The only problem is that those international standards are still a work in progress.

    Let's make sure that every company has an audit committee made of independent non-executive directors. Let's change auditors and audit firms on a regular basis so the company does not capture them.

    But, as Paul Healey and Krishna Palepu argued recently in Harvard Business Review, the over-emphasis on avoiding auditor conflicts is leading to audit firms and the accounting profession to demand "precise almost mechanical accounting standards and have developed routine operating procedures to reduce variability in their audits".

    The reason for this is simple. Audit firms and accountants are in the firing line for a range of legal actions and lawsuits if there is a problem with the company. Why take a chance on providing broad-based financial analysis to the client. Keep it simple, keep it legal and avoid trouble.

    The unintended consequence of this is that while audits may adhere to current corporate governance or accounting standards neither the company nor the shareholders get the kind of independent financial information that is needed.

    Obeying the rules is not the same as playing the game.

    Healey and Palepu suggest these improvements:

    1. Auditors report interim findings to management.

    2. Auditors provide a private report to the ASX containing the initial findings including action taken to fix any problems. This gets the ASX involved in specifying the information that they want auditors to deliver and this ultimately will benefit investors.

    3. Auditors use company information to issue a

    public, standardised transparency rating that gives investors a chance to judge the company.

    In other words let's get accounting standards and/or corporate governance rules that have demonstrable benefit to investors rather than perceived benefits. A pass or fail audit may protect the profession but it is simply not good enough for investors.

    The aim of new rules and regulations is to try and prevent what happened in the past. And everyone involved in the process is putting their hand on his or her heart and saying this will create an informed market. But if the new rules create a situation where no one wants to speak out for fear of straying beyond the compliance regime then we have only set the scene for more corporate scandals and failures.

    Let's blow the whistle for a corporate governance regulation time out and have a good think about the outcome we want to achieve and the best way this will be achieved in the interests of investors and shareholders.


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