Corporate Governance in the UK
As corporate governance (which encompasses Turnbull Combined Code and Companies Act 2006) becomes ever more firmly a board and management agenda item, the most usefully current, thorough and eminently practical introductory text available on UK corporate governance is:
Corporate Governance: A Practical Guide to the Legal Frameworks and International Codes of Practice.
The two UK corporate governance handbooks that give far more detailed and extensive coverage of the issues are:
- Butterworth's Corporate Governance Handbook, and
- Tottel's Corporate Governance Handbook, 4th Edition.
Risk management, increasingly seen as part of the board's corporate governance responsibility, is equally important.
UK Combined Code on Corporate Governance
UK incorporated companies listed on the UK Stock Exchange (not AIM) are subject to the Combined Code on Corporate Governance. The most recent (2003) version of the Code combines the Cadbury and Greenbury reports on corporate governance, the Turnbull Report on Internal Control (revised and republished as the Turnbull Guidance in 2005), the Smith Guidance on Audit Committees and elements of the Higgs Report. The Combined Code is, in 2006, subject to a review. The Financial Reporting Council (FRC) is the independent UK regulator responsible for the Combined Code and a copy can be downloaded from their website. The FRC is also responsible for the statutory oversight and regulation of auditors and of the professional accountancy and actuarial bodies.
The UK Combined Code works on what is known as a 'Comply or Explain' basis; in other words, companies may choose not to comply with specific provisions but, in that case, will have to provide a proper public explanation of their decision.
The Turnbull Report - Combined Code Requirements
The Turnbull Report - "Internal Control: Guidance for Directors on the Combined Code", published by the Internal Control Working Party of the Institute of Chartered Accountants in England and Wales - sets out how directors of listed companies should comply with the UK's Combined Code requirements in respect of internal controls, including financial, operational, compliance and risk management. Organisations that wish to be good corporate citizens, whether publicly quoted, privately owned or in the public sector, look to the Combined Code - and therefore to the Turnbull Report - for guidance on how to do this.
AIM Companies
Companies listed on AIM in the UK are not formally required to comply with the Combined Code. Some choose to do so. The QCA (Quoted Companies Alliance) published, in July 2005, the Corporate Governance Guidelines for AIM companies, which are based on the Combined Code and are voluntary.
UK Companies Act 2004
The UK’s Companies (Audit, Investigations and Community Enterprise) Act of 2004 placed a statutory duty on officers and employees (including ex-employees) to provide auditors with information (other than legally privileged information) and explanations in respect of any issue related to their audit of the company’s accounts. The directors are required to make a statement that they have disclosed (having taken appropriate steps to ascertain it) all relevant information to the auditors and making a false statement is a criminal offence.
The UK’s Financial Reporting Review Panel (the FRRP), which was originally set up in 1990 to look into instances of corporate accounting non-compliance with UK GAAP, gained new powers to require companies, directors and auditors to provide documents, information and explanations if there might be an accounts non-compliance with relevant reporting requirements. With the exception of small and medium enterprises, UK companies will be required to make detailed disclosure of non-audit services supplied by their auditors.
UK Companies Act 2006
The Companies Act 2006, which received royal assent at the end of 2006, is coming into law in stages and will be fully in effect by October 2008. This Act replaces virtually all the previous UK companies legislation. The first commencement order contained requirements on disclosure of company information and made provisions for the use of e-communications.
As this Act affects every single UK company, it is important to keep abreast of changes - which can be done through the DTI Companies Act 2006 pages.
EU 8th Company Law Directive (sometimes called 'E-Sox' or SOX-'lite')
The FRRP, the FSA (the UK’s Financial Services Authority) and the UK Inland Revenue are also in the process of coordinating their investigative activities so as to comply with standards set by the Committee of European Securities Regulators. The FSA retains the power to decide on corrective or punitive action and it has a range of sanctions available to it. Clearly driven as much by SOX as by its own home grown corporate disasters, the EU issued a ‘Directive on Statutory Audit’ in 2004.This directive (sometimes called ‘Europe’s SOX’, or ‘SOX-lite’) will, when it is adopted, replace the existing EU 8th Company Law Directive of 1984. It ‘clarifies the duties of statutory auditors, provides for their independence and ethical standards, introduces a requirement for external quality assurance, and provides for the public oversight of the audit profession and improved cooperation between oversight bodies in the EU.’ The directive, seen as a ‘minimum harmonisation’ proposal for statutory audits within the EU, also provides a basis for international co-operation between EU regulators and those in third countries.
‘The Commission believes that the PCAOB (the US Public Corporate Accounting Oversight Board) is particularly important because of the global nature of modern capital markets.’ Negotiations between the EU, the SEC (the US Securities and Exchange Commission) and the PCAOB have been taking place to try and avoid EU auditors having to register with the PCAOB. The FRC (Financial Reporting Council)’s remit was extended to include independent oversight (through its newly set up Professional Oversight Board for Accountancy (POBA)) of the accounting profession. EU and audit rules are now 'quite convergent', following the principles of independent public oversight, audit quality assurance, more frequent auditor rotation and avoiding conflicts of interest.
The adoption of IFRS and the regulatory convergence opens up the opportunity for the widespread formal adoption of the International Standards on Auditing (ISA). ISAs are published by the IAASB (the International Auditing and Assurance Standards Board) and are already incorporated into the national auditing standards in a number of countries.
