New ‘Audit Reform and Corporate Governance [ARGA] bill’ fails to add up
THE recent King’s Speech set out proposals for the new government to replace the Financial Reporting Council with a new regulator the Audit Reporting and Governance Authority [ARGA] – replete with additional powers to tackle bad financial reporting.
No one would dispute the need for truthful financial reporting as an essential plank in both creating successful major companies but also building trust with all those who depend on such honesty - whether shareholders, customers, pensioners, wider society or, indeed, we can gather government.
However, the key idea of the new ‘Audit Reform and Corporate Governance bill’ - correcting the anomaly that only those company directors with accountancy qualifications can be prosecuted for inaccurate financial reporting - is not only an incredibly slow and lengthy due process but rather misses the point of what is driving disasters in the boardroom and company scandals.
In order to write a book on this subject (Disaster in the Boardroom: Six Dysfunctions Everyone Should Understand) with Randall S. Peterson from London Business School, we studied in depth the drivers underlying over 300 years of scandals. During this research we looked closely at many disasters and scandals including the BHS collapse - costing 11,000 jobs - and Carillion's demise - resulting in £1 billion debt, £500 million pension deficit, and 30,000 unpaid subcontractors. These corporate failures (and others) also caught the eye of the new government and also drove the need for this reform (and the birth of ARGA).
To my mind, both BHS and Carillion are just two recent big scandals with big numbers and consequences but the idea that all that stands between a recurrence of this kind of scandal or business disaster elsewhere are a few accountancy certificates misunderstands how corporate governance works.
More importantly, the narrow auditing of financial statements remit of the ARGA seems guaranteed to provide no analysis of the boardroom culture that drives incorrect financial reporting. Ignoring that the regulator is unlikely to have sufficient teeth to regulate all financial reports, it is also informative to note that the number of company directors currently in jail for financial misreporting is zero, whether or not they have an accountancy qualification.
While it appears it is going to fall outside the remit of the new ARGA, I would suggest that the government would do well to address the corporate governance failings that regularly occur in disaster and scandal-driven boardrooms. There are - when you boil it down across 300 years of research and case studies of disasters and scandals in any industry, geography or sector you care to name - six basic types of board dysfunction. None of those are solely audit and accountancy-led. To imagine so is, at best, naive.
Though a laudable and possibly much needed revamp of audit qualification and competences as they apply to the regulations governing financial reporting, the idea that we could regulate away business scandal and disaster using this narrow accounting qualification/financial reporting metric in isolation just doesn't add up. Of course, quick caveat, we await the fine detail of the draft bill before confirming that this is the case. But, on the surface, focussing on the need for the regulation of accountancy qualifications to better underpin accurate financial reporting ignores many drivers of business scandals, not least that culture and people drive boardroom behaviours not their spreadsheets and tables.
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