Audit Committees Face Regulation

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Byline: Kit Bingham

Directors who serve on the audit committees of UK companies can expect their work to become subject to comprehensive best-practice guidelines and government regulation.In a recent speech on company law, UK Trade Secretary Patricia Hewitt said: "We should consider giving an enhanced role to the audit committee... We will think things through though, and take action where it is justified."

Ideas being considered include giving the audit committee the right to hire and fire the audit firm, and to determine the level of non-audit services supplied by auditors.

Jon Grant, executive director of the Auditing Practices Board (APB), the profession's self-regulatory body, says: "We would welcome an evolution of the role of audit committees. It would significantly help perceptions of independence."

Chris Pearce, a professional standards executive at the Institute of Directors (IoD), says the role and structure of audit committees should be spelled out.

He says: "We want a lot more detail." But some doubt whether further regulation of boardroom behaviour can lead to improved practice.

Lord Young of Graffham, former Trade Secretary in the Thatcher administration and later chairman of telecoms firm Cable & Wireless, says: "I don't notice we've achieved very much with a decade of regulation of non-executive directors. The position seems not to have improved very much from what it was 10 years ago.

"I'm not sure that the present system of having an audit committee, chaired by a non-executive who might well be appointed by the chairman, is giving the sort of independence that our world really requires.

"We've seen over the past 15 years or so, more and more non-executives coming in to create a two-tier type board, in which these part-time non-executives are somehow responsible for looking at the strategy of the board and the conduct of the business. And yet we've seen companies like Marconi where this has patently failed. We've really got to say, where have we gone wrong?"

Lord Young also suggests that the more work that is piled on the shoulders of non-executive directors, the more dependent on the job they become.

He asks: "If the non-executive director gets a lot of extra fees for doing additional work, you have got to ask how independent are they?"

The IoD is working closely with the government-sponsored review of non-executive director effectiveness, led by Derek Higgs, senior adviser to UBS Warburg UK.

It has undertaken a research project to analyse companies' published statements about their board committees.

Pearce says: "We're seeing a very high level of difference on structure, composition, the number of meetings, the terms of reference - all sorts."

He notes that while the Combined Code on corporate governance spells out detailed best practice guidance on many areas of boardroom behaviour, there is little on how committees should operate. …