UK Companies Flouting the Rules on Audit Independence

Financial News, March 18, 2002 | Go to article overview

UK Companies Flouting the Rules on Audit Independence


Leading UK companies including BHP Billiton, the mining group, and Associated British Foods continue to flout best practice standards on the independence of board audit committees.

In the wake of Enron, investors are keen to ensure that overly close relationships do not develop between audit firms and client companies. In particular, they insist that boardroom audit committees are made up solely of independent directors - that is, non-executive directors with no other commercial relationship to the company that might compromise their judgment.

Such a standard is enshrined in the Combined Code on corporate governance, with which UK listed companies are expected to comply. The government recently announced a review of audit regulation in the wake of the Enron collapse, which is likely to lead to a tightening of standards.

However, several UK companies have audit committees that include former employees of the auditor. In two cases - at BHP Billiton and at IG Group, the spread betting firm - such connected directors chair the audit committee. In all cases, the companies deem the director concerned to be independent.

For example, Martin Adamson was involved in the audit of Associated British Foods' accounts while a board member of KPMG. He later joined the company as a non-executive director, currently sits on the audit committee and is deemed an independent director by the company.

Geoff Lancaster, an Associated British Foods spokesman, pointed out that several years have passed since Adamson worked for KPMG. He says: "We don't think it's an issue. His prior knowledge of the company is valuable for us. There's no conflict of interest."

At BHP Billiton, the audit committee is chaired by David Crawford, who used to be Australian national chairman of KPMG, the company's auditors.

PIRC, the shareholder voting advice group, says it has "serious concerns about the potential for conflicts of interest". BHP Billiton points out that Crawford worked for BHP in Australia, which was audited by Andersen. Following the merger with Billiton, and the appointment of KPMG as auditors of the combined group, he resigned his position at KPMG.

Even if former audit firm employees don't serve on the audit committee, investor representatives have concerns about independence.

The Voting Issues Service of the National Association of Pension Funds, which advises client funds how to vote their shares, says any director with a connection to the audit firm will be regarded as non-independent unless the company makes a convincing case to the contrary.

Francis Plowden, a non-executive director at ITNET, the IT applications business, joined the company shortly after retiring from the company's auditors, PricewaterhouseCoopers. …

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