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Don't Overlook UK's Important Thinking On Audit

Posted on July 14, 2016 at 3:40 PM

We are living in what feel like crazed times in the United Kingdom. But one thing is clear - finally, it may no longer be acceptable to talk about 'corporate governance' synonymously with remarks about 'anoraks' (a deprecating allusion that no one but a Brit could actually fathom, ....).

The reason for the seemingly imminent elevation of corporate governance is our new Prime Minister, Theresa May. The country is still scrambling about trying to keep up with events, so there has been limited reaction as yet to her comments on curbing executive pay, and putting workers on plc boards. They were covered here on Forbes as soon as they were made. Has it been THREE WHOLE DAYS ? Time flies.

But you can smell the fear.

I see PwC (whose partner focusing on remuneration Tom Gosling manages to be a one man tour de force when it comes to attending so many City events talking about the 'importance of benchmarking against peers' ) has already claimed prime space in the Financial Times with a report on executive pay.

Bizarrely, it seems a bit muddled in its message. Either that, or PwC has decided that it can play it both ways.

The public would be shocked, shocked, if it knew just how big the discrepancy is between worker pay and CEO pay, says the report engagingly titled 'Time to Listen.'

However, “Shareholders don’t want more votes and may be less inclined to cast a binding vote against a pay proposal than they would an advisory vote" it says.

"Investors would also be inundated with requests for consultation over pay from companies worried about the issue" writes the FT.

PwC's sense of altruism here is remarkable. Or perhaps, there is now suddenly an urgent sense that to keep the business you might need to change the tune.

The country awaits Mrs May's next thoughts on both the points mentioned. Sir Vince Cable, having first reacted to the idea of binding shareholder votes on pay with concern about potential  litigation, then seemed to backtrack when he said on BBC Radio 4 Today that it was all very interesting going forward...

In the midst of all this, there has been interesting material released by the FRC, the corporate governance and accounting watchdog.

Developments in Audit: An Overview 2015/16 is the first report of its kind for the FRC as the UK’s Competent Authority for audit. It describes itself as focusing on assessing justifiable confidence in UK audit and summarising the current ‘state of play’ as seen by the FRC and its stakeholders. You can access it here

It is interesting because of this emphasis: "concern remains that the FTSE 350 audit market is concentrated across the Big Four firms, as the smaller firms are thought to struggle to match on skill level, resource and ability to bear the cost of tendering processes."

It is also worth looking at the YouGov research on confidence in the value of audit, conducted for the FRC in 2014 and then again in 2016 (same link). It gives an insight into the range of concerns across stakeholders, and describes it as a 'work in progress.'

Factor in fast changing public expectations, and growing investor concerns on climate risk and environmental conditions and how they are reflected in company reports, and you realise just how much of a 'work in progress' it remains.

I recommend reading the YouGov research - both readable, and illuminating. It makes it clear that auditor choice is a very real concern in the UK today. And the YouGov report passes the ball  on this firmly to investors.

"Investors – the group which all stakeholders agree are the primary beneficiary of audit – also have an important role to play in fostering an increase in confidence by engaging more with ACCs (audit committee chairs)  and audit firms for the entities which they have invested in according to respondents" it says. (my emphasis).

No wonder the Big Four are scrambling about. Get ready for more instant reports.

Categories: Investors, Governance, Scrutiny