Newsletter | Volume 1

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U.K. Regulator Criticizes Corporate Safeguard

The U.K.'s Competition Commission criticized audit committee's lack of focus on shareholders' needs and lack of independence.

The Financial Times is reporting that a key corporate governance safeguard that is supposed to safeguard investors has been criticized by the Competition Commission, one of the United Kingdom's most powerful regulators. According to the Times,"commission members said "the introduction of audit committees in 1994 had failed to ensure that auditors satisfied the needs of shareholders and were independent of the companies they vetted." The competition watchdog states that the audit committee chairs devoted just two days a month or less to their duties at 75 percent of the companies in the FTSE 350

More power to the audit committees
With increased responsibilities comes increased power. Most audit committees have too much ion their plate, however if an audit committee of companies lack focus on shareholder needs and lack of independence as was the case, we have a serious issue.

A central theme of Corporate Governance's recommendations includes protecting investors and ensuring independence. As the audit committee continues to receive more tasks requires a much greater effort to cope with the complex and time-consuming implications and details of their review of accounting, auditing, and IT security, internal control and risk management systems and conditions. In addition to the accounting, audit committee usually also responsible for soft recommendations of Corporate Governance and the ever increasing demands for Compliance.

An audit committee of listed companies was mandatory in the EU a few years ago. In Denmark, with the significant exception that the board may choose to act audit committee as a whole. Where a few years ago, the debate was about this committee could add value has changed. The rule and the accepted recognition is that audit committees are useful and improves the board’s performance.

A safe and appropriate audit committee can provide the Board with the right cash flow considerations paid by the Board as funding sources, can receive through processed documentation for loan applications. The Board can then concentrate and focus on strategy and long-term planning, while the audit committee takes care of the time consuming accounting and legal implications.

Board watchdog
However, the audit and accounting area can be overlooked by the committee and skeletons can be resolved through the controls established by the audit Committee. The Board can then concentrate and focus on strategy and long-term planning, while the audit committee takes care of the time consuming accounting, technical and legal implications.

During the recession and continuing recession, it is harder to borrow money, which is further compounded by financial and credit crisis. The business conditions are harder and many companies get into financial difficulties. A safe and appropriate audit committee can provide the Board with the right cash flow considerations paid by the Directors as funding source can receive through the prepared documentation for the loan application.

Not only for listed
Perhaps more boards also in unlisted companies consider reducing audit and risk committee. Another option was perhaps to establish specific risk committee in good time before the company eventually gets into trouble. The entire board must work with risk management - but it can be useful to consider a small committee of experts.

Audit committees in companies that are not publicly listed, are entirely appropriate. But is there any reason to believe that the benefits of audit committees results can only be harvested by listed companies?

Corporate Governance In its recommendations for good corporate governance also recommended the establishment of an audit committee. They have in their guidance in detail, what it's audit committee are:
  • Rate auditors' independence. This applies to both the external and internal audit
  • The need to select from the range of external auditors to the Board of Directors and General Meeting
  • They must assess the tasks external and internal audit performs beyond the statutory audit. This will help to ensure that the independent auditor objectivity and that there is no self-audit
  • Assess fees to the independent auditor, including fees for non declaration benefits
  • Assessment of internal audit work
  • Assessment of the quality of the audit

The auditor legislation set requirements for audit committees. They can be briefly explained here:
  • Board reduced governing body, CoR members elected from the Board
  • The President shall have accounting or auditing skills
  • Separate committee or the entire Board
  • Meet with the audit annually without the participation of daily management, also they should also have the President of the CoR hold separate meetings with internal and external auditors in private

Competition Commission's criticism
Furthermore, there were also several boards that chose a predecessor to the board. This in terms of having the audit and accounting skills required. This is very sensible, not least because of the requirements imposed on RU.

The UK Competition Commission's fierce criticism of the audit committee consists of the lack of objectivity and independence of the committee to oversee the audit and the audit. Including secure. However, there are several examples where a former signatory auditor for a company of public interest, has been chairman of the audit committee. This means that the President of the CoR years after that have signed the financial statements as an accountant, signing as a board member, and has been one and made assessment of his former colleagues audit, as well as their independence. It is in such cases that good corporate governance recommendations degree bend.

The Danish oversight
How can the audit committee secure auditor’s independence in a world of free competition with limited oversight. The simplest would be to nationalize the audits of companies which are of public interest. The latest initiative is to audit the supervision of these companies will now be directly subject Erhvervsstyrelsen. Thus, the employees from the Erhvervsstyrelsen will conduct and perform oversight of the accounting firms that perform audits of public interest entities. How do regulators that supervision continue to be based on the basis of generally accepted auditing standards?

Segregation of duties and conflicts of interest
The treatment of these in many contexts confidential relationship is complicated, if there is a confusion of roles. Auditor independence cannot be questioned by conflicts of interest, because the external auditors report directly to the Board, without the management. In addition to the above, there are also details of the company's auditor's report, audit report and auditor's report could be questioned.

The conclusion must be that audit committees are here to stay, and companies can better organize and use them well than to introduce them for the sake of formalities. The ongoing crisis has shown that lack of compliance or lack of risk can lead to incalculable consequences for businesses.