Audit and corporate governance

Reading this report by KPMG on the new audit committee and auditors' reports made me want to cheer. It looks as if the approach to reporting that the Cadbury Committee envisaged - that reports should be the prompt for a conversation between companies and investors - has been taken on board, certainly by some auditors.

But then I turned to this "consultation document" from ACCA which has been languishing in my reading pile for some time. I thought that thinking about the questions posed might be intellectually stimulating but it is a very disappointing document. I am easily distracted: the initial claim that "The word governance comes from the ancient Greek verb kyberan meaning to pilot or steer" sent me to the OED which indicates that the word comes from Old French. Whether the Old French took it from the Greek is an unanswered question and the ACCA report cites no source for the claim.

And indeed much of the report is based around anecdote and press comment with very little reference to peer reviewed academic research. This is not necessarily a problem for a discussion paper that has a clear objective, such as the series of papers on corporate governance issues published by ICAEW, which are models of concise expression (no, I had no hand in them..) But the ACCA report seems to be trying to do too many things at once, including bolstering its assertions with reference to illustrations drawn from sources such as its own previous publications and media reports.

Its scope is confusingly wide and it is unclear exactly what respondents to the consultation are expected to comment on. It starts with seven hypotheses and each chapter concludes with many questions, some of which are highlighted as more important although the reason for this is unclear and it is not easy to relate the questions to the hypotheses (too many years spent marking Masters dissertation research proposals makes me sensitive to this!)

The bulk of the report focuses on value issues, perhaps not surprising given the title. Governance is defined variously as being "about how to make good decisions" and "to create value sustainably" (is that different from creating sustainable value, I wonder?) The South African King Code is cited, defining good governance as "essentially about effective leadership" but this focus is dismissed without explanation. And in places governance and risk management seem to be treated as synonymous.

There are lots of rather good diagrams and hidden away in the text there are some important points identified. The opacity of accountability in the investment intermediary chain is noted and the effectiveness of NEDs is questioned in passing. But the "three legged" model of performing, informing and holding to account is not very different from the model of performance and conformance introduced by Bob Tricker back in the 1980s (see for example this paper) And although the CoCo model of internal control is reproduced, nowhere does the report mention the role of audit.

Perhaps it's because I started thinking about corporate governance from the perspective of audit committees when I first started research but I remain convinced that audit, both internal and external, is central to corporate governance. It is enshrined in company law as the linchpin, through corporate reporting, of communication between investors and companies. And yet many discussions of corporate governance ignore it and it gets only brief mentions in corporate governance textbooks. You could argue that one of the raisons d'être of the accountancy profession is corporate governance.