May 22, 2017 Overseeing governance
Who watches the watchmen? It’s a question which comes up in so many different guises and yet it is one which we rarely stop to ponder, unless something goes wrong. And yet one of the fundamental planks of our system of governance is that every official body has some form of review, helping to ensure that it continues to deliver in the best interests of those for whom it was selected to serve.
For example, the internal workings of a company are overseen by the board, by oversight committees, by auditors, by shareholders and by the Financial Reporting Council (FRC). And although the FRC is an independent body it too is subject to oversight and review. One such ongoing review is looking at the effectiveness of the sanctions imposed on accountants, auditors and actuaries under the FRC’s enforcement procedures. The independent review was set up in March 2017 and it has now issued a call for submissions and evidence.
The review is fairly wide-ranging, looking at the fairness and effectiveness of the sanctions available including whether they are sufficient to ‘deter and protect’ and whether they remain fit for purpose. In pursuit of this the review committee has come up with thirteen questions on which they are inviting a response. Some of these, such as whether financial penalties are being set at the right level, are fairly straightforward. Others perhaps require a little more thought.
In question 4 we are asked to comment on whether decision-makers should “seek to place any particular focus on entities rather than individuals or vice versa.” This is a question which strikes at the heart of culture, governance and teamwork. Undoubtedly there will be instances where one individual is acting so far outside of the scope of their authority that may be an argument to say that the sanctions should be seen to be aimed primarily at the individual rather than their organisation. But even here some might argue that had there been an adequate system of checks and balances in place, the individual would not have been able to act as they did.
Investors rely on boards to act in the long-term best interests of the company; delivering strong and stable governance. External auditors are seen as a vital component in this process, providing independent oversight and validation. Investors therefore rightly expect auditors to undertake a competent and thorough job in order to protect the interests of the company, its investors and others. As the review comments “The primary purpose of imposing sanctions for breaches of the Relevant Requirements is not to punish but to protect the public and the wider public interest.”
