UK - Pension funds cannot expect auditors to blow the whistle on failing or corrupt companies, a leading corporate governance expert claims.
Instead, those looking to increase shareholder activism – before the government makes it law – should look to strengthen the role of non-executive directors, an NAPF consultant believes.
Friends Ivory & Sime director of corporate governance Richard Singleton said: If an auditor has some useful and valid criticism of things which can be mended and this is made public, the company might well cease to be a viable ongoing enterprise.”
Such an action, he pointed out, would ultimately hurt shareholders too.
Singleton said auditors' reports in company accounts were typically bland – unlike the reports they drew up for the company’s eyes only which were much more frank.
Meanwhile, Mark Henderson a consultant to the NAPF voting issues service suggested that shareholder activism would be much better spent on strengthening the role of the non-executives who monitor auditors.
Henderson also said the amount of non-audit work performed by auditors for the clients posed a potential conflict of interest.
It was, he said, openly acknowledged in business that accountancy firms often offered audit services as a loss leader, in the hope of earning money from other services that came from the company.
He believed such conflicts of interest could be prevented if non-executives formed the majority on the audit committee.
Such a committee should then disclose to shareholders the amount of work awarded to auditors outside their audit, but also the other work they were offered to tender for.
Morley Fund Management's head corporate governance Anita Skipper saw the solution more in strengthening the role of the non-executive directors and their links with a company’s workforce.
She said: “There should be some kind of formal process by which employees who have concerns about any kind of issue, should have access to the non-executives directly.”
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