Corporate Governance Corporate Governance and Accountabilityand Accountability

Corporate governanceCorporate governance

1.1. Protects the rights of shareholders to trade Protects the rights of shareholders to trade shares, to obtain timely and regular shares, to obtain timely and regular information about corporate well being, information about corporate well being, participate and vote in general shareholder participate and vote in general shareholder meetings, elect and remove members of meetings, elect and remove members of the board, and share in corporate profits.the board, and share in corporate profits.

2.2. Recognises and protect the rights of Recognises and protect the rights of stakeholders. stakeholders.

Ethical principles supported by Ethical principles supported by lawlaw

Honesty and TransparencyHonesty and Transparency Responsibility and AccountabilityResponsibility and Accountability Fairness and JusticeFairness and Justice Avoidance of conflicts of interest and related party Avoidance of conflicts of interest and related party

dealingsdealings Application of the principles of good corporate Application of the principles of good corporate

governancegovernance

Corporate governance underpins Corporate governance underpins corporate survivalcorporate survival

Not just formal accountability but vital for investor Not just formal accountability but vital for investor confidence - affects capitalisation, regulation, confidence - affects capitalisation, regulation, reputationreputation Now measured by GovernanceMetrics International cf. Now measured by GovernanceMetrics International cf.

Corporate Governance Authority, Transparency Corporate Governance Authority, Transparency International.International.

http://www.gmiratings.com/(svoakc45be23zh450xr2pw4http://www.gmiratings.com/(svoakc45be23zh450xr2pw45)/Default.aspx5)/Default.aspx

World Bank sponsored Global Corporate Governance World Bank sponsored Global Corporate Governance Forum <http://www.gcgf.org/>Forum <http://www.gcgf.org/>

Why is good corporate governance important?

It can lower the cost of capital.It promotes investor confidence.It is important to respond to global best practice.

How is good corporate governance achieved?

There are various models of good corporate governance. Most recently, the OECD has set guidelines. The Cadbury Committee in the UK, benchmarked CG and then the General Motors Guidelines on Significant Corporate Governance Issues. The Canadians and the ASX Corporate Governance Council have espoused similar principles.

OECD recommendations 2004OECD recommendations 2004

Disclosure ofDisclosure of1.1. The financial and operating results of the company. The financial and operating results of the company. 2.2. Company objectives. Company objectives. 3.3. Major share ownership and voting rights. Major share ownership and voting rights. 4.4. Remuneration policy for members of the board and key executives, Remuneration policy for members of the board and key executives,

and information about board members, including whether they are and information about board members, including whether they are independent. independent.

5.5. Related party transactions. Related party transactions. 6.6. Foreseeable risk factors. Foreseeable risk factors. 7.7. Issues regarding employees and other stakeholders. Issues regarding employees and other stakeholders. 8.8. Governance structures and policiesGovernance structures and policies

Good corporate governance and Good corporate governance and developmentdevelopment

1991 - following collapse of firms declared 1991 - following collapse of firms declared healthy in audited returns, the healthy in audited returns, the Financial Financial Reporting Council, the London Stock Reporting Council, the London Stock Exchange and the UK accountancy Exchange and the UK accountancy profession established the Cadbury profession established the Cadbury Committee to inquire into financial aspects Committee to inquire into financial aspects of corporate governance. of corporate governance.

What is corporate governance?

Corporate governance is the system by which companies are directed and managed. Good corporate governance structures add value to corporations and provide accountability and control systems.

Good corporate governance and Good corporate governance and developmentdevelopment

1991 - following collapse of firms declared 1991 - following collapse of firms declared healthy in audited returns, the healthy in audited returns, the Financial Financial Reporting Council, the London Stock Reporting Council, the London Stock Exchange and the UK accountancy Exchange and the UK accountancy profession established the Cadbury profession established the Cadbury Committee to inquire into financial aspects Committee to inquire into financial aspects of corporate governance. of corporate governance.

Cadbury Report RecommendedCadbury Report Recommended

Conformity with its Code of Best Practice. This Conformity with its Code of Best Practice. This was voluntary.was voluntary.

More clear and detailed financial reporting in More clear and detailed financial reporting in order to:order to:

Inspire public confidence in corporationsInspire public confidence in corporations Enable directors to advance the best interests of the Enable directors to advance the best interests of the

company and to avoid concentrations of power.company and to avoid concentrations of power.

The clear separation of the responsibilities of The clear separation of the responsibilities of CEO and chair of the board.CEO and chair of the board.

Non-executive directors shouldNon-executive directors should

Have a stronger role on boards Have a stronger role on boards

Should be selected according to formal Should be selected according to formal processesprocesses

Be clearly independent from the management Be clearly independent from the management of the companyof the company

Not have business interests which could Not have business interests which could conflict with those of the companyconflict with those of the company

Cadbury also recommendedCadbury also recommended

The establishment of an Audit Committee with The establishment of an Audit Committee with at least 3 non-executive directors and at least 3 non-executive directors and access to independent audit advice access to independent audit advice

ImplementationImplementation

Since 1993, the London Stock Exchange has, Since 1993, the London Stock Exchange has, required listed companies to include in required listed companies to include in annual reports statements of compliance annual reports statements of compliance with the Code of Best Practice or, give with the Code of Best Practice or, give reasons for not doing so.reasons for not doing so.

In December 1994, Guidance to the In December 1994, Guidance to the interpretation of the Cadbury Code was interpretation of the Cadbury Code was issued. This was perceived as a watering issued. This was perceived as a watering down of the Code. down of the Code.

Implementation 2Implementation 2

The Code had called upon the directors to report on the The Code had called upon the directors to report on the effectiveness of the company’s system of internal effectiveness of the company’s system of internal control, the Guidance requires only that directors state :control, the Guidance requires only that directors state :

that directors are responsible for the company’s system that directors are responsible for the company’s system of internal financial controlof internal financial control

that such a system is only relatively secure, not that such a system is only relatively secure, not absolutely soabsolutely so

the most important procedures for internal financial the most important procedures for internal financial controlcontrol

that directors have reviewed the system of controlthat directors have reviewed the system of control

Ernst and Young, The Cadbury Codes Requirements on Internal Ernst and Young, The Cadbury Codes Requirements on Internal Control at http:/www.ernsty.co.uk/accting/ifc/ifc2.htm.Control at http:/www.ernsty.co.uk/accting/ifc/ifc2.htm.

The essential corporate governance principlesA company should: Page1. Lay solid foundations for management and oversight 15Recognise and publish the respective roles and responsibilitiesof board and management.2. Structure the board to add value 19Have a board of an effective composition, size and commitmentto adequately discharge its responsibilities and duties.3. Promote ethical and responsible decision-making 25Actively promote ethical and responsible decision-making.4. Safeguard integrity in financial reporting 29Have a structure to independently verify and safeguard the integrityof the company’s financial reporting.5. Make timely and balanced disclosure 35Promote timely and balanced disclosure of all material mattersconcerning the company.6. Respect the rights of shareholders 39Respect the rights of shareholders and facilitate the effective exerciseof those rights.7. Recognise and manage risk 43Establish a sound system of risk oversight and management andinternal control.8. Encourage enhanced performance 47Fairly review and actively encourage enhanced board andmanagement effectiveness.9. Remunerate fairly and responsibly 51Ensure that the level and composition of remuneration is sufficientand reasonable and that its relationship to corporate and individualperformance is defined.10. Recognise the legitimate interests of stakeholders 59Recognise legal and other obligations to all legitimate stakeholders.

Formalise and disclose the functions reserved to the board and those delegated to management.Adopt a formal board charter that details the functions and responsibilities of the board or a formal statement of delegated authority to management.

Principle 1: Lay solid foundations for management and oversight

Principle 2: Structure the board to add value

A majority of the board should be independent directors. An independent director is independent of management and free of any business or other relationship that could materially interfere with – or could reasonably be perceived to interfere materially with – the exercise of their unfettered and independent judgment.

Principle 3: Promote ethical and responsible decision-making

Clarify the standards of ethical behaviour required of company directors and key executives Establish a code of conductPromote integrity

Principle 4: Safeguard integrity in financial reporting

Require written statements from the CEO and the CFO to the board that the company’s financial reports present a true and fair view of its financial condition in accordance with relevant accounting standards.Establish an audit committee of at least 3 non-executive directors, not chaired by chair of board.

Principle 5: Make timely and balanced disclosure

Develop continuous disclosure policies and procedures.

Principle 6: Respect the rights of shareholders

Design and disclose a communications strategy to promote effective communication with shareholders and encourage effective participation at general meetings.

Principle 7: Recognise and manage risk

Establish a system to identify, assess, monitor and manage risk inform investors of material changes to the company’s risk profile.The CEO and CFO should certify to the board that the company’s risk management and compliance systems are operating effectively.

Principle 8: Encourage enhanced performance

Disclosure of performance evaluation of the board.Induction program for new directors.All board members to have direct access to company secretary.Board members to have access to independent advice at company expense.

Principle 9: Remunerate fairly and responsibly

Disclose company’s remuneration policiesincluding cash, fees and other benefits.The board should establish a remuneration committee

Why were not such measures Why were not such measures already in place?already in place?

Why did it take the collapse of Enron, Why did it take the collapse of Enron, WorldCom, HIH Insurance and many other WorldCom, HIH Insurance and many other firms to move the industry, investors and firms to move the industry, investors and governments to act?governments to act?

Was it because of the accepted dogma that Was it because of the accepted dogma that high risk is good for business because it high risk is good for business because it produces high returns?produces high returns?

Such rules are a floor, not a Such rules are a floor, not a ceilingceiling

The GM Corporate Governance Guidelines by contrast, place The GM Corporate Governance Guidelines by contrast, place a stronger emphasis on Directors’ skills and suitability for a stronger emphasis on Directors’ skills and suitability for the Board, eg. Item 4, the Board, eg. Item 4, Director Orientation and Continuing Director Orientation and Continuing EducationEducation

The Board and Management will conduct a comprehensive The Board and Management will conduct a comprehensive orientation process for new Directors to become familiar orientation process for new Directors to become familiar with the Corporation's vision, strategic direction, core values with the Corporation's vision, strategic direction, core values including ethics, financial matters, corporate governance including ethics, financial matters, corporate governance practices and other key policies and practices .... The Board practices and other key policies and practices .... The Board also recognizes the importance of continuing education for also recognizes the importance of continuing education for its directors and is committed to provide such education in its directors and is committed to provide such education in order to improve both Board and Committee performance.order to improve both Board and Committee performance.

Classic Symptoms Preceding Collapse

Overstatement of the value of assets, andunderstatement of liabilities in financial reports.

Use of related party transactions to disguise the reality, e.g. to create a false impression about earnings.

Delays in financial reporting.

Continuing financial losses and cash flow deficienciesWeak management Inadequate management succession planning Looming debt payments & concealment of bad debtsInadequate capital expenditure programsLack of adequate information systemsShareholder disputes

The case of EnronThe case of Enron

Kenneth Lay, former chairman and CEO of Kenneth Lay, former chairman and CEO of Enron, claims that he and the board were Enron, claims that he and the board were misled by CFO, Andrew Fastow (who has misled by CFO, Andrew Fastow (who has pleaded guilty to fraud and is to be sent to pleaded guilty to fraud and is to be sent to jail).jail).

A clutch of Enron officers have pleaded guilty A clutch of Enron officers have pleaded guilty to crimes, so what does that say about the to crimes, so what does that say about the CEO and board’s governance?CEO and board’s governance?

FastowFastow

Fastow joined Enron in 1990 and promoted to Fastow joined Enron in 1990 and promoted to CFO in 1998 after designing innovative CFO in 1998 after designing innovative financial structures that reduced Enron’s financial structures that reduced Enron’s debt allowing it to diversify its activities. debt allowing it to diversify its activities.

He began building off-the-books partnerships He began building off-the-books partnerships in 1997 to increase its capital and hide debt.in 1997 to increase its capital and hide debt.

Fastow’s take from his deals was $30 million.Fastow’s take from his deals was $30 million.

Not just rotten applesNot just rotten apples

Enron’s culture, which included strategies such as Enron’s culture, which included strategies such as the ‘war for talent’, licenced officers to act on their the ‘war for talent’, licenced officers to act on their own initiative but to act without regard for probity. own initiative but to act without regard for probity. This made it possible for Enron to manipulate the This made it possible for Enron to manipulate the Californian energy market.Californian energy market.

It adopted a veritable thicket of questionable It adopted a veritable thicket of questionable accounting practices, such as booking its energy accounting practices, such as booking its energy trades at full value rather than at the value of its trades at full value rather than at the value of its margin, thus inflating profits.margin, thus inflating profits.

The culture at EnronThe culture at Enron

It was clear that Enron routinely engaged in sharp It was clear that Enron routinely engaged in sharp practice, that it sought to disguise this from practice, that it sought to disguise this from investors and the financial world by a complex and investors and the financial world by a complex and all but unintelligible structure of accounts and all but unintelligible structure of accounts and partnerships.partnerships.

It is clear that Enron encouraged maverick behaviour It is clear that Enron encouraged maverick behaviour by sacking the lowest performing 10% of staff and by sacking the lowest performing 10% of staff and promoting the best 10%. Results were all that promoting the best 10%. Results were all that counted.counted.

Deliberate deceptionDeliberate deception

Enron’s auditor was Arthur Andersen. It signed off Enron’s auditor was Arthur Andersen. It signed off the accounts each year as a true and fair the accounts each year as a true and fair representation of the corporation’s financial representation of the corporation’s financial condition for which it received over $20 million. It condition for which it received over $20 million. It received over $20 million also in consulting fees.received over $20 million also in consulting fees.

The SEC received Enron’s reports year after year, The SEC received Enron’s reports year after year, but no one there was alert to the danger.but no one there was alert to the danger.

Hence the resort to legislative reform of the formal Hence the resort to legislative reform of the formal accountability mechanisms.accountability mechanisms.

Andersen accused of knowing that• Reduction of shareholder equity was a result ofimproperclassification of hundreds of millions of dollarsas increases, ratherthan decreases in equity value• Enron lied about charges against income asnon-recurring, although Andersen believedEnron did not have a basis for this, and took nosteps to correct the record• Andersen was alerted to possible fraud at Enron• Andersen audit team directly contravenedapprovedaccounting standards

Andersen management decided thatdocumentation that could assist Enron inresponding to the SEC should be collated• It then began destroying Enron documents at itsHouston offices• Similar procedures were enacted by staffworking on Enron audit matters in Oregon,Illinois and London• When the SEC served Andersen with asubpoena relating to its work for Enron.audit teams were instructed that there could be“no more shredding” because the firm had been“officially served” for documents

Andersen was charged with knowingly,intentionally and corruptly persuading andattempting to persuade Andersen employees, to(a) withhold records, documents relevant tocriminal proceedings and (b) alter, destroy,mutilate and conceal objects withintent to impair the objects’ integrity andavailability for use in such official proceedings.

The Verdict• After a 6-week trial and 10 days of deliberation, a jury found Arthur Andersenguilty of obstructing justice when it destroyed Enron Corp. documents while onnotice of a federal investigation by the SEC.• The jury rejected Andersen’s defense that the documents were destroyed as partof its housekeeping duties and not as a ruse to keep Enron documents away fromthe regulators• Andersen received the maximum sentence of 5 years probation and a $500,000fine• 35,000 people lost their jobs worldwide

Sherron Watkins, Enron heroine, Sherron Watkins, Enron heroine, interviewed in June, 2004interviewed in June, 2004

Do you think that post-Enron America is a more ethical place? Do you think that post-Enron America is a more ethical place? ““Not really. We are building more Enrons, but we don't want to Not really. We are building more Enrons, but we don't want to

admit it. I fall into Warren Buffett's camp when he says that admit it. I fall into Warren Buffett's camp when he says that C.E.O. pay is the acid test. When C.E.O. pay has been C.E.O. pay is the acid test. When C.E.O. pay has been reduced, then I'll believe that our business leaders have reduced, then I'll believe that our business leaders have adopted a spirit of corporate reform.”adopted a spirit of corporate reform.”

If the government were to demand a pay ceiling for C.E.O.'s in If the government were to demand a pay ceiling for C.E.O.'s in this country, what should it be? this country, what should it be?

J.P. Morgan said that C.E.O.'s should not make more than 20 J.P. Morgan said that C.E.O.'s should not make more than 20 times the average hourly worker. We're above 500 times right times the average hourly worker. We're above 500 times right now! The average worker gets, let's say, $20 an hour. So the now! The average worker gets, let's say, $20 an hour. So the highest C.E.O. salary should be -- $1 million a year.highest C.E.O. salary should be -- $1 million a year.

Interviewed by Deborah SolomonInterviewed by Deborah Solomon, , NYTNYT..

Sarbanes - Oxley ActSarbanes - Oxley Act

Sarbanes-OxleySarbanes-Oxley (2002) passed in wake of Enron and other (2002) passed in wake of Enron and other collapses to strengthen corporate governance and collapses to strengthen corporate governance and restore investor confidence and public trust in restore investor confidence and public trust in accounting and reporting practices.accounting and reporting practices.

Establishes enhanced governance and management Establishes enhanced governance and management standards for all US publicly listed companies and standards for all US publicly listed companies and public accounting firms.public accounting firms.

Establishes the Public Company Accounting Oversight Establishes the Public Company Accounting Oversight Board under the SEC to oversee public accounting Board under the SEC to oversee public accounting firms and issue accounting standards.firms and issue accounting standards.

SOA 2SOA 2

CEOs and CFOs now have to sign off on CEOs and CFOs now have to sign off on all company financial statements, the all company financial statements, the audit committee of the board must be audit committee of the board must be made up of independent outside made up of independent outside directors, and companies have to have directors, and companies have to have thier audit of internal financial controls thier audit of internal financial controls audited externally.audited externally.

Functions of the Public Company Functions of the Public Company Accounting Oversight BoardAccounting Oversight Board

register public accounting firms; register public accounting firms; establish "auditing, quality control, ethics, establish "auditing, quality control, ethics,

independence, and other standards relating to the independence, and other standards relating to the preparation of audit reports for issuers;" preparation of audit reports for issuers;"

conduct inspections of accounting firms; conduct inspections of accounting firms; conduct investigations and disciplinary conduct investigations and disciplinary

proceedings, and impose appropriate sanctions; proceedings, and impose appropriate sanctions; enforce compliance with the Act, securities laws enforce compliance with the Act, securities laws

and rules,and professional standardsand rules,and professional standards

The Board requires public The Board requires public accounting firmsaccounting firms

Among other measures to:Among other measures to: Maintain audit working papers for 7 yearsMaintain audit working papers for 7 years Adopt 2nd partner review and approval of audit Adopt 2nd partner review and approval of audit

reports .reports . Accounting firms to adopt quality control standards.Accounting firms to adopt quality control standards. Conduct annual quality reviews for accounting firms Conduct annual quality reviews for accounting firms

with with 100 reports & others every 3 years. 100 reports & others every 3 years.

Section 106: Foreign Public Section 106: Foreign Public Accounting Firms.Accounting Firms.

Foreign accounting firms who audit a U.S. Foreign accounting firms who audit a U.S. company are subject to registrations with company are subject to registrations with the Board. the Board.

Section 201: Services Outside The Scope Of Section 201: Services Outside The Scope Of Practice Of Auditors; Prohibited Activities.Practice Of Auditors; Prohibited Activities.

Unless specifically approved by the Board, it is Unless specifically approved by the Board, it is unlawful for a public accounting firm to provide unlawful for a public accounting firm to provide anyany non-audit service to a client undergoing audit, non-audit service to a client undergoing audit, including:including: services related to its financial statementsservices related to its financial statements financial information systems design and financial information systems design and

implementationimplementation internal audit outsourcing servicesinternal audit outsourcing services management functions or human resourcesmanagement functions or human resources investment adviser, or investment banking servicesinvestment adviser, or investment banking services

Section 203: Audit Partner Rotation.Section 203: Audit Partner Rotation.

The lead audit and the reviewing partners The lead audit and the reviewing partners must be rotated every 5 years.must be rotated every 5 years.

Section 206: Conflicts of Interest.Section 206: Conflicts of Interest.

The CEO, CFO, Chief Accounting Officer or The CEO, CFO, Chief Accounting Officer or equivalent cannot have been employed by the equivalent cannot have been employed by the company's audit firm during the 1-year period company's audit firm during the 1-year period preceding the audit.preceding the audit.

Section 301: Public Company Audit Section 301: Public Company Audit Committees.Committees.

Audit committee members are members of the corporation’s board Audit committee members are members of the corporation’s board of directors, and shall be independent, i.e. not in receipt of any of directors, and shall be independent, i.e. not in receipt of any consulting, advisory, or other compensatory fee apart from a consulting, advisory, or other compensatory fee apart from a director’s fee.director’s fee.The SEC may make exceptions to this rule.The SEC may make exceptions to this rule.

The AC is directly responsible for the appointment, remuneration, The AC is directly responsible for the appointment, remuneration, and oversight of the corporation’s accounting firm.and oversight of the corporation’s accounting firm.

Audit committee have the authority to engage independent advice, Audit committee have the authority to engage independent advice, in order to carry out its duties. The corporation shall provide in order to carry out its duties. The corporation shall provide appropriate funding to the audit committee.appropriate funding to the audit committee.

Section 302: Corporate Responsibility Section 302: Corporate Responsibility For Financial Reports.For Financial Reports.

The CEO and CFO shall attest to the The CEO and CFO shall attest to the "appropriateness of the financial statements and "appropriateness of the financial statements and disclosures contained in the periodic report, and disclosures contained in the periodic report, and that those financial statements and disclosures that those financial statements and disclosures fairly present, in all material respects, the fairly present, in all material respects, the operations and financial condition of the issuer."operations and financial condition of the issuer."

Section 303: Improper Influence on Section 303: Improper Influence on Conduct of AuditsConduct of Audits

It is unlawful to influence auditors in any way.It is unlawful to influence auditors in any way.

Section 401 (c): Study and Report on Section 401 (c): Study and Report on Special Purpose Entities.Special Purpose Entities.

The SEC shall examine off-balance sheet The SEC shall examine off-balance sheet disclosures to determine a) their extent disclosures to determine a) their extent (including assets, liabilities, leases, losses and (including assets, liabilities, leases, losses and the use of special purpose entities); and b) the use of special purpose entities); and b) whether generally accepted accounting rules whether generally accepted accounting rules result in transparent financial statements result in transparent financial statements

and make a report containing recommendations to and make a report containing recommendations to the Congress.the Congress.

Section 402(a): Prohibition on Personal Section 402(a): Prohibition on Personal Loans to Executives.Loans to Executives.

Generally, it is unlawful for to extend credit to any Generally, it is unlawful for to extend credit to any director or executive officer. Consumer credit director or executive officer. Consumer credit companies may issue credit and credit cards to companies may issue credit and credit cards to its directors and executive officers on the same its directors and executive officers on the same terms and conditions made to the general public.terms and conditions made to the general public.

Section 404: Management Assessment Section 404: Management Assessment Of Internal Controls.Of Internal Controls.

Requires annual reports to contain an audited Requires annual reports to contain an audited internal control reportinternal control report

Nature and effectiveness of the internal control Nature and effectiveness of the internal control structure for integrity in financial reporting.structure for integrity in financial reporting.

Title VIII: Corporate and Criminal Fraud Title VIII: Corporate and Criminal Fraud Accountability Act of 2002.Accountability Act of 2002.

It is a felony "knowingly" to destroy documents It is a felony "knowingly" to destroy documents or to "impede, obstruct or influence" any or to "impede, obstruct or influence" any existing or contemplated federal investigation.existing or contemplated federal investigation.

Employees of corporations and accounting firms Employees of corporations and accounting firms are extended "whistleblower protection”.are extended "whistleblower protection”.

Title IX: White Collar Crime Penalty Title IX: White Collar Crime Penalty EnhancementsEnhancements

Creates a crime for tampering with a record or Creates a crime for tampering with a record or otherwise impeding any official proceeding.otherwise impeding any official proceeding.

SEC given authority to seek court freeze of SEC given authority to seek court freeze of extraordinary payments to directors, offices, partners, extraordinary payments to directors, offices, partners, controlling persons, agents of employees.controlling persons, agents of employees.

US Sentencing Commission to review sentencing US Sentencing Commission to review sentencing guidelines for securities and accounting fraud.guidelines for securities and accounting fraud.

The effect …?The effect …?

Accounting firms and lawyers are booming on the back of Accounting firms and lawyers are booming on the back of Sarbanes-Oxley.Sarbanes-Oxley.

In May 2004, In May 2004, RateFinancials found:RateFinancials found:

That most financial statements did not reflect public That most financial statements did not reflect public companies' true financial states.companies' true financial states.

In November it found that:In November it found that:

That related party transactions were still common.That related party transactions were still common.

By year’s endBy year’s end

The Big Four audit firms were moving back into The Big Four audit firms were moving back into consulting having sole their consulting arms after the consulting having sole their consulting arms after the Andersens debacle.Andersens debacle.

Since 2002, all have been wary of using the term Since 2002, all have been wary of using the term ‘consulting’ in their literature.‘consulting’ in their literature.

Regulators' sanctions have not been as punitive as initially Regulators' sanctions have not been as punitive as initially feared. While auditors are not allowed to offer non-feared. While auditors are not allowed to offer non-audit related services to audit clients but can do so for audit related services to audit clients but can do so for all other companies. all other companies. Philip Aldrick Telegraph,Philip Aldrick Telegraph, 29/12/2004.29/12/2004.

Misconduct encouragedMisconduct encouraged

By lack of a system of laws that clearly state obligations By lack of a system of laws that clearly state obligations and prohibitionsand prohibitions

By a diminished sense of personal responsibilityBy a diminished sense of personal responsibility By lack of enforcable laws and regulationsBy lack of enforcable laws and regulations By a small risk of being detectedBy a small risk of being detected By insufficient penaltiesBy insufficient penalties By a climate of sharp practiceBy a climate of sharp practice By a lack of ethical recognitionBy a lack of ethical recognition

But law and enforcement But law and enforcement

Will not replace ethics and a personal sense Will not replace ethics and a personal sense of responsibilityof responsibility

Will not prevent corruption by themselvesWill not prevent corruption by themselves Still rely upon a level of trust: fear will make Still rely upon a level of trust: fear will make

people risk averse and stifle business.people risk averse and stifle business. Are expensive means of securing Are expensive means of securing

compliancecompliance

Principle 10: Recognise the legitimate interests of stakeholders

The board should set standards of public accountability for the company and oversee adherence to these. Establish a code of conduct to guide compliance with legal and other obligations.