Preventing corporate failure: the Cadbury Committee’s corporate governance report
| Published date | 01 April 2003 |
| DOI | https://doi.org/10.1108/13590790310808727 |
| Pages | 141-145 |
| Date | 01 April 2003 |
| Author | Mohammed B. Hemraj |
| Subject Matter | Accounting & finance |
Preventing Corporate Failure: The Cadbury
Committee's Corporate Governance Report
Mohammed B. Hemraj
INTRODUCTION
Corporate governance refers to a method by which a
®rm is being governed, directed, administered, or
controlled and to the goals for which it is governed.
Spectacular failures of companies that only shortly
before had received clean audit reports has prompted
renewed questioning over the part played by auditors
in reporting to shareholders on their investment.
Corporate failures are attributed to the looseness of
accounting standards
1
and the lack of eective
board accountability.
2
The 19-point code of `corpo-
rate governance', was produced by the Cadbury
Committee consisting of 14 members, which was
set up in 1991 by the Stock Exchange, the Financial
Reporting Council and the accounting profession.
It took 18 months for the committee to complete
its task under terms of reference requiring it to
outline responsibilities of directors (executive and
non-executive) and auditors.
The Cadbury Report aimed to improve the
standard of corporate governance in Britain. What
was needed was the promotion of `good corporate
governance without sti¯ing entrepreneurial drive or
impairing competitiveness'.
3
It was important to
strike a balance between directors having freedom
to drive the companies forward, at the same time
ensuring this was done within the framework of
eective accountability. Unexpected failures of
some of the leading companies and directors over-
remunerating themselves were neither in the interests
of companies nor their shareholders.
The weaknesses then present were: (a) lack of
competitive pressure on auditors to maximise
business with clients, (b) the looseness of accounting
standards and practices which at times allowed too
much scope for manoeuvres, and (c) the lack of a
framework for reporting on the adequacy of the ®nan-
cial control system. There was also a need to raise the
standards of conduct and to clarify responsibilities of
both the company auditors and the directors.
4
THE CADBURY MISSION
The Cadbury Report did not aim at reform, rather its
terms of reference were narrow and its mission was
`to spread the boardroom practices of the best-run
companies to all the others'.
5
In that respect the mis-
sion was `to drag corporate performance up a notch
over time, reduce the numbers of costly mistakes
and help ensure they were dealt with, not swept
under the boardroom carpet and smoothed over in
company accounts'.
6
In other words, simply put
`the committee was asked to address only the ®nan-
cial aspect of corporate governance, with a view to
restoring con®dence in ®nancial reporting and
auditing practice'.
7
What was needed was a way to deal with the per-
ceived weaknesses in the UK corporate governance
system and to call for the principles of good corporate
governance to be set out and to be supported by all
interested parties. The main issues covered in the
report included responsibilities for the board, quali®-
cation of directors, audit rotation, audit committee
and auditor liability. Both the UK and the USA
have seen parallel challenges to their corporate life-
styles and wished to achieve the necessary high
standard of corporate behaviour. The approach,
however, appears to be dierent in addressing
the same problem. In the USA one can expect
either increased regulation or increased shareholder
participation.
8
Code of best practice
The Cadbury recommendation was for a code of best
practice and was addressed to the boards of all listed
companies registered in the UK. The Cadbury
Committee recognised that in practice the manage-
ment retains the right to hire and ®re the auditor.
9
On independence, the committee proposed the rota-
tion of audit partners within the ®rms
10
(to bring a
fresh approach to audit) who should have direct
access to non-executives on the board.
Potential con¯ict facing the accountant was con-
ducting, besides auditing, non-audit work such as
consultancy for its client, and thus receiving large
fees which might threaten independence.
Merely disclosing non-audit remuneration does
nothing to identify possible con¯icts that might
arise.
11
Aclear de®nition of the auditor's responsibilities
Page 141
Journal of Financial Crime Ð Vol. 10 No. 2
Journal of Financial Crime
Vol.10,No. 2,2002,pp. 141 ±145
#HenryStewart Publications
ISSN 1359-0790
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