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Daily Telegraph: City comment: Too dangerous for us, say auditors

Daily Telegraph: City comment: Too dangerous for us, say auditors

“KPMG is the auditor to Shell, where the American class-action lawyers are just getting going.”

Edited by Neil Collins

(Filed: 08/09/2004)

There’s a simple way to encourage good directors, but the DTI won’t do it

“Scrapping the DTI would rob Britain of a key tool in creating jobs, helping businesses thrive and ensuring rights at work are upheld.” Thus did Patricia Hewitt, still secretary of state for trade and industry last night, encapsulate why this department has had its day. “Helping business thrive” is clearly at odds with “ensuring rights at work are upheld”, since executive time spent on the latter does nothing for the former.

This might provide a figleaf to justify the DTI’s seven (count ’em) ministers, and perhaps it’s why the department can put out the sort of tosh it disgorged yesterday. It has consulted wide and long on the vexed question of director and auditor liability, and produced a statement of the obvious.

We want more high-quality individuals to be directors, says the DTI, and we want companies to have more choice of auditor – but we’re going to do nothing to bring either of these worthy aims about. Apart from a technical sop allowing companies to pay directors’ legal fees, it’s inaction as usual; neither directors nor auditors are to be allowed limited liability, the move which would encourage a bit more biodiversity among both.

Just four firms of auditors audit 343 of the country’s biggest 350 listed companies. In theory, a single botched audit could wipe out one of the four; Ernst & Young faces that possibility over Equitable Life, while KPMG is the auditor to Shell, where the American class-action lawyers are just getting going.

At the same time, the risks and responsibilities of being a non-executive director have become much more onerous. In the past, a good non-exec was there to offer impartial advice, a shoulder for the chief executive to cry on, and the accumulated wisdom of a career elsewhere.

Under today’s rules, it’s at least theoretically possible for a corporate collapse to bankrupt a non-exec, which is why they are so hard to find. A simple rule could limit any director’s liability to, say, his total remuneration over the previous two years. This would be straightforward, transparent and, who knows, might even discourage some of the more outrageous pay awards.

The auditor problem looks much more intractable. The failure of Arthur Andersen, which reduced the Big Five to the Even Bigger Four, followed the post-Enron collapse of its reputation, rather than any ruinous legal action, although that would surely have followed had Andersen not committed corporate hara-kiri. Come to think of it, it’s an example that the DTI might follow.

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