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Corporate governance has become a theme for the profession in the 1990s. It is not surprising that following every wave of scandal, normally after recessionary times, the auditing profession becomes the focus of criticism. The standing and authority of our profession worldwide is such that auditors are perceived as upholders of the integrity of financial reporting in the public interest. That standing and authority is a result of the high standards of our membership and our readiness to respond to public concern by continually examining the issues and providing solutions. The following is my own perspective as to what has happened in the United Kingdom in relation to the review of corporate governance. There have been parallel developments elsewhere as financial markets and institutions and the profession seek to stabilize and restore the highest levels of integrity and respect to financial reporting.
Why a Review of Corporate Governance?
In November 1990, I had the privilege, as president of the Institute of Chartered Accountants of Scotland (ICAS), of raising the issue in a speech in London, just at the time our profession was in the eye of the storm of public skepticism following a number of major company failures such as BCCI, Ferrani, Atlantic Computers, Polly Peck, and Maxwell, to name but a few. These have become household names as their failures threw the financial markets and confidence in our profession into disarray. At the time, the words integrity, trust, fairness, truth, and openness were in danger of becoming old hat. The drive was toward the bottom line of profit--earnings per share--as the sole mark of success or failure in stock market terms. In some cases, the need for personal gain took over in the economic boom of the late 180s, leading business managers to act in short-term, destructive ways.
Some common threads of business failure were overly optimistic financial reporting, lack of operational and internal control within companies, questionable transactions and fraud, power in the hands of too few (particularly dominant chairman/chief operating officers), and weak boards where nonexecutive directors found themselves ineffectual.
The origins of the present corporate model in the U.K. go back to William Gladstone in 1844. It was conceived as a means whereby individuals could invest in a project or projects...