Business can ‘get it right’ but only when it is diverse, innovative, and looking at the longer term, according to the Audit Quality Forum 10th Anniversary Debate that took place on Monday 09 March 2015. 350 delegates from business, finance and civil society attended the event, included speakers Dr. Vince Cable and Lord Mayor Alan Yarrow.
The evening, hosted in the Egyptian Room at The Mansion House, was on the theme 'Can Business Ever Get It Right?' and centred around two debates, each chaired by former ITV chief political and economics correspondent Daisy McAndrew.
The AQF was formed in the aftermath of the Enron and Worldcom scandals which shook confidence in auditing and company reporting to its core. This video illustrates the role the AQF plays in responding to these challenges in the past, present and future to maintain confidence in audit.
We asked those who attended this event the following questions
Welcome by Charles Bowman, Chairman, Audit Quality Forum and keynote speech on 'Future challenges for the financial system' by The Rt Hon the Lord Mayor, Alderman Alan Yarrow
An introduction to the event’s discussions by chair Daisy McAndrew & the first debate 'What is the role of business in society?' featuring: Robert Barrington (Transparency International), Sir Win Bischoff (Financial Reporting Council), Andy Brough (Schroders) and Ben Lucas (RSA)
Keynote speech by the Rt Hon Dr Vince Cable MP, Secretary of State for Business, Innovation and Skills
The second debate 'How innovative can business be?' featuring: Jason Cowley (New Statesman), Simon Dingemans (GSK and the top 100 group), Mark Goldring CBE (Oxfam) and Harriet Green OBE
Closing speech by Charles Bowman
Technology and social media...
"If you don't understand and embrace technology it can become highly disruptive if it is imposed upon you and of course social media has negative elements as well.
If you are not involved in social media, if you are fearful of it as a CEO or as business people then often you are not connecting with your consumers or your primary communities.
So, better to know it and have an influence on it from inside then just say, this Tweeting is a God forsaken thing as it too shall pass."
"In two companies now, the last two I've worked in, and it wasn't terribly popular to start with in the last one is reverse mentoring where you take the millennials, the digital smart young things and they mentor your senior team.
At Thomas Cook we needed to drive digital aggressively and it's really fun to see a 22 year old just say, what if you just did this with the web... and then you change that and then the senior person says; that's interesting but let me explain the implications - so it's a two way process of learning and of knowledge but I think unless you embrace that knowledge in a practical way you will always be."
Women and diversity in business
"So let's take investment banking, it's an environment that has virtually no women at senior level and when you talk to investment bankers 'this person was inequitably the best candidate for the role. What does best mean? I had the most experience? I worked globally?
I can say on many occasions I have picked a diversity candidate on the basis of ethnicity or gender because I felt that having tilted the tables, I was promoting on potential.... they would do sensationally and I have zero example of that not being the case"
Promoting confidence in business
During the decade that has passed since the Audit Quality Forum (AQF) was formed, it has established a worldwide reputation for challenging current thinking and practice in audit and corporate reporting and it has high hopes for the next decade. “There is no room for complacency. But we can be justly proud of the role the AQF has played over the past decade, and when the Forum recently convened for its 10th anniversary debate, we were keen to share some of our ambitions for the next 10 years,” says Charles Bowman, chairman of the AQF and a partner at PwC.
The AQF will build on earlier work programmes – which most recently explored the reliability of financial statements (see box) and how auditors can respond to society’s expectations for financial information they can trust – to look more broadly at confidence in business and what audit can do to support this. This extended focus was reflected in the Forum’s 10th anniversary event’s theme ‘Can business can ever get it right?’
Before the event began at The Mansion House, London, audience members were asked to vote yes or no to “can business can ever get it right?”. They were also asked to choose one card from a selection of seven they felt best illustrated what business does best when it does get it right. The choices were from: cares for the planet; creates jobs; innovates; is transparent; looks after people; makes money; pays tax.
To help the AQF develop its work in promoting business confidence the event included two thought-provoking debates on the questions: ‘What is the role of business in society?’ and ‘How innovative can business be?’
Keynote speech on 'Future challenges for the financial system'
By The Lord Mayor, Alderman Alan Yarrow
Lord Mayor Alan Yarrow opened the event with a keynote speech on the future challenges facing the financial system. Mr Yarrow said that in speaking to and for the City he welcomed the strong processes in place to detect and correct misbehaviour. But he also wanted to see people trusting in the strong processes and laws that existed to tackle wrong-doing.
Mr Yarrow said he was concerned that the principle of innocent until proven guilty was being eroded. He warned this could have "very serious, unintentional consequences" not just for the financial sector but for society, endangering the well-being of industries that do so much to support British jobs, pensions and public services.
In answering the question posed by the event, Mr Yarrow said that business can get it right when it looks after people. He added that creating wealth was a good thing because used responsibly "it can do a lot of good". The biggest challenge the financial system faced was to convince people to embrace that positive message.
Robert Barrington, Transparency International,
Sir Win Bischoff, Financial Reporting Council,
Andy Brough, Schroders,
Ben Lucas, RSA
In the debate, Sir Win Bischoff, chairman of the Financial Reporting Council, pointed out that sound business activity was an integral part of any society. Democracy and capital were intrinsically linked, he said. Mr Bischoff added: "People who get up and go to work each morning don't become society when they go home in the evening. Business is an integral part of society."
He highlighted three important functions of business - it created prosperity, satisfied peoples' desire to contribute to society by working, and contributed to the economy through taxes. Where business failed was in its governance rather than in its underlying role, and the FRC has pledged to deal with poor governance practice.
Robert Barrington, executive director of Transparency International, noted the dissonance between how society views business and businesses' views of business, and the dissonance between the corporate social responsibility reports of some businesses and accusations of aggressive tax avoidance, damaging the environment or ignoring human rights.
Andy Brough, who manages Schroders' £1.4bn mid-cap fund, noted how much business models and the license for business to operate have evolved since the 1950's, broadening the range of active stakeholders and their expectations and speeding up the delivery time frames. "The role of business is only positive if everybody involved leaves the party with a balloon" he said, adding that this used to be possible because fund managers invested for the long term. "Today, fund management can be like investing in a casino. Short-term pressures are everywhere."
Ben Lucas, principal partner at RSA, suggested that businesses do more to help rebalance the UK economy by supporting local wealth creation, civic development and growth away from London and Bristol, the only UK cities growing faster than the national average. He predicted the end of a 20-year trend of maximising shareholder capital at all costs, as the values of newer businesses, started by millennials, impact on larger more established businesses. "I suspect we are at the start of a cycle where there is going to be a much wider notion of what generating wealth means" he said.
Speakers' concerns about the dangers of short-termism in business, the need for business culture to change and for the tone to be set at the top, were reinforced by comments from the floor. A suggestion that the UK can learn from the Swedish model, where investors get more involved in the long term running of companies, seemed to resonate across the Forum; though it was acknowledged that the Swedish model works partly because of the persistence of the family ownership element in many Swedish companies.
The event welcomed Dr Vince Cable, the cabinet minister in charge of the Department for Business, Innovation and Skills as its keynote speaker. It was appropriate that Dr Cable should be involved in the event as it was one of his predecessors Patricia Hewitt who as Secretary of State for Trade and Industry requested that the AQF be set up to restore public confidence in the audit profession following the public scandals around Enron and WorldCom.
At the event speakers and the audience seemed to agree that there has been a failure of corporate leadership in society; that short-termism must be discouraged; that business culture needed to change and that the tone must be set from the top. Dr Cable agreed and said that pending government changes included plans to increase transparency around areas such as liquidity hoarding and late payment and the introduction of an open register of beneficial ownership.
Dr Cable talked of expanding the diversity of boards so that they totally represented the public, the consumers and the workforce. He also highlighted the need to address the problem of companies which are governed by what he described as “authoritarian, bullying, bosses”, because there is evidence that they are often associated with corporate failure.
Cable asked the AQF "How do we deal with that kind of situation? Can we use the method of audit to judge the way chief executives perform?"and explained that the kind of 360 degree analysis this needs is increasingly the norm in the civil service. Cable proposed a benchmarking exercise to develop a system of metrics for judging good corporate behaviour, and the establishment of a panel of business leaders, academics and trade unionists, to consider how to deal with poor corporate leadership. "How can we progress this further?" he asked, giving the AQF food for thought.
Jason Cowley, editor, New Statesman
Simon Dingemans, GSK and the 100 Group
Mark Goldring CBE, Oxfam
Harriet Green, OBE
Jason Cowley focussed on the political and economic instability and uncertainty which he expects to follow the UK election. "There will be profound challenges for business and the nation," he said, observing how Japan has responded to decades of stagnation. "It’s not a country that is falling apart, but its aspirations have changed," he said. "We are entering a period comparable to that in the UK. It will require business to continually innovate and the nation to innovate too."
Simon Dingemans, CFO at GlaxoSmithKline and chairman of the 100 Group, was less pessimistic. "We must constantly challenge ourselves as business leaders to innovate and avoid the arrogance, bureaucracy and complacency that Warren Buffett describes as the 'ABC of business decay'." said the CFO. Mr Dingemans argued for incremental innovation in business and funding models to stay competitive and in step with society and its expectations, but suggested that more radical innovation may be needed to deal with some of the big challenges discussed at the Forum.
Mark Goldring CBE, chief executive of Oxfam, said that business has played a significant role in lifting people out of poverty but that there is more to be done to reduce inequality and ensure that business success is shared by the wider community that gives business the license to operate. He covered various taxes, environmental and labour-related challenges, but said: “If there is one thing I would encourage the audit profession to focus on it is gender dynamics, as the most vulnerable and exploited workers are more often women than men."
Harriet Green OBE, the ex-CEO of Thomas Cook, focussed on what she described as the elephant in the room. “Technology innovation is at the core of what we need to think about,” she said, pointing out that artificial intelligences such as IBM’s Watson could soon displace millions of white collar workers in sectors such as accountancy and audit. Ms Green urged businesses to do more to embrace emerging technologies and governments to do more to support emerging technology companies.
She said: “If you are not involved in social media, if you are fearful of it as a CEO or as business people then often you are not connecting with your consumers or your primary communities.” She described how she had pioneered reverse mentoring at her last two companies where the “digital smart young” employees had mentored her senior team.
Comments from the audience led to a discussion on using the AGM as a catalyst for change and using digital technology to reach smaller investors more effectively. There were also calls to avoid top-down political and regulatory initiatives which add to the length and complexity of the annual report in favour of clearer and more concise reporting. This theme reflects the recent work programme of the AQF, looking at reliability of financial statements and how auditors can respond to society’s expectations for reliable information that they can trust.
A short film looking at ten years of the work of the AQF was introduced by Henry Irving, ICAEW’s Head of Audit and Assurance Faculty. The video shows how the AQF through working with a wide variety of stakeholders has helped to improve confidence in the work of auditors. It offers an opportunity to use the same model to help raise public confidence in business.
Margaret Doyle, Head of Financial Services Research at Deloitte, explains the value of the AQF’s work in the video. She says: “People care deeply about audit. They care deeply about the assurance that it gives, about the quality of company statements and that they want to see it protected; they want to see it enhanced. They welcome the engagement offered by the Audit Quality Forum.”
Charles Bowman, Head of the Audit Quality Forum, added: “The AQF has covered lots of different agendas, reliability and the role of audit which is the current agenda, a hot topic and an agenda that we are focused on.”
The video can be viewed further up this page
So what does all of this mean for the AQF? What challenges will it face in the next 10 years? Members of the Forum will keep pushing for improvements that are ground-breaking and innovative and that will make more people want to be involved. The Forum will continue to look beyond audit, through its open debates, and tackling tough issues, such as the level of assurance that audit gives and how to communicate this to the world at large, and asking tough questions, such as whether more stakeholders and a broader range of stakeholders need to be involved.
Robert Hodgkinson, executive director of technical, ICAEW, told the 10th anniversary Forum: “The original AQF remit was around companies, their investors, their auditors and the regulators and standard setters in audit. Maybe today, we should be looking at a wider range of stakeholders in audit; people who need to have their confidence in corporate reporting and corporate behaviour enhanced.” Neither the audit profession nor the AQF has all of the answers, but by encouraging open and constructive debate, they can play a significant role in helping to rebuild trust and confidence in business.
As a result of this the Forum is energised into thinking about the challenges for the audit profession to help business get it right and will reflect the need to progress the broad topic of helping business to get it right, understanding what stewardship means, together with the narrower, more traditional focus of the forum around audit quality matters for listed companies.
When the AQF first convened in 2004, it was at the request of Patricia Hewitt, former Secretary of State for Trade and Industry, and in response to the Enron and WorldCom scandals, which had knocked confidence in audit. So the AQF is hosted by ICAEW; supported by the UK government Department for Business, Innovation and Skills (BIS) and the Financial Reporting Council (FRC), the UK regulator responsible for promoting high quality corporate governance and reporting; and AQF debates bring together stakeholders including business management, investors, academics, standard setters, regulators, accountants and auditors, students, and people from charities and non-governmental organisations.
The AQF first looked at ways to improve shareholder involvement in audit, such as competition, identifying the audit partner and putting questions to auditors. Then it moved on to look at the fundamentals of high quality audit, such as the purpose of the statutory audit, the need for principles-based standards, and whether international standards could be made local. These two programmes of work highlighted the need to consider audit in the broader context of corporate governance, and were followed by the evolution programme, which considered the impact of audit committees, stakeholder expectations and changes in financial reporting and practice.
Challenging current practice and thinking on audit issues attracted international interest in the work of the AQF, so it extended its agenda to look at global challenges around the role of audit and the promotion of audit quality. As this cannot be addressed without considering financial information as a whole, the Forum went on to explore the reliability of financial statements and how auditors can respond the society’s expectations for reliable information that they can trust. Then, during the past year, the AQF has taken this agenda further to look more broadly at confidence in business and what audit can do to support this.
You can learn more about the AQF by visiting its web page at www.icaew.com/aqf