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The 'Cadbury Committee' was set up in May 1991 with
a view to overcome the huge problems of scams and failures occurring in
the corporate sector worldwide in the late 1980s and the early 1990s.
It was formed by the Financial Reporting Council, the London Stock of
Exchange and the accountancy profession, with the main aim of addressing
the financial aspects of Corporate Governance. Other objectives include:
(i) uplift the low level of confidence both in financial reporting and
in the ability of auditors to provide the safeguards which the users of
company's reports sought and expected; (ii) review the structure, rights
and roles of board of directors, shareholders and auditors by making them
more effective and accountable; (iii) address various aspects of accountancy
profession and make appropriate recommendations, wherever necessary; (iv)
raise the standard of corporate governance; etc. Keeping this in view,
the Committee published its final report on 1st December 1992. The report
was mainly divided into three parts:-
- Reviewing the structure and responsibilities
of Boards of Directors and recommending a Code of Best Practice The boards of all listed companies should comply with the Code of Best
Practice. All listed companies should make a statement about their compliance
with the Code in their report and accounts as well as give reasons for
any areas of non-compliance. The Code of Best Practice is segregated
into four sections and their respective recommendations are:-
- Board of Directors - The board should meet regularly,
retain full and effective control over the company and monitor the
executive management. There should be a clearly accepted division
of responsibilities at the head of a company, which will ensure
a balance of power and authority, such that no one individual has
unfettered powers of decision. Where the chairman is also the chief
executive, it is essential that there should be a strong and independent
element on the board, with a recognised senior member. Besides,
all directors should have access to the advice and services of the
company secretary, who is responsible to the Board for ensuring
that board procedures are followed and that applicable rules and
regulations are complied with.
- Non-Executive Directors - The non-executive directors
should bring an independent judgement to bear on issues of strategy,
performance, resources, including key appointments, and standards
of conduct. The majority of non-executive directors should be independent
of management and free from any business or other relationship which
could materially interfere with the exercise of their independent
judgment, apart from their fees and shareholding.
- Executive Directors - There should be full and
clear disclosure of directors’ total emoluments and those of
the chairman and highest-paid directors, including pension contributions
and stock options, in the company's annual report, including separate
figures for salary and performance-related pay.
- Financial Reporting and Controls - It is
the duty of the board to present a balanced and understandable assessment
of their company’s position, in reporting of financial statements,
for providing true and fair picture of financial reporting. The directors
should report that the business is a going concern, with supporting
assumptions or qualifications as necessary. The board should ensure
that an objective and professional relationship is maintained with the
auditors.
- Considering the role of Auditors and addressing
a number of recommendations to the Accountancy Profession
The annual audit is one of the cornerstones
of corporate governance. It provides an external and objective check
on the way in which the financial statements have been prepared and
presented by the directors of the company. The Cadbury Committee recommended
that a professional and objective relationship between the board of
directors and auditors should be maintained, so as to provide to all
a true and fair view of company's financial statements. Auditors'
role is to design audit in such a manner so that it provide a reasonable
assurance that the financial statements are free of material misstatements.
Further, there is a need to develop more effective accounting standards,
which provide important reference points against which auditors exercise
their professional judgement. Secondly, every listed company should
form an audit committee which gives the auditors direct access to
the non-executive members of the board. The Committee further recommended
for a regular rotation of audit partners to prevent unhealthy relationship
between auditors and the management. It also recommended for disclosure
of payments to the auditors for non-audit services to the company.
The Accountancy Profession, in conjunction with representatives of
preparers of accounts, should take the lead in:- (i) developing a
set of criteria for assessing effectiveness; (ii) developing guidance
for companies on the form in which directors should report; and (iii)
developing guidance for auditors on relevant audit procedures and
the form in which auditors should report. However, it should continue
to improve its standards and procedures.
- Dealing with the Rights and Responsibilities
of Shareholders
The shareholders, as owners of the company, elect the directors
to run the business on their behalf and hold them accountable for
its progress. They appoint the auditors to provide an external check
on the directors’ financial statements. The Committee's report
places particular emphasis on the need for fair and accurate reporting
of a company's progress to its shareholders, which is the responsibility
of the board. It is encouraged that the institutional investors/shareholders
to make greater use of their voting rights and take positive interest
in the board functioning. Both shareholders and boards of directors
should consider how the effectiveness of general meetings could
be increased as well as how to strengthen the accountability of
boards of directors to shareholders.
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