Browsing by Author "Bender, Ruth"

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    The Audit Committee and the Credit Crunch
    (2008-01-01T00:00:00Z) Bender, Ruth
    No one response to the economic situation The impact of the credit crunch will vary dependent on whether or not the company is in the financial services sector, and on its current financial position. External auditors are paying more attention to forecasts and going concern In many companies, audit procedures are the same as in previous years, but there is somewhat more focus on budgets and forecasts, and on the financing position of the business and its banking covenants. The Board and the audit committee are examining treasury and financial policies, as well as the financial statements Many of the issues discussed in this report are being dealt with at Board level as well as, or instead of, by the audit committee. Some of the audit committees already incorporated regular covenant reviews and treasury reviews into their agenda, and so had processes for dealing with this. Others had formally added these items to their workload. Funding is critical Audit committees are examining closely the company's ability to roll over loans when they come to the end of their term. Treasury policies are being inspected in detail in the light of the current economic climate. Bank covenants are being monitored closely, and more stringent stress-testing is being done than previously. Business activities Audit committees are aware of the need to monitor the financial status of major trading partners. For some, this was already part of their agenda. Attention is being paid to the likely impact on revenues, profits and cash flows of an economic slowdown. Financial statements Accounting policies such as mark-to- market are causing difficulties in many companies, resulting in volatile accounting results. Accounting for pensions is leading to problems in valuing both pension assets and liabilities. The Boards of many companies are not clear whether their pension funds are holding sub-prime debt. This is a matter for the audit committee to investigate. Changes to accounting standards on pension funds are unwelcome at this particular point in the economic cycle. Communicating with investors Although the market needs information, there is a nervousness that it might over-react to news. Narrative disclosures and investor presentations should be examined carefully by the whole Board before release.
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    Audit Committee Communication: What is Said, Why, How and to Whom?
    (2007-01-01T00:00:00Z) Bender, Ruth
    The way an audit committee communicates needs to reflect the context of its relationship with the Board, which differs in every company. In order to be of most use, minutes should be prepared and distributed very shortly after the meeting. However, processes varied widely. The style of audit committee meeting minutes is diverse; some are brief and anodyne, others are fuller and capture the essence of the discussion. The most important aspect of the minutes is the list of action points. Opinion diverged as to the usefulness of the committee's formal minutes. Some took the view that they did not matter, others saw them as an important tool in managing relationships, and in supporting the finance director where appropriate. More important than the formal minutes is the oral briefing given to the Board by the Chair of the audit committee. This is generally both timely and comprehensive. It is one way in which all Board directors can assure themselves that they are complying with their legal responsibilities on making full disclosure to the external auditors. The published report of the audit committee, included in a company's annual report and accounts, is seen as a compliance matter and not as a helpful form of communication. Extending its coverage was not seen as appropriate. The audit committee operates as a sub-committee of the Board, but in all critical matters its role is that of review rather than action. Accordingly, it was considered that there is no need for any increase in the level of communication - formal or informal - between the committee and investors.
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    Audit Committee Regulation: Financial Literacy What does it mean?
    (2006-01-01T00:00:00Z) Bender, Ruth
    There is no universal standard for the way in which audit committees work. Although broadly they covered the same activities, the number of formal meetings of companies reviewed ranged between 3 and 13 in the year. The time taken per meeting also differed considerably. Although all audit committee members must be independent non-executives, practice differs considerably as to whether the company chairman and/or the CEO regularly attend audit committee meetings. The documentation supporting audit committee work needs to be managed carefully to ensure that the committee members are well-informed, but are not so overloaded with information that key points are missed. Dealing with regulatory matters takes a great deal of audit committee time. It can be useful to schedule a ‘white space' meeting to discuss broader risk issues. Having multiple directorships, and being able to compare practices in different companies, is an advantage to audit committee members both in evaluating the performance of their committees and in providing strategic advice. Audit committee evaluation takes place in a variety of formal and informal ways, including interviews and questionnaires, administered internally and by external professionals. It is very important to non-executives that they feel that they can trust the company's executives. The corollary to this is that in situations where the executives are considered less trustworthy, governance might be difficult as well-qualified potential non-executives might be reluctant to join the board. There appears to be an expectations gap between how the audit committees see their regulatory role and how this is perceived by the media. For example, some parts of the media appear to see the audit committee role as the prevention and detection of fraud. This view sits uncomfortably with the views of audit committee members - in line with regulation - that theirs is an oversight function. Although audit committee practices differ widely, they appear to evolve to suit the companies' and individuals' particular contexts. Accordingly, legislation to standardise practice might not be useful, indeed, it may be counter productive. Given the potential changes to UK regulation that could arise from implementing the EU 8th Directive, it is important that this point be made explicitly to legislator
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    Change for the Better?: Meeting with Peter Williams, Chair of the Investor Relations and Markets Committee of the Hundred Group
    (2009-12-31T00:00:00Z) Bender, Ruth
    Prepared for the Audit Committee Chair Forum, published by Ernst & Young, CBI and Cranfield School of Management.  This paper reflects the discussions at a meeting of the Audit Committee Chair Forum(ACCF) held on 24th September 2009, which was addressed by Mr Peter Williams. Mr Williams is chair of the Investor Relations and Markets Committee of The Hundred Group,which represents the finance directors of the 100 largest publicly-traded companies in theUnited Kingdom. The meeting discussed the UK corporate governance regime and how it was likely to change.
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    A Conversation with a Regulator : Meeting with Paul Boyle, Chief Executive of the Financial Reporting Council
    (2009-05-29T00:00:00Z) Bender, Ruth
    Prepared for the Audit Committee Chair Forum, published by Ernst & Young, CBI and Cranfield School of Management. This paper reflects the discussions at a meeting of the Audit Committee Chair Forum (ACCF) held on 19th March 2009, which was addressed by Mr Paul Boyle, Chief Executive of the Financial Reporting Council. The meeting discussed corporate governance and corporate reporting in the UK.
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    Does 'Best Practice' in Setting Executive Pay in the UK Encourage 'Good' Behaviour?
    (Springer Science Business Media, 2006-01-01T00:00:00Z) Bender, Ruth; Moir, Lance
    We examine how UK listed companies set executive pay, reviewing the implications of following best practice in corporate governance and examining how this can conflict with what shareholders and other stakeholders might perceive as good behaviour. We do this by considering current governance regulation in the light of interviews with protagonists in the debate, setting out the dilemmas faced by remuneration-setters, and showing how the processes they follow can lead to ethical conflicts. Current ?best? practice governing executive pay includes the use of market benchmarks to determine salary and bonus levels, significant levels of performance-related pay, the desire for executives to hold equity in their companies, the disclosure of total shareholder return compared to an index, and a perceived need for conformity, in order to grant legitimacy to policies. Whilst each of these may in some circumstances lead to good practice, each has the potential to cause dysfunctional behaviour in executives. Overall, we conclude that although best practice might drive good executive behaviour that coincides with the company?s and key stakeholders? objectives, there are many reasons why it should not.
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    The Drivers of Audit Quality
    (2006-01-01T00:00:00Z) Bender, Ruth
    The Financial Reporting Council is charged, through the Audit Inspection Unit, with monitoring audit quality. However, ‘audit quality' is intangible, with no agreed defi nition. Although the ACCF meeting came to no unequivocal resolution, it was agreed that an overiding aspect of audit quality was the quality of the individuals conducting the audit, at all levels of the audit team. It related to their understanding of the business, their objectivity and scepticism, and their ethical stance and the culture of the audit fi rm. Assessing audit quality is just as diffi cult as defi ning it. Members of the audit committee, as independent non-executives at a remove from the business, are less able to do this than are the company's executives. Thus the audit committee needs to rely in part on management in its evaluation of the auditor
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    How Executive Directors' Remuneration is Determined in Two FTSE 350 Companies: Results of an Exploratory Study
    (2002-10-01T00:00:00Z) Bender, Ruth
    This paper sets out the results of interview-based research into the way in which executive directors’ remuneration is set in two UK utilities. Although the subject of executive directors’ remuneration has been widely researched, little work has addressed the question ‘how is the directors’ remuneration determined?’. This study addresses that research gap through direct and in-depth questioning of key people involved in the remuneration-setting process. Research was carried out at two UK utilities, both listed in the FTSE 350. In each company, interviews were conducted individually with the key executives and non executives involved in the remuneration-setting process, and with the compensation consultants who acted as their advisors, to determine the processes undertaken and the factors affecting their decisions. The interviews were semi structured, in order to enable open discussion and ensure a wide-ranging discussion of the protagonists’ actions and reasoning. The findings of the research project reflected both economic and social-psychological theories adopted in the executive remuneration literature. The interviews showed that the level and structure of remuneration were clearly influenced by ‘the market’, although issues were surfaced about the problems of determining a suitable comparator market. Institutional theory influences were identified in the level and structure of the pay, and the way trends in practices influenced the protagonists. Furthermore, the way in which the companies’ policies were tailored to their corporate strategies was consistent with c
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    How Executive Directors' Remuneration is Determined in Two FTSE 350 Utilities
    (Blackwell Publishing Ltd, 2003-07-01T00:00:00Z) Bender, Ruth
    This paper contributes to the literature on directors' remuneration by reporting the results of interview-based research carried out with executive and non executive directors at two listed UK utilities, and their advisors. The findings on how directors' pay is set reflect aspects of both economic and social- psychological theories. They show that the level and structure of remuneration were clearly influenced by the market, and highlight the problems of determining a suitable comparator market. Institutional theory influences were identified in the level and structure of the pay, and the way in which trends in practices influenced the protagonists. Furthermore, the way in which the companies' policies were tailored to their corporate strategies was consistent with contingency theory.
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    Onwards and upwards: why companies change their executive remuneration schemes, and why this leads to increases in pay
    (Blackwell Publishing Ltd, 2006-10-01T00:00:00Z) Bender, Ruth
    Much has been written about the phenomenon of ever-increasing executive pay in listed companies. This paper examines some of the underlying reasons for this continued increase in executive directors’ remuneration. It reports the results of 40 interviews with protagonists in the remuneration debate in FTSE 350 companies, exploring the types of change made and the reasons given for these changes. This issue has not specifically been addressed by previous studies. Reasons given for making changes included: increases due to being below market; changing performance-related schemes that did not pay out or paid less than the anticipated amount; changes in the company's culture or strategy; changes to senior personnel (executive and non-executive); compliance with good human resources practice; and a perceived need to comply with best practice in corporate governance. The results are analysed through two theoretical lenses. An agency theory explanation provides insight into the structure of executive remuneration contracts, and expectancy theory suggests why schemes might be changed to motivate the executives. The expectancy theory explanation tempers the agency theory explanation, showing why changes are made even though this may lead to moral hazar
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    Onwards and Upwards: Why Companies Change their Executive Remuneration Schemes, and Why This Leads to Increases in Pay
    (Blackwell Publishing Ltd, 2007-07-01T00:00:00Z) Bender, Ruth
    Much has been written about the phenomenon of ever-increasing executive pay in listed companies. This paper examines some of the underlying reasons for this continued increase in executive directors’ remuneration. It reports the results of 40 interviews with protagonists in the remuneration debate in FTSE 350 companies, exploring the types of change made and the reasons given for these changes. This issue has not specifically been addressed by previous studies. Reasons given for making changes included: increases due to being below market; changing performance-related schemes that did not pay out or paid less than the anticipated amount; changes in the company's culture or strategy; changes to senior personnel (executive and non-executive); compliance with good human resources practice; and a perceived need to comply with best practice in corporate governance. The results are analysed through two theoretical lenses. An agency theory explanation provides insight into the structure of executive remuneration contracts, and expectancy theory suggests why schemes might be changed to motivate the executives. The expectancy theory explanation tempers the agency theory explanation, showing why changes are made even though this may lead to moral hazar
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    Paying For Advice: The Role of the Remuneration Consultant in UK Listed Companies
    (2008-11-28T00:00:00Z) Bender, Ruth
    The use of remuneration consultants to advise on executive pay is ubiquitous amongst larger listed companies, and has attracted academics to consider how their work impacts upon the structure of pay plans. This paper adds to that literature, extending it by taking a qualitative approach and providing a rich context to the interaction between consultants, executives and remuneration committees.
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    Risk Management in a Cost-Cutting Environment
    (2008-01-01T00:00:00Z) Bender, Ruth
    Increased risk In times of cost-cutting, organisations may be at increased risk due to poor morale, staff changes, or individuals and divisions cutting corners in attempting to meet the original expectations. Tone at the top Boards should set a cultural expectation that everyone in the organisation will act with integrity, and will make it clear what operating and financial practices are acceptable. The need for internal audit The audit committee should ensure that internal audit is focused on its prime role of maintaining financial integrity. Increased liaison with auditors Audit committees are spending more time with internal and external audit, to ensure that potential problems are known in advance, and risk areas highlighted. Impact on financial results Budgets, forecasts and impairment calculations must be prepared with a realistic understanding that the economic environment has changed substantially. There is less of a push to ‘make the numbers' than in previous recessions, and more realism about the health of the business. In some companies, the audit committee is holding management back from issuing profit warnings before they are needed. ‘No surprises' is the mantra from the audit committee. Going concern Proposed changes in guidance from the Financial Reporting Council are unlikely to have a major impact on practice, given what audit committees are currently do
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    The Role and Function of the Audit Committee
    (2005-01-01T00:00:00Z) Bender, Ruth
    There is no universal standard for the way in which audit committees work. Although broadly they covered the same activities, the number of formal meetings of companies reviewed ranged between 3 and 13 in the year. The time taken per meeting also differed considerably. Although all audit committee members must be independent non-executives, practice differs considerably as to whether the company chairman and/or the CEO regularly attend audit committee meetings. The documentation supporting audit committee work needs to be managed carefully to ensure that the committee members are well-informed, but are not so overloaded with information that key points are missed. Dealing with regulatory matters takes a great deal of audit committee time. It can be useful to schedule a ‘white space' meeting to discuss broader risk issues. Having multiple directorships, and being able to compare practices in different companies, is an advantage to audit committee members both in evaluating the performance of their committees and in providing strategic advice. Audit committee evaluation takes place in a variety of formal and informal ways, including interviews and questionnaires, administered internally and by external professionals. It is very important to non-executives that they feel that they can trust the company's executives. The corollary to this is that in situations where the executives are considered less trustworthy, governance might be difficult as well-qualified potential non-executives might be reluctant to join the board. There appears to be an expectations gap between how the audit committees see their regulatory role and how this is perceived by the media. For example, some parts of the media appear to see the audit committee role as the prevention and detection of fraud. This view sits uncomfortably with the views of audit committee members - in line with regulation - that theirs is an oversight function. Although audit committee practices differ widely, they appear to evolve to suit the companies' and individuals' particular contexts. Accordingly, legislation to standardise practice might not be useful, indeed, it may be counter productive. Given the potential changes to UK regulation that could arise from implementing the EU 8th Directive, it is important that this point be made explicitly to legislator
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    The Role of the Audit Committee In Risk Management
    (2007-01-01T00:00:00Z) Bender, Ruth
    Risk is a Board responsibility, which cannot be delegated. The boundaries of the audit committee lie somewhere below strategic risk, which is a Board function, and above detailed internal control, which belongs to management. However, there was no consensus about just where those boundaries lie. The flipside of risk is opportunity, and the Board should set a risk appetite for the organisation that reflects this. The Combined Code suggests a role for a Board-level risk committee, comprising independent non executives. The participants in the discussion did not think this to be practical: risk management must involve executives. There is a danger that too much focus on the process of risk management could lead to complacency or to a lack of focus on the risks themselves. The review of risk at Board and audit committee level necessitates having non executive directors with a suitable range of backgrounds. The skills mix, as well as financial, should include high-level business knowledge, for example the understanding of significant opportunities/risks specific to the business. A key aspect of risk management is understanding the culture of the organisation. Non executives, with limited contact below Board level, may find difficulty in understanding the culture at lower levels of the organisation. The audit committee's role in risk management requires a strong relationship with the internal audit function of the organisation, one of whose roles is as a ‘financial policeman'. Different types of risk should be addressed in different ways. Financial, operational and strategic risk have little in common, and their management and review should reflect the context of the particular compan
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    The Role of the Audit Committee regarding Non-Audited Information
    (2007-01-01T00:00:00Z) Bender, Ruth
    The volume of non-audited information released by companies is extensive, and growing. This information has the power to move the share price. However, there are few regulations concerning this information, and practices differ widely. The tone of such information is often as important as the underlying content. A hierarchy of oversight is necessary. Not all of the information disclosed should or could be reviewed by non executives. Companies have to determine the significance of each statement and judge whether it is a matter for Board review, for delegation to the audit committee, or for the executive management. The Board should confirm that appropriate processes are in place to ensure the probity of the disclosures. Narrative disclosures in the financial statements are generally reviewed in some detail by the Board and the audit committee. The preliminary statement of results is reviewed by either the Board or the audit committee, or both. Particular attention is paid to the tone and outlook of this document. The level of review of interim statements by audit committees varies between companies. The level of audit committee or non executive involvement in the pre-close statement also differs significantly between companies. Practices regarding investor/analyst presentations vary. In a few companies the non executives see both the slides and the scripts for the presentation before the event, and have the time to make comments. However, in a significant number of organisations there is little non executive input or review. This was seen as a matter for some concern. It was felt that it would be useful for there to be broad guidelines concerning what is expected with regard to the non-audited information in investor/ analyst presentations and in the pre-close statement. This would be of use to non executives and also to finance directors. However, it would be inappropriate for standards or regulations to be introduced in this area.
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    Telling a Good Story: Meeting with Bill Knight and David Lindsell, Chairman and Deputy Chairman of the Financial Reporting Review Panel
    (2009-09-30T00:00:00Z) Bender, Ruth
    Prepared for the Audit Committee Chair Forum, published by Ernst & Young, CBI and Cranfield School of Management. This paper reflects the discussions at a meeting of the Audit Committee Chair Forum(ACCF) held on 8th June 2009, which was addressed by Mr Bill Knight and Mr DavidLindsell, respectively the Chairman and Deputy Chairman of the Financial ReportingReview Panel ("FRRP" or "the Panel"). The meeting discussed financial reporting in the UK and the work of the Panel.
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    What is an Effective Audit, and How Can You Tell?
    (2006-01-01T00:00:00Z) Bender, Ruth
    The Combined Code requires that audit committees conduct an annual evaluation of the effectiveness of the audit process. In order for this to be done properly, committees need to determine what they mean by effectiveness, and to implement appropriate procedures for the evaluation. Audit effectiveness means different things to different people. Formal definitions revolve around the quality, competence, procedures and independence of the audit firm. In practice, the effective audit is less easy to identify than the ineffective audit. However, the latter may only come to light if problems surface at some future time. If there are no underlying problems, the fact that an audit was ineffective may not be apparent. The output of an audit is in the form of a series of reports and presentations. To some extent, the effectiveness of the audit is judged on these, and on the level of service given by the audit firm. The outcome of an effective audit includes financial statements that present a true and fair view, and advice on how the company's processes may be improved. An effective audit is completed to schedule, and with minimal disruption to the company. Prerequisites for an effective audit are an effective audit firm and team. The firm needs sound procedures; the team needs an understanding of the company and industry, together with judgement, objectivity and independence of mind. Some audit committees use checklists as a means to evaluate the effectiveness of their audits. Others choose to do the evaluation in a less formal way, by means of a discussion. In either case, the input of management is essential to the process, as the audit committee members are at a remove from the detail of the audit process. Increased regulation over the past few years has led to pressure on auditors. There is some fear that too much time is being spent on boilerplate and audit checklists, in order to meet review requirements. Audit working papers have improved, but not necessarily audit effectiveness. There is a commercial requirement for auditors to keep fees down, by working more efficiently. However, this must not lead to the audits being less effective.
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    Why Do Companies Use Performance-Related Pay for Their Executive Directors?
    (Blackwell Publishing Ltd, 2004-10-01T00:00:00Z) Bender, Ruth
    This paper sets out the results of interview-based research to determine why companies use performance-related pay. The findings indicate that many companies adopt this structure despite a belief that the money does not motivate executives. Reasons related in part to best practice in human resource management: pay structures were designed to attract and retain executives with the potential of large earnings; to focus their efforts in the direction agreed by the board; and to demonstrate fairness. Importantly, the variable pay was seen as a symbol of the director's success, both internally and to his or her peers in other companies. Finally, and significantly, an institutional theory explanation was given: companies used performance-related pay because their peers did, and because that legitimised them in the eyes of the establishment.