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Monday, 22nd April 2024
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‘Credibility gap’ needs fixing Back  
With inquiries and hearings likely to recur, the first steps for improving corporate governance are in the chain of internal control and the quality and independence of internal audit, writes Professor Edward Cahill
T he Hamilton report into the Beef Processing Industry in 1994 provided hard facts about aspects of business organisations, banks and professional firms. It included a chapter on ‘Tax Evasion and Avoidance’. The outcome was that subsequent taxation policy changes in a Finance Act had new implications for companies, auditors and tax advisers.

Perhaps deeper public concern emerged with the investigations and the evidence in the Dunnes Payments Tribunal in mid-1997. Bankers, accountants and lawyer explained how they acted on behalf of clients. The broad nature and operation of the ‘Ansbacher Accounts’were explained. Many were surprised at the level of dependence of Guinness & Mahon (Ireland) on the Ansbacher deposits in the late 1980’s - quite apart from the issues of internal control, audit and governance.

Who would have expected that a dispute among the members of a large family company would not only lead to information about payments for the benefit of politicians, but also reveal the Ansbacher accounts and connections with the Cayman Islands? That was certainly serendipitous or unfortunate - depending on one’s perspective! These revelations led Ms. Harney to commission her staff to examine the issues. The Institute of Chartered Accountants was also prompted to set up an internal investigation (The Blaney inquiry) into the conduct of two accountancy firms associated with Dunnes Stores.

The 1990 Companies Amendment Act, triggered into being by the Goodman International financial difficulties, helped bring in much stronger powers of corporate inquiry by inspectors. These new powers were soon exercised and reports on their findings were published. Many unpalatable facts emerged. Examples were Irish Sugar/ Greencore, Telecom and Countyglen. We now await reports of inspections into NIB and Ansbacher Cayman.

The publication of the Comptroller and Auditor General’s report on DIRT was particularly relevant to banking and financial services. Its commissioning by the Public Accounts Committee (PAC) and powers backed by the Dail, represents a new form of investigation and disclosure. The subsequent public questioning of representatives of the Central Bank,
the Revenue Commissioners and all the larger banks by the PAC certainly brought out new information which, in my opinion, was disturbing. I have no doubt that the PAC report will have some serious findings for banks and other institutions.

The 1990’s exposed certain types of corporate actions in Ireland, which may have been technically legal but may not have met good ethical standards. Just as one company inspection was followed by another, a similar policy followed with regard to Tribunals of Inquiry. The new unknown is whether the PAC, with its special powers, will follow the DIRT example and inquire into another matter in the next few years. The odds suggest it will, as it looks to be following a
type of USA model.

From a regulatory perspective, the planned creation of the Single Regulatory Authority (SRA) for the financial services sector, next year, will bring an additional array of powers of inquiry, enforcement, sanctions and publication of reports. It would not be surprising if the new SRA initiated firm regulatory actions quite early in its life. These would enable it to make its presence felt and test the extent of its powers.

A credibility gap seems to have emerged as regards the perceived behaviour of some financial institutions. Not all acted in the same way when it came to DIRT issues. Some appear to have not taken sufficient account of their responsibilities to the public interest. The institutions may respond that this behaviour was in the past and practices have moved on. Reassurance is needed so that a greater degree of trust is restored. Questions also arise for auditing and accountancy firms.

Boards of directors should review the nature of their risk control and corporate governance processes. The first step is the chain of internal control and quality and independence of internal audit. Who does the internal auditor report to and who sees all the internal audit reports? Second, are the structure, competence, role and depth of activity of the audit committee adequate to the institution’s needs? Third, how does the audit committee report to the main board? How does the board review risk exposures and the quality of controls in the organisation? Fourth, does the board consider its governance responsibilities from a stakeholder set, which includes the public interest as well as shareholders, customers and employees?

The exposures of recent years herald a new era of compliance and regulation. If a ‘reputation gap’ continues then the regulators response must be much more extensive bureaucratic controls - with consequences for innovation and flexibility and compliance cost. In particular, some financial services organisations may need to reinforce their commitment to a culture of ethical values and behaviour. One way to reassure the public and the regulators would be to publicly issue copies of their codes of ethics and corporate conduct.

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