True and fair isn't enough

It just goes to show what can be done when the political will is there. Compare that with our efforts to modernise the Companies Act.

Granted, the sorts of changes being proposed aren’t so urgent as the measures now rattling US CFOs and their auditors, but it is difficult to imagine similar action being taken in the UK with similar alacrity.

The second thing about Sarbanes-Oxley is how it draws on some UK principles – things such as having the directors sign the accounts, the concept of truthfulness (or rather, “not untrue”) as well as fairness, comment on internal controls and rules governing share trading by directors.

But the new laws go further, setting out details on audit committees, the relationship with the group auditor, and so on. And since the act also applies to non-US companies with securities listed on Wall Street – scores of UK companies have their shares traded as American Depository Receipts – you can expect Sarbanes to become the corporate governance benchmark for all UK-quoted companies. That’s not to say it will become mandatory, but it seems certain that mid-sized companies will come under pressure to explain themselves if they fail to comply with the same rules as British Airways or ICI.

However, there is one problem that isn’t being properly addressed – and, as ever, the Dilbert cartoon spotted it. “Stockholders are worried that our profits are nothing but accounting gimmicks,” says the boss. “I’m putting you in charge of destroying all of our accounting records.” “That’s illegal,” retorts Dilbert. “Oh,” says the boss. “Then just make them more confusing.” The point being, FDs have to ensure their annual reports are understandable, and not ridden with investor-repelling complexity. You can start by looking at the new proposals for the operating and financial review.