Caveat emptor, or ‘buyer beware’, is back in vogue. Witness the proposed changes to the UK’s listing rules and the corporate governance code, which all companies will need to follow in the new single listing regime.
The Financial Conduct Authority (FCA) had already begun to unpick the premium listing category by allowing dual-class shares and reducing the minimum free float for candidates (see the AB article ‘LSE set to reform rules’). Its primary markets effectiveness review goes much further in proposing the removal of mandatory rules, such as those requiring a three-year financial track record prior to listing and shareholder votes on significant transactions once a company is listed.
The justification – other than reducing a regulatory burden blamed (dubiously) for deterring London listings – is that companies will still have to publish sufficient disclosures for investors to make well-informed judgments. This assumes we live in an ideal world of active, rational and well-resourced investors, which is questionable in a world in which passive and retail participants play a big part.
In practice, caveat emptor must be backed up by continuing rigour in prospectus requirements and a heightened focus on the market abuse regulation, which combats insider dealing and share price manipulation via transparency. This is particularly true of significant acquisitions/disposals and related-party transactions. The danger of minority shareholders being abused by controlling owner-managers is heightened by multivote shares and small free floats.
Rising challenge
Investor protection will increasingly fall to non-executive directors (NEDs) and professional advisers – notably accountants and auditors – who must challenge any inclination of executives or controlling shareholders to dodge scrutiny. The FCA’s reliance on a sponsorship approach led by investment banks and brokers – the ‘sell’ side – compares poorly with a proper audit regime. The latter gives priority to the interests of users of the information – the ‘buy’ side and other stakeholders.
Under the Financial Reporting Council’s proposed changes to the corporate governance code, a board will declare that it can ‘reasonably conclude that the company’s risk management and internal control systems… have been effective’. It is a brand of board accountability that falls far short of the Sarbanes-Oxley regime in the US.
NEDs anxious about accountability will increasingly become the buyers of external expertise
Checks and balances
To improve the chances of material weaknesses being identified, the ecosystem of checks and balances applied by independent NEDs, internal and external accountants, auditors and risk managers will need to be boosted. The same goes for assurance on other financially driven requirements covered in the wider set of government proposals for corporate reporting, including resilience statements, distributable reserves and fraud prevention. NEDs anxious about accountability will increasingly become the buyers of external expertise, which is much better than leaving it to the executives.
Companies’ new audit and assurance policies will widen the scope of disclosures that could receive limited or reasonable assurance to sustainability reporting. As the FRC says: ‘This information increasingly influences capital allocation decisions, and therefore needs to be as reliable as financial information.’ This is the holistic view of the annual report in action.
All of the above adds up to a host of opportunities for the accounting and auditing profession. Embrace it not only on behalf of your own company but also of the millions of savers who ultimately rely on the information.
