Philip Turnbull, Chief Executive of the Association of International Accountants (AIA), takes a look at the Woolf Report following the corruption allegations surrounding BAE Systems and considers the implications for companies, the UK and the worldwide accounting profession.
Lord Woolf, the former Lord Chief Justice, described the alleged improprieties involving Britains’ biggest defence company, BAE, as having ‘damaged the global reputation of this country’. This is no grandiose statement – this episode highlights only too clearly the importance of high standards of conduct to everyone in business and, crucially, the need to be able to demonstrate that a company’s conduct is beyond reproach. As the world has shrunk, the pivotal role of a company’s worldwide reputation has grown and the accounting profession has a key part to play in ensuring that a culture of transparency and good corporate governance is fostered.
There can be no doubt that the BAE debacle has seriously damaged the UK’s international reputation and demonstrates the need for good governance and ethical practice. Released earlier this month, the Woolf Report followed a year long review into policies and practices at BAE. The review was ordered by the company in an attempt to rescue its reputation after a Serious Fraud Office enquiry into its arms dealings with Saudi Arabia. To avoid being tainted by corruption, BAE has worked hard to ‘clean up its act’ over the last three years by radically reviewing its ethical business policy, including swiftly axing all of its advisers who had profited from consulting on defence deals. In an unprecedented move, BAE even agreed to abide by the report’s recommendations before it was published – such was the perceived damage to the company of the ongoing allegations.
The scathing report said that in order to restore its reputation, the firm would have to surrender multi-million defence contracts from countries with questionable ethical records; and stop making ‘facilitation payments’ to government officials in other countries to ensure that deals ran smoothly. The company has pledged to implement all of Woolf’s proposals. Although BAE has steadfastly rejected claims that it has done anything illegal, interestingly, Chairman Dick Olver and Chief Executive Mike Turner have now accepted that the company ‘did not in the past pay sufficient attention to ethical standards and avoid activities that had the potential to give rise to reputational damage.’ Furthermore, the report also recommended that the government carry out a review of the ‘ethical and reputational’ risks faced by the defence industry and publish a code of conduct for businesses to follow.
Striving for the ‘gold standard’
Lord Woolf’s recommendations on ethical behaviour are relevant not just to BAE, but to businesses throughout the UK, all of which should strive to achieve his ‘gold standard’. A strict adherence to ‘whiter than white’ financial reporting is a crucial aspect of demonstrating a company’s ethical practice. Now, more than ever, businesses need to be able to demonstrate that they employ transparent financial reporting systems and it is the responsibility of accountants to ensure that these principles embodied in the Companies Act 2006 are rigorously adhered to by implementing airtight audit processes with exhaustive checks and balances. As well as better regulation, the Companies Act placed stringent duties placed on directors, not only to act in the best interests of the company, but also to be aware of what is good for society at large. It sought to bring about a cultural change in the way companies conduct their business in order to embrace wider social responsibilities.
Moreover, Sarbanes Oxley imposed similar compliance legislation in the US and had global implications. It came into force in 2004 with the intention of preventing financial malpractice and accounting scandals such as Enron. Sox covers a whole range of governance issues as well as the requirement for compliance to be demonstrated and accurately monitored and reported. The main area of focus is the archiving of all communications and the creation of transparent and auditable systems for recording transactions, dealings and any kind of business correspondence. Accountants are required in two functions: consulting on how to comply with the massively complex rules embodied in the legislation; and providing external, independent auditing services which is a central requirement of both the Companies Act and Sox.
Overall, the BAE case highlights the fact that no company can afford to overlook the importance of fostering trust and integrity by implementing stringent business ethics which are transparent to the outside world. The change in culture embodied by the Woolf Report, with the emphasis on greater awareness of the effect of a business’ conduct on society at large, should be embraced by the accounting profession and be central to the way we see our role.