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The Companies Bill: It's worth the effort
Reasons to like compliance...

By Mike Davis

Published: Monday 15 November 2004

Many companies will dread the IT investments they'll have to make to comply with the latest corporate regulation before Parliament - the Companies Bill. But, argues Butler Group's Mike Davis, the money spent and effort made will be good for businesses in the long run.

It is frustrating that the issue of the limits on auditors' liabilities has overshadowed the potentially major benefits of the Companies (Audit, Investigations and Community Enterprise) Bill currently before Parliament.

The Department for Trade and Industry, led by Patricia Hewitt (coincidently a former employee of auditing company Arthur Andersen), wishes to limit the exposure of auditors, as it is concerned about their ability to get indemnity cover. The Treasury sees unlimited liability for partners as a major stick with which to force auditors to do their jobs properly.

But this is a distraction from the main purpose of the Bill, which is to make businesses more transparent in their processes and dealings so that all parties, including investors, can have a clear idea of how the company is performing. This prospect will scare many businesses that have traditionally seen opaqueness of their books as 'competitive advantage'. In fact, it could be argued that a major foundation of business is in bending or breaking the rules to gain such advantage, until the point when society and government sees it as an abuse, and then introduces laws. In the US, Sarbanes-Oxley followed the Enron and WorldCom scandals and the adoption of the already planned Companies Bill in the UK was made certain by the events at Parmalat and then Shell.

The Companies Bill makes certain commendable provisions that will bring enormous value and benefit. The introduction of OFRs (Operational and Financial Reviews) will have a profound effect on both external and internal transparency.

Externally, shareholders and key stakeholders will be able to access regular details on UK companies which will have unprecedented depth of information. They will be able not only to use the OFRs as a constant barometer of a company's business performance, but also to see how its inner mechanisms are behaving. For example, the OFRs have a provision for the auditing of human capital. This innovative and challenging requirement will allow external regulators and interested parties to see how a company is performing beyond the balance sheet to its most critical asset - its people.

For the company itself, the requirement to provide OFRs on such matters as HR will force it to invest in the technologies that will enable it to do so. Implemented correctly, management will be able to use these technologies to easily access up-to-date information on their own company and its performance that they have simply never had before. The power this will give management to make better and more strategic decisions will bring real and immediate value.

The Companies Bill mandates tighter control of accounting practice, particularly auditing. However, as with Sarbanes-Oxley, the only efficient and cost-effective way for UK businesses to meet the Bill's requirements will be through the investment in certain key technologies.

Any organisation will have a raft of existing infrastructure, such as reporting systems, very few of which will be up to scratch in terms of meeting the Companies Bill requirements. In other words, very few systems can deliver the information within required timescales with any accuracy without a great deal of manual overhead.

As a matter of urgency, companies need to improve their IT infrastructure in order to meet the Companies Bill requirements. Failure to make these investments quickly and correctly will leave UK businesses prone to severe financial penalties. But companies need to recognise the fact that these are exactly the same investments in technology that need to be made if they are going to be able to make business decisions more effectively.

Compliance with the Bill will undoubtedly require improvements in information and reporting systems in businesses, but I do not believe this should be seen as another 'burden of red tape', and 'a cost businesses cannot afford'. Quite the reverse.

More transparent reporting throughout a company gives people at all levels, whether board members or shop floor workers, better information on which to make decisions. The ability of a company to report accurately and rapidly on both its performance and potential liabilities should give shareholders confidence and make the auditing task faster (and consequently less costly).

Most importantly, better reporting systems, and the ongoing process of review of operations that they will facilitate, offer significant opportunities for business improvement - these are all features that I believe add to competitive advantage.

Such improvement and advantage will not, however, be realised if the company at the highest level does not enthuse the potential benefits of the transparency that compliance with the Bill will bring. As such companies must invest in better systems, not to meet the legislation but to run a better business.

The Companies Bill is a step in the right direction. Organisations that embrace it quickly will have a real advantage, despite the fact that there appears to be a lot of work and cost involved.

Mike Davis is senior research analyst at Butler Group.