November 8, 2019 Challenge, Diversity, Group Think
Do we learn from corporate failure? According to the outgoing Chair of the Business, Energy and Industrial Strategy Committee (BEIS) the answer appears to be ‘no’. Following an enquiry into the collapse of Thomas Cook, the BEIS committee wrote to the Secretary of State commenting that the enquiry raised a number of issues ‘especially in relation to corporate governance and audit reform.’ The letter also drew attention to the Committee’s frustration that lessons from previous high profile corporate failures appeared not to have been learned.
Accompanying the letter an eight page document sets out a number of recommendations and conclusions many of which have been the subject of previous reports. They cover areas such as pay and bonuses, late payments, the role of the board, and audit.
The report makes interesting reading, particularly in the way in which boards and auditors can fall into the trap of group think. Whilst the authors do comment that ‘it is not possible to prove causality between lack of diversity on the Thomas Cook board and the collapse of the company’ they do highlight a lack of challenge in respect of decisions to take on debt and resistance to new business approaches.
In the light of this the BEIS Committee highlights the importance of cognitive diversity on boards in order to promote more effective challenge and more informed decision making. They also call on the FRC to work with others to provide further guidance in respect of board diversity.
Another area of note relates to the treatment of goodwill on the balance sheet. Following on from the collapse of Carillion the Committee concluded that the inability on the part of auditors to question or challenge the treatment of goodwill was fundamental to a misleading picture of corporate health as shown in that company’s accounts.
The same pattern has emerged in the case of Thomas Cook with that company’s auditors commenting that they had followed accountancy standards and procedures in respect of goodwill. The committee sees this as a cause for grave concern and makes a strong recommendation that the treatment goodwill and its impairment should be swiftly reviewed. They also question the role of ‘audit automatons’ which the Committee says are ‘incapable of drawing the most basic of conclusions from a balance sheet.’
Many of the recommendations within the report have been made in the past and thanks to new legislation some are already in the process of being implemented. Nevertheless this report highlights the fact that there is a long way to go and calls on the new government to recognise the ‘unequivocal consensus around the need for change’ and make urgent provision for the required legislation early in the new parliament.