Enterprise and accountability: striking a balance
Laura F. Spira
Keywords
Corporate governance,
Accountability,
Non-executive directors
Abstract
Explores the relationship between
enterprise and accountability
within the context of the UK
corporate governance debate over
the last decade. The development
of the corporation, through the
concept of limited liability and the
consequent separation of
ownership and control, enabled
entrepreneurial activity to flourish
within a framework of corporate
accountability defined by company
law and accounting and audit
practice. Financial scandals
during the 1980s highlighted the
apparent inadequacies of this
framework to meet the demands
of the current business
environment, leading to a series of
policy recommendations relating
to corporate governance. These
recommendations were initially
based on a central concern with
accountability and control but it
has been argued that this focus
potentially inhibits enterprise:
more recent pronouncements have
emphasised broad principles
rather than detailed prescription in
an attempt to correct this
balance. This shift in emphasis is
traced and it is suggested there is
sparse evidence to support the
contention that accountability
hinders enterprise.
Management Decision
39/9 [2001] 739±748
# MCB University Press
[ISSN 0025-1747]
Oxford Brookes University Business School, Oxford, UK
Introduction
The spirit of enterprise must work within a
sound framework of accountability, and the
balance between them is critical (Clarke,
1998).
Good governance means a proper balance
between enterprise and accountability
(Charkham, 1998).
Entrepreneurship is often identified with a
single forceful leader who is prepared to take
risks and challenge boundaries, actions
which may attract praise if the outcome is
successful, or criticism if company interests
appear to be damaged. As Demb and
Neubauer observed:
. . . in the entrepreneurial organization, power
is usually centralized in the hands of a strong,
frequently charismatic CEO. Such
individuals usually dislike submitting to
authority . . . (Demb and Neubauer, 1992, p. 74).
Since the entrepreneur will often be making
use of resources provided by others,
entrepreneurial activity needs to take place
within a framework of accountability.
Corporate governance systems provide this
framework, and financial reporting and audit
are important components of such systems.
Financial scandals which occurred during
the 1980s, such as Polly Peck and Maxwell,
were viewed as failures of the UK system.
Although each example represented a unique
and often complex case, the common feature,
emphasised in contemporary reports and
subsequent commentary, was widespread
loss among company stakeholders as a result
of the apparently unconstrained
``entrepreneurial'' activities of powerful
individuals. Demands for improvements in
control led to the establishment of the
Cadbury Committee on the Financial Aspects
of Corporate Governance which reported in
1992, producing the Cadbury Code, the first of
The current issue and full text archive of this journal is available at
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a series of recommendations for company
boards to follow, designed to improve
corporate governance.
Although extensively adopted, the Cadbury
Code was widely criticised, both by
commentators who thought that its
recommendations were insufficient and by
those who believed that it focused too
strongly on monitoring and control, at the
expense of enterprise. Proponents of less
prescriptive policy recommendations assert
that accountability constrains enterprise.
This paper suggests that there is limited
evidence to support this contention.
The paper first outlines the corporate
governance policy recommendations issued
throughout the 1990s, identifying the shift in
focus from accountability to enterprise, and
considers theoretical approaches to the
relationship between them. The development
of the UK system of accountability and
financial reporting is described: key
underpinning concepts are examined,
observing that recent challenges to these
concepts have not been based on their
potential to hinder enterprise. The
relationship between accountability and
enterprise is then explored in the context of
other changing elements of the corporate
governance system ± the role of the non-
executive director (NED) and approaches to
audit. The paper concludes that the argument
that accountability impedes enterprise
remains unproven and that more research is
needed.
1. Accountability: failure and
response
The financial scandals of the 1980s focused
attention on apparent weaknesses within the
financial reporting system, which failed to
protect investors and other stakeholders
from significant losses. Although such
weaknesses were characterised as corporate
governance problems, needing to be
addressed in a broader context than that of
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financial reporting alone, the first move was
made jointly by the accountancy profession,
the Financial Reporting Council and the
Stock Exchange. These bodies sponsored the
Cadbury committee, the remit of which was
confined to financial aspects of corporate
governance. The recommendations of this
committee, embodied in the Cadbury code,
focused on accountability and control,
viewing the role of the non-executive director
NED as key to more effective governance
systems. The recommendations rest on the
following assumptions:
. higher standards of corporate governance
can be achieved through improvements in
the quality of financial reporting; and
. such improvements will be facilitated by
an increased level of auditor
independence which can be effected
through the introduction of audit
committees composed of NEDs.
The reasons for the establishment of the
Cadbury committee were explained thus:
Its sponsors were concerned at the perceived
low level of confidence both in financial
reporting and in the ability of auditors to
provide the safeguards which users of
company reports sought and expected. The
underlying factors were seen as the looseness
of accounting standards, the absence of a
clear framework for ensuring that directors
kept under review controls in their business,
and competitive pressures both on companies
and auditors which made it difficult for
auditors to stand up to demanding boards
(Cadbury Committee, 1992, p. 14).
The implication here is that corporate
governance deficiency lies in a failure to
protect auditors from the pressure to
sanction defective financial reports exerted
by executive directors wishing to prevent an
unduly optimistic picture of corporate
performance.
The accountancy profession had a
particular interest in diverting criticism and
stemming potential litigation against
auditors. Cadbury conveniently cast auditors
as victims, needing protection from
unscrupulous management, which led to
some vociferous criticism from directors
such as Corrin (1993) who saw their integrity
being impugned. The full history of Cadbury
has yet to be written [1] but it is probable that
a further stimulus was the concern of the
sponsoring organisations to pre-empt, with a
voluntary code, possible government
regulation in response to the financial
scandals of the 1980s.
The Cadbury committee report could be
expected to focus on improvements in
accountability and control since it was a
response to what were viewed as abuses of
the existing system Similar perceptions
prompted the next policy recommendation
relating to corporate governance in the UK ±
the report of the Greenbury committee in
1995 which addressed the specific problem of
directors remuneration, a response to public
concerns that directors were rewarding
themselves disproportionately, particularly
in the newly privatised utility companies.
Following a similar approach to that of
Cadbury, the Greenbury recommendations
focused on amended board structure ± the
establishment of remuneration committees ±
and increased disclosure of information.
The Cadbury committee had recommended
that a successor body should revisit the
issues covered and this task was given to the
Hampel committee, established in 1995 and
finally reporting in 1998. In the intervening
period, the major governance preoccupation
had been directors' remuneration, shifting
the focus away from financial reporting
issues. The Hampel report adopted a very
different tone to that of Cadbury and began
unequivocally:
The importance of corporate governance lies
in its contribution both to business
prosperity and to accountability. In the UK
the latter has preoccupied much public debate
over the past few years. We would wish to see
the balance corrected . . . the emphasis on
accountability has tended to obscure a
board's first responsibility ± to enhance the
prosperity of the business over time (Hampel
Committee, 1998, p. 7).
The original expressions of the committee's
views on this were even stronger. In the
committee's preliminary report, published in
August 1997, the second sentence of this
extract read:
In the UK the latter has preoccupied much
public debate over the past few years to the
detriment of the former.
The second paragraph of the preliminary
report also included the sentence, dropped
from the final version:
It is important to recognise that there is no
hard evidence to link success to good
governance, although we believe good
governance enhances the prospect.
These changes were viewed by commentators
as cosmetic: the tone of the report still
conveys the clear assumption that
governance and accountability do not
enhance entrepreneurial activity, although
no evidence is provided to support this view
(Bruce, 1998). In keeping with this view that
accountability systems can potentially
impede enterprise, Hampel emphasised the
importance of broad principles rather than
detailed rules, which, it asserted, lead to
mechanical box ticking:
Laura F. Spira With guidelines, ones asks ``How far are they
Enterprise and accountability: complied with?''; with principles, the right
striking a balance question is ``How are they applied in
Management Decision practice?'' (Hampel Committee, 1998, p. 16).
39/9 [2001] 739±748
The final strand of the Combined Code on
Corporate Governance was provided in 1999
by the publication of guidance on internal
control reporting by the Turnbull committee.
The requirement for boards to report on
internal control was initiated by Cadbury:
. . . directors should make a statement in the
report and accounts on the effectiveness of
their system of internal control and . . . the
auditors should report thereon (Cadbury
Committee, 1992, p. 4.32).
To facilitate this, the accountancy profession
was asked to develop criteria for assessing
effectiveness, together with guidance for
companies on the form of such reports and
guidance for auditors on procedures and the
form of reports ± a controversial
recommendation since directors and
auditors were reluctant to make such
statements when internal control
effectiveness remained a nebulous concept
and litigation might result from such
statements. The Rutteman working party
was set up to address this code requirement
and reported in 1994 but replaced the
Cadbury prescription that directors should
report on internal control effectiveness by
the suggestion that they may wish to do so [2].
However, the amalgamation of the Cadbury,
Greenbury and Hampel recommendations
into the Combined Code of the Committee on
Corporate Governance included explicit
statements about the role of the board in
relation to internal control:
The board should maintain a sound system of
internal control to safeguard shareholders'
investment and the company's assets
(Principle D.2).
The directors should, at least annually,
conduct a review of the effectiveness of the
group's system of internal control and should
report to shareholders that they have done so.
The review should cover all controls,
including financial, operational and
compliance controls and risk management
(Provision D.2.1).
Guidance for directors on meeting these
requirements was subsequently provided by
Turnbull (Turnbull Committee, 1999).
Turnbull defined the elements of a ``sound''
system of internal control and outlined a
process whereby boards could fulfil their
responsibilities in this area. Like Hampel,
the Turnbull approach is deliberately non-
prescriptive: no reporting format has been
prescribed, a deliberate intention to avoid
the limitations of ``box-ticking'' or boilerplate
reporting. Boards are urged to ensure that
their disclosures ``provide meaningful, high-
level information'' (Turnbull Committee,
1999, p. 11). It remains to be seen how
companies will respond: the Turnbull
provisions apply fully for accounting periods
ending on or after 23 December 2000.
The Turnbull guidance strongly
emphasises the relationship between
internal control and business risk: although
Hampel referred briefly to risk management
in the context of internal control, Cadbury
did not explicitly link the two [3]. This close
identification of internal control with risk
management is a further indication of the
shift in the corporate governance debate
from a focus on control and accountability
systems to a concern that corporate
governance mechanisms should not impede
enterprise. The Hampel report argued that
the regulation of the downside of risk
through internal control was achieved at the
expense of the recognition of the positive
view of risk which underpins enterprise. The
redefinition of internal control as risk
management emphasises links to strategy
formulation and characterises internal
control as a support for enterprise. This shift
also reflects developments within internal
and external audit, discussed later in this
paper.
This section has summarised the
development of UK policy recommendations
on corporate governance, demonstrating the
shift in approach from the Cadbury
prescriptions to improve control to the
Hampel concern with correcting a perceived
imbalance between accountability and
enterprise. Evidence for this imbalance is not
adduced ± as Mayer has commented:
Corporate governance has become a subject
on which opinion has drowned fact (Mayer,
1997, p. 152).
In search of such evidence, the next section
explores theoretical approaches to the
relationship between accountability and
enterprise.
2. Enterprise and accountability:
some theoretical approaches
At the level of the individual organization,
tension between entrepreneurial activity and
the internal controls necessary to meet
demands for accountability is demonstrated
by the model of corporate development
postulated by Macintosh (1994, p. 65). His
dialectic model of coordination and control,
identified phases through which a developing
organisation passes. Each evolutionary
phase ± creativity, direction, delegation,
coordination and collaboration ± ends with a
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crisis leadership, autonomy, control, red-tape
± which moves it through organizational
adjustment into the next phase. The creativity
phase embodies the entrepreneurial activity
which initially drives the founding of the
organisation but results in a leadership crisis
as the growing organisation needs the
introduction of formal systems to sustain
future growth. The direction phase leads on to
a situation where controls are inhibiting
development, particularly at lower
management levels. An organisation which
successfully addresses this autonomy crisis
will introduce delegated authority which will
eventually lead to a control crisis, requiring
reorganisation to ensure that the
organisational units with delegated
autonomy act in a coordinated fashion,
involving a shift to centralisation. The
coordination phase will eventually end with a
red-tape crisis where innovation is once
again constrained. Reorganisation will again
lead into a new phase of cross-organisational
collaboration through new groupings.
In this model, each crisis identified
represents a threat to entrepreneurial and
innovative activity arising from
organisational limitations or constraints. In
each case, a shift in control focus enables
new patterns of organisational
accountability to be established and further
growth to take place. However, this model
does not take account of external
accountability and control, which may be
exerted through markets, through
regulation, or through a combination of both.
Tricker's model of the company board
(Tricker, 1997) incorporates alignment with
external constraints and identifies the two
major board roles as performance
(contributing to company strategy and the
achievement of goals) and conformance
(ensuring that management is complying
with approved policies and plans, and with
external regulatory requirements). These
activities are seen as separate and
complementary, rather than conflicting.
A broader systemic view suggests that a
suitable system of corporate governance will
enable organisations to sustain a level of
entrepreneurial activity which generates
growth and a satisfactory return on
investment, while recognising the need for
resource providers (and possibly other
stakeholders) to make informed decisions
about corporate performance and thus
disclosing adequate information to meet this
need. Charkham, in a comparative study of
corporate governance systems in Germany,
Japan, France, the USA and the UK,
identified two fundamental criteria for
assessing such systems:
Dynamism. Does the system permit the
management of the enterprise to drive it
forward without undue fear of governmental
interference, litigation or displacement?
Accountability. Does the system ensure that
in exercising its freedom management is
effectively accountable for its decisions and
actions so that the necessary standards are
maintained and the appropriate remedial
action can be taken in a timely way if they are
not? (Charkham, 1995b, p. 354).
He did not suggest that there is a conflict
between these two criteria.
The corporate governance literature
contains extensive exploration of the
relationship between governance systems
and company performance but demonstrates
that the variables involved interact in
complex ways and that generalisation about
the most effective systems is problematic.
For example, Dalton and Daily, who have
researched extensively in this area, noted:
The problem . . . is that there is barely a shred
of evidence to support a relationship between
board composition and financial
performance. Despite several decades of
research designed to establish such a
connection, the results have been described
as ``vexing,'' ``contradictory,'' ``mixed,'' and
``inconsistent'' (Dalton and Daily, 1999, p. 30).
The literature is dominated by an agency
theoretic approach which assesses systems
in terms of the alignment achieved between
the interests of principal and agents and the
associated reduction in costs of monitoring.
A fundamental assumption of this approach
to governance is that managers will be
constrained by markets, especially the
market for corporate control. From this
perspective, enterprise could thus be viewed
as a part of the governance system, rather
than conflicting with it. However,
O'Sullivan (2000) presented a critique of
agency theory by constructing a theoretical
framework which explicitly focuses on
entrepreneurial activity by incorporating
the impact of innovation. Using detailed
historical research in the USA and Germany
to support her analysis, she argued that
reliance on the market for corporate control
as a governance mechanism hinders
enterprise. In her view, innovation,
fundamental to entrepreneurial activity is
driven by three linked factors:
1 financial commitment;
2 organisational integration; and
3 insider control.
She observed that these features are variable
and dynamic:
Since the organisational and financial
requirements of innovation vary across
business activity, as well as with the
Laura F. Spira emergence of new competitive challenges,
Enterprise and accountability: over time, we should not expect that
striking a balance governance institutions that supported
Management Decision innovation in one activity and era will be an
39/9 [2001] 739±748 appropriate basis for the generation of higher
quality, lower cost products in another
activity and era. Particular types of
organisational integration, financial
commitment, and insider control may, once
instituted, either promote or constrain
innovative business enterprise depending on
the business activity and the competitive
environment (O'Sullivan, 2000, p. 398).
Lazonick and O'Sullivan (2000) argued that
the pursuit of shareholder value has become
a fundamental principle of corporate
governance and traced its impact on
enterprise. They demonstrated that the
principle of ``retain and reinvest'', which
sustained long-term entrepreneurial activity,
has been replaced, in the attempt to unlock
shareholder value, by ``downsize and
distribute'', and they presented evidence
from the US economy to argue that this may
have a negative impact on economic growth.
This perspective suggests that
accountability, in terms of satisfying
shareholder requirements for short-term
distribution, may lead to company policies
which conflict with enterprise over a longer
period but does not focus on the compliance
aspects of accountability with which
Cadbury and Hampel were concerned.
This variety of theoretical approaches
offers no consensus on the relationship
between enterprise and accountability at
either the organisational or systemic levels.
Short et al., in two comprehensive
examinations of the governance literature
(Short et al., 1998, 1999), demonstrated that
the effect of governance mechanisms on
accountability and enterprise remains poorly
understood. They noted that, although there
is empirical evidence from the USA which
points to possible relationships between
governance, accountability and enterprise,
there is insufficient UK research and they
outlined key research questions to be
pursued. Their work confirms that, in the
UK, the link between academic research and
practice in this area is tenuous at best and, in
consequence, policy recommendations have
tended to be based on assertion and unproven
assumptions.
Key elements of the accountability
framework are financial reporting, NEDs and
audit. The following section explores
developments in each of these specific
contexts which may clarify the relationship
between accountability and enterprise.
3. Accountability: the development
of the UK framework
3.1. Financial reporting
The origins of the current legal framework of
corporate accountability lie in a concern to
promote, rather than constrain, enterprise.
The concept of limited liability encouraged
entrepreneurial activity by reducing the risk
of investment and thus enabling
entrepreneurs to raise funds more easily. As
Tricker (1993, p. 2) noted:
Today's economically advanced societies owe
a great deal to a notion of the mid-nineteenth
century ± the concept of the joint stock,
limited liability company. Elegantly simple
and superbly successful, the idea of
incorporating a legal business entity,
separate from the owners whose liability for
the corporate debts was then limited, has
provided vast employment, fuelled huge
economic growth and created untold wealth.
However, the rapid development of industry
in the early nineteenth century combined
with the separation of ownership from
control resulting from the adoption of limited
liability, soon created a need for legal
measures to protect those who provided
finance from the risk of unscrupulous
management activity. Although the
establishment of the financial reporting
system was prompted in response to
instances of defalcation and fraud, the notion
of stewardship which underpins it has a very
lengthy history. The financial reporting
structure enshrined in UK company law was
designed to make entrepreneurs accountable
to creditors and investors by requiring
disclosure of the use made of the funds
supplied (Chandler and Edwards, 2000).
Effective accountability depends crucially
on the supply of information. As Bird
observed:
The duty of accountability arises throughout
the private and public sectors wherever
resources are entrusted to stewards by their
owners. This duty is discharged by the
provision to the owners of statements of
account and an audit report. The objective of
both of these is to give information to owners.
They will succeed in doing this only if they
communicate effectively to the owners their
intended message, and that message is
relevant to decisions that owners must take
in relation to the resources they own,
especially the decision whether to allow the
steward to retain his position (Bird, 1973,
p. 55).
Approaches to accountability, and thus to
governance, are predicated on particular
views of the role of business in society. The
concepts of capital maintenance and
prudence which underpinned the early
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development of UK financial reporting
assume that accountability to shareholders
and creditors is paramount, a view subject to
extensive criticism in the latter half of the
twentieth century. This perspective on the
purpose of financial reporting inevitably
influences the form and extent of information
disclosed.
The concept of capital maintenance
provides a buffer for the protection of
creditors: as long as capital remains within
the company, assets must exist to meet
claims. If profit is overstated and dividends
are then distributed, there is a risk that
capital will be depleted. The integration of
this concept into company law was seen even
in the nineteenth century as potentially
inimical to enterprise [4], but it remains
fundamental to the existing system, as noted
in the recent government discussion paper
on company law review, which hints at
possible future change:
The principle of capital maintenance is at
least as old as the limited liability company.
The law gave the shareholder the privilege of
limiting his liability, so that once he had paid,
or promised to pay on call, an amount equal to
the nominal value of the shares he took up he
had no further responsibility for the debts of
the company. In order to protect members
and creditors, however, a body of rules was
erected; such rules were designed to prevent
the capital so provided from being extracted
or otherwise eroded, save as a result of
trading or other business events . . . Our
limited enquiries tend to indicate that
creditors and potential creditors do not any
longer regard the amount of a company's
issued share capital as a significant matter
when deciding whether or not to extend credit
to it . . . Whilst the existence of a substantial
share capital may sometimes be regarded as a
comfort, sophisticated creditors pay much
more regard to the size of the company's total
resources . . . and to its cash generation
(Department of Trade and Industry, 1999,
pp. 81-2).
The concept of prudence or conservatism,
which requires financial reports to recognise
all anticipated losses but only those gains
which have been realised, follows logically
from the requirements of capital
maintenance as it protects against the
depletion of assets, and hence capital,
through inadvertent distribution of
unrealised profit. However, although
enshrined as a fundamental accounting
concept in the Statement of Standard
Accounting Practice 2 issued in 1971 by the
Accounting Standards Committee, the
concept has undergone recent
reinterpretation (Davies et al., 1999, p. 84).
This challenge to the traditional view of
prudence is not, however, couched in terms
of hindering enterprise but rests on the
argument that financial reporting should
provide objective information for users:
prudence, leading to under-reporting of
profits, represents a bias (albeit a ``good''
bias) which is as undesirable as over-
reporting. In a similar way, the notion of
stewardship has met with challenge from a
more recent concern in the later part of the
twentieth century that financial reports
should provide information more directly
relevant to decision making [5] and also
recognise and serve a broader range of
stakeholders. These ``user needs'' arguments
have not been extended to claim that either
prudence or stewardship directly hinders
enterprise, although there has been much
debate over the economic consequences of
accounting standards and lobbying by groups
claiming that compliance would have
adverse consequences has been successful in
achieving amendment to standards[6].
However, even if the fundamental
principles of the accountability system are
not seen as incompatible with enterprise, the
imposition of layers of regulation on top of
legislation represents a compliance challenge
for corporations, resulting in possible
tension. In commenting on the DTI
discussion document quoted,
PricewaterhouseCoopers summarised this:
A market economy entrusts wealth creation
to the private sector. This encourages
enterprise of those who run businesses and
those who work in them. Government has a
responsibility to provide an orderly
framework for the responsible and honest
conduct of companies. Company law is the
core of that framework whether or not the law
itself contains the details or provides for them
to be worked out by others. But the law is
Victorian and hugely complex. Now it is
supplemented by corporate governance codes,
listing rules, accounting standards and so on.
``It is all a distraction from running the
business.'' Enterprise and accountability
should not represent a contradiction in terms
(PricewaterhouseCoopers, 1999, p. 11)
The source of the quotation forming the
penultimate sentence is not provided but the
message is similar to that of Hampel. The
outcome of the company law review remains
uncertain but the cases for change to
fundamental principles and for a reduced
burden of disclosure seem to be equally
poorly supported by evidence that the
existing system impairs enterprise.
3.2. The development of the NED role
As noted earlier, Tricker's model of the
company board analyses board roles into
components of performance and
conformance (Tricker, 1997). These two
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aspects of board responsibility are
encapsulated in the role of the non-executive
director (NED) who is expected to contribute
to both.
In the earliest companies, all directors
were non-executive, i.e. they did not perform
management functions [7]. The twentieth
century development of the role of the
company manager led to promotion to the
board as a reward within the management
career structure. UK company law makes no
distinction between types of director and the
unitary board remains the dominant
governance structure. Very little research
into company boards was conducted in the
UK prior to the 1970s. Studies specifically
addressing the NED role were carried out by
Tricker (1978) and Spencer (1983) but neither
offered evidence to indicate that NEDs
experienced significant role conflict,
although this became the subject of extensive
comment after the publication of the
Cadbury Report in 1992 (Cadbury Committee,
1992) which laid great emphasis on the
monitoring role of the NED as a governance
mechanism. Evidence supporting the
effectiveness of NEDs in monitoring their
fellow executive board members is sparse [8]
although critics of Cadbury have focused on
the apparent conflict between the
requirement for NEDs to contribute to
company strategy as well as monitor the
board (Ezzamel and Watson, 1997). Hampel
observed:
The Cadbury committee raised the profile of
the non-executive director, and this has been
very beneficial. An unintended side effect has
been to overemphasise the monitoring role
(Hampel Committee, 1998, p. 25).
There is little evidence to demonstrate that
NEDs themselves share this concern about
their role. The foreword to a survey of NEDs
conducted in 1994 commented:
. . . the non-executives see their position as
combining a commercial role ± particularly
regarding strategy ± with a governance role.
Few see these as conflicting roles. They are
both part of representing the shareholders'
interests (KPMG, 1994, p. 6).
In a study by McNulty and Pettigrew (1996),
NEDs reported that their contribution to
board activities was wide ranging in terms of
issues addressed but they perceived that
their major contribution was in governance
areas: hiring and firing of chairman and
board members, board remuneration and
board processes and conduct. The interviews
in this study took place in 1994 and again
there is no mention of conflict in fulfilling the
NED role. In 1994 Jonathan Charkham, an
experienced NED and member of the
Cadbury committee who has written
extensively on governance issues, expressed
the view (in private conversation with the
author) that no conflict exists since the
monitoring role of NEDs is indirect, in that it
consists of ensuring that executives have
systems in place to monitor themselves.
In contrast, a 1999 survey began with the
comment:
The primary role of non-executives still
appears to be to ``hold the executives' feet to
the fire'' by challenging them in the
formulation and implementation of their
strategy (KPMG, 1999, p. 1).
This survey revealed that NEDs reported that
they were having to take on a greater role in
governance and monitoring, but again there
is no mention of role conflict ± the major
problem cited was lack of time.
While research exploring NED
effectiveness as monitors remains very
limited, there is a growing US literature on
NED impact on company performance and
enterpreneurship, which suggests that NEDs
may have a negative effect in this area
(Donaldson and Davis, 1994; Wagner et al.,
1998) but it is not clear how applicable this
may be in the UK context where board
structures are predominantly executive in
contrast to the US dominance of NEDs.
Although recent commentary and analysis
may suggest that NEDs experience problems
in balancing enterprise and accountability
issues within their role, empirical evidence
remains, once again, inconclusive.
3.3. Audit
Audit is a key mechanism within the
accountability system and the Cadbury
recommendations were designed to
strengthen both facets of the audit role,
external and internal. In theory, external
auditors would be protected from the
potential undue influence by management by
having direct access to the support of NEDs
via the audit committee [9].
The focus on internal control systems as
corporate governance mechanisms has
highlighted the role of internal auditors who
have traditionally been viewed as the
guardians of such systems, monitoring
compliance. The Cadbury recommendation
for the establishment of audit committees
emphasised the importance of internal audit:
Where an internal audit function exists, the
audit committee should ensure that it is
adequately resourced and has appropriate
standing within the company. The internal
audit programme should be reviewed by the
audit committee, and the head of internal
audit should normally attend its meetings
(Cadbury Committee, 1992, p. 29).
[ 745 ]
Laura F. Spira
Enterprise and accountability:
striking a balance
Management Decision
39/9 [2001] 739±748
[ 746 ]
Internal audit departments thus achieved
direct access to the board. However, at the
same time, the costs of internal audit were
being closely scrutinised in many companies,
often as a result of the application of business
process re-engineering techniques. The
implementation of techniques such as
Control Risk Self Assessment allowed
internal auditors to present themselves as
consultants and facilitators, rather than
police. Evidence of this ``paradigm shift''
(Selim and McNamee, 1999) may be found in
the new definition of internal auditing issued
by the Institute of Internal Auditors in June
1999, as well as commentary in recent articles
(Bou-Raad, 2000; Chambers, 2000) Evidence of
the changing conception of external audit
was provided by Lemon et al. (2000) who
surveyed the methodologies developed by the
largest audit firms in the UK, USA and
Canada, concluding that the developing trend
is a move to a business risk audit approach.
The advantages of linking internal control
to risk management are thus significant for
auditors. Internal auditors, previously
viewed as intrusive monitors within
companies, now offer themselves as
consultants, assisting in identifying and
managing risk in different areas of company
activity, rather than checking transactions to
ensure compliance with control systems.
They are able to consolidate their influence
by drawing in specialists from functional
areas such as engineering or marketing.
External auditors have also adopted a risk-
based approach, offering their clients risk
management models. Audit, now often
described as ``assurance'' [10], is presented as
an input to strategic decision making and a
support for enterprise. The risk management
focus of Turnbull highlights the role of
entrepreneurial activity rather than control
compliance. This focus also assists auditors,
both internal and external, in demonstrating
that the audit function adds value: they too
need to behave entrepreneurially in order to
secure their positions within the market for
their services.
4. Conclusion
This paper has traced the shift in emphasis in
UK corporate governance policy
recommendations over the last decade from a
central focus on control and accountability to
a contention that prescriptive monitoring
mechanisms may hinder enterprise and has
demonstrated that the evidence to support
this contention is very limited.
Developments in three key areas of
accountability ± financial reporting, NEDs
and audit ± have been examined for evidence
that enterprise is hindered by accountability.
The challenges posed to financial reporting
focus on the scope of accountability and the
type of disclosure appropriate but do not
address the impact on enterprise. Although
commentators have identified a theoretical
enterprise-accountability conflict inherent in
expectations of the NED role, there is little
evidence to show that NEDs share this
perception and, as Short et al. (1999) have
indicated, a great need for further research
into the impact of board composition. Audit,
in the face of criticism and market
challenges, appears to be undergoing a
process of reinvention, moving from a
compliance tool, explicitly serving
accountability purposes, to a risk
management tool providing support for
entrepreneurial activity.
There remains a distinct schism between
those commentators like Charkham (1998)
who see good corporate governance as
integral to company success, with enterprise
and accountability interdependent, and those
who share the Hampel view that
accountability concerns may inhibit
enterprise. Surveying developments over the
last decade, it is clear that neither view is
firmly grounded in empirical evidence and
there is considerable need for extensive
research in this area. Some years have now
elapsed since any major financial scandal
focused public attention on accountability
issues and aroused demands for greater
intervention to control corporate affairs. It
remains to be seen if future events will once
again shift the focus of corporate governance
policy.
Notes
1 Charkham, a member of the Cadbury
Committee, outlined some aspects of the
committee's thinking (Charkham, 1995a) but
did not provide a comprehensive account.
2 Chambers (1997) surveyed the response to
Rutteman, suggesting that this weakening of
the Cadbury recommendations was the result
of lobbying by finance directors who feared
litigation.
3 Advice for directors from the ICAEW on how
to implement the Turnbull requirements goes
even further, treating internal control and
risk management as virtually synonymous
throughout (Jones and Sutherland, 1999).
4 See French (1977) for a detailed discussion of
this.
5 See Page (1991, 1992), for further discussion of
this issue.
6 Property companies successfully campaigned
to be exempt from the depreciation provisions
of SSAP 12 (Davies et al., 1997, p. 41).
Laura F. Spira 7 Their role was principally reputational; see
Enterprise and accountability: Page and Spira (2000).
striking a balance 8 Demonstrated in studies of audit committees
Management Decision by Collier (1996) and Spira (1998).
39/9 [2001] 739±748 9 Spira (1999) discussed the limitations of the
audit committee role.
10 At KPMG, for example, the previous Head of
Audit (Gerry Acher) was replaced by a new
Head of Assurance (Ted Awty).
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