Company boards, particularly the non-executive director members, need to ensure they take an ethical and value-led approach to financial reporting according to the latest paper from the UK’s Institute of Business Ethics.

The author of the report Guy Jubb, former governance head at Standard Life Investments, stated that accounting is not simply a question of following rigid rules but is also about making judgements and these will always have an ethical dimension. Responsible financial reporting Jubb argued is at the heart of responsible capitalism and directors should make the right choices about how to present profits and other key financial data. Boards should, therefore, be able to deal with challenges such as the short‐term pressures of the market or the desire by executives to meet remuneration targets.

Jubb said: ““Responsible financial reporting requires an engaged board and an effective audit committee comprising non‐executive directors who are demonstrably independent of management and have the personal and professional courage to challenge – and to do so effectively. Without independent non‐executive directors who are prepared to question the unquestionable and pursue their concerns to get satisfactory resolution, one way or the other, responsible financial reporting will suffer.”

There are six elements of responsible financial reporting according to Jubb: truthfulness and integrity; fair presentation and freedom from bias; neutrality supported by prudence; consistency; completeness and comprehensibility.

The paper stated that independent non‐executive directors must use all the resources at their disposal in seeking the truth that is the
foundation of responsible financial reporting. They then needed to challenge accounting policies and how they are applied, as well as the accuracy of the information used.

Non-executive directors, the paper suggested also needed to probe related party transactions, which can often be controversial when viewed through the lens of shareholders. They also needed to go out of their way to get feedback on the financial statements from professional analysts and shareholders Jubb suggested. Additionally, they should take steps to ensure that the auditors bring to bear an appropriate degree of professional scepticism, the paper said.

Philippa Foster Back CBE, IBE’s director said: “This board briefing is relevant reading for all directors, not just those who serve on audit committees. In a unitary board, all directors must take responsibility for ensuring that the financial reports show a true and fair view. When things go wrong with financial reporting, the buck stops with the board, not just the audit committee. Guy’s wise counsel will help executives and boards navigate their way through the ethical challenges.”

Last Updated: 17 September 2017