View from Sir Jon Thompson: Governance – more important than ever

An important part of moving the economy forward as we emerge from lockdown is ensuring that we continue to attract investment from overseas. All the predictions are that we are entering a period of recession. It’s difficult to say how long this will last, or how deep it will be, but there will certainly be challenges and our traditionally high standards of conducting business are a crucial element of the UK’s value to investors.

This is why we need organisations to have healthy internal audit functions to help them to monitor and manage their risks and provide insights into the effectiveness of their corporate governance. Well-run businesses need to be on top of their governance and risk to reassure stakeholders and investors – even more so in challenging times, when many risks are heightened.

So this is no time to slacken off; if anything, organisations should be focusing more on internal audit in the months ahead. As a chief executive, I would want assurance and challenge from internal audit about what the organisation is doing, what additional or increased risks it is facing and how we are dealing with these.

Internal audit is not a “nice to have”, it is an essential plank of a well-governed organisation. In the short term, businesses will be focusing on cash and how they conserve and manage it, but it would be a fundamental mistake if they sidelined internal audit in this period. How will you know if you are on top of financial and other risks if you don’t have strong risk management, corporate governance and internal audit?

The current situation is exceptional, but there are many elements that most businesses should have thought through as part of their business continuity planning. This is why many have coped well and are managing to continue working in some form during the pandemic. In future, we will learn more lessons from the experiences we’re going through. Some organisations will be asking whether they need all their office space, or could support more employees working from home, and are analysing how this will change the relationship between managers, employees and customers.

Similarly, staff are getting used to working in new and different ways and some will want elements of this to continue. For example, about 30 per cent of our staff are saying that they would like to work from home permanently.  The economic implications of such changes will be wide-ranging for many sectors.

At the same time, regulatory changes that are already in the pipeline will be affected by the crisis and its consequences. The timetable for the creation of the new ARGA regulator has been postponed till the autumn, but this may be affected by the economic situation we find ourselves in at that time. Schedules for other recommendations, such as the introduction of a UK Sarbanes-Oxley Act and regulation of audit committees may also be reconsidered.

However, only a small number of these changes will have a signficant impact on most organisations. Some of the recommendations in the reviews by Sir John Kingman and Sir Donald Brydon don’t require new legislation, so these could go ahead sooner.

It’s important to recognise that our Corporate Governance Code is genuinely world-leading and the UK is known for its high governance standards. Maintaining this global reputation is vital, especially if part of our solution to current economic challenges is increased inward investment.

All the recent reviews have stressed the importance of transparency, and external audit and internal audit have a role to play in this.

Audit committees are also important.  The Competition and Markets Authority (CMA) has called for a regulatory regime for audit committees and we agree. Non-executives need the audit committee and internal audit to help them hold management to account.

I believe that as we emerge from this crisis internal audit should therefore have a higher profile – and it needs to be vocal, relevant and valued. Chief executives  can’t be everywhere or see everything and they need to know where internal audit believes they should focus their valuable time and attention.

Sir Jon Thompson is chief executive of the Financial Reporting Council. He was previously permanent secretary at the Ministry of Defence and chief executive
of HM Revenue & Customs. He will be speaking at the Internal Audit Conference on 30 September-1 October.

This article was first published in July 2020.