Reforming disclosure and corporate governance in the UK: Between Scylla and Charybdis

Abstract

Like the USA, the UK is characterised by dispersed owners of equity shares and has a strong investor protection regime. Like Continental European countries, the UK relies on a voluntary code of best practices. Similarly, the UK accounting system, although very similar to the USA in terms of accounting principles, does not employ a detailed rule system. The UK legal system, which holds only a limited place for private rights of action and thus far more for contingency-fee arrangements and securities class-action suits, relies on a principles-based regulatory scheme and prohibits the offence of market abuse. The latter is also the subject of an EU directive, which prohibits market manipulation and also requires the immediate disclosure of all pricesensitive information. Even prior to Enron and Sarbanes–Oxley, the UK was in the midst of company law reform and the Steering Group for Company Law had completed a report which argued for changes in company law, including an officers' financial report to be included in financial statements; a broader private right of action; revamped regulation of the accounting industry; and the process for determining restatements. After Sarbanes–Oxley, the Department of Trade and Industry (DTI) issued its White Paper; the Higgs Committee issued a report on director independence and the need for financial experts on audit committees; and the Coordinating Committee on Accounting Authority proposed new rules on accounting. In addition, the Smith Report details a proposed practice of procedure for reconstituted audit committees. The Coordinating Committee on Accounting and the DTI White Paper come to different conclusions about the need to criminalise the knowing dissemination of false or misleading financial reports. The decision of the EU to adopt international accounting standards by 2005 and the memorandum of understanding between FASB and the IASB to converge standards mean that the issue of rules versus principles will remain in the limelight in the foreseeable future. The UK should employ a rules-based approach to the extent necessary to criminalise accounting fraud and enable private rights of action.