In the late 1980s there was a series of sensational business scandals in the United Kingdom. There was particular public outrage at the plundering of pension funds by Robert Maxwell, at the failure of auditors to expose the impending bankruptcy of the Bank of Credit and Commerce International, and at the apparently undeserved high pay raises received by senior business executives. The City of London responded by creating a special committee to examine the financial aspects of corporate governance. This paper (...) describes the resulting Code of Best Practice produced by the Cadbury Committee. To reduce the power of executive directors in the boardroom the Code recommends a greater role for non-executive directors, changes in board operations, and a more active role for auditors. The paper reviews the various published reactions to the Cadbury Report, and concludes that the Code is unlikely to halt the incidence of business scandals in the United Kingdom. (shrink)

Fraudulent financial reporting, financial statements with errors so material as to require restatement, and biased reporting marred by defects such as managed earnings have plagued financial reporting in many countries in recent years. All of those failures are ethics failures that represent breaches of fiduciary duties by individuals who accepted responsibilities but did not fulfill them. The financial reporting system practiced in America is viewed by the parties involved in it as generally satisfactory. However, according to another view, the interests (...) of those primarily and secondarily responsible for those reports conflict with the interests of the intended beneficiaries, or users, of the corporate financial statements. A more realistic view of the actual operation of that reporting system shows that it is fundamentally flawed. Primary responsibility for failures rests with top management and financial management of the reporting corporation who are so strongly motivated to render favorable reports on their stewardship that they neglect their fiduciary responsibilities to investors. Secondary responsibility falls on independent auditors who are so heavily influenced by enterprise management that they, too, fail in carrying out their responsibilities to users of the audited financial statements. Ethics compromises are also found in the performances of academic accountants and members of accounting standards-setting bodies. The conflict between managements interest in reporting its performance in a favorable light and investors interest in decision-useful financial information will always exist and require regulation. However, changes in those regulations and in the basic governance arrangements involving shareholders, management, and auditors could reduce the opportunities and temptations for failures in carrying out fiduciary responsibilities. Most importantly, the close relationships between auditors and management must be loosened in favor of closer relationships between auditors and investors. (shrink)