Content of external report on internal controls

In common with corporate governance codes elsewhere, there are four broad themes that such a report should contain.

1.Firstly, the report should contain a statement of acknowledgement by the board that it is responsible for the company’s system of internal control and for reviewing its effectiveness. 

This might seem obvious but it has been shown to be an important starting point in recognising responsibility. It is only when the board accepts and acknowledges this responsibility that the impetus for the collection of data and the authority for changing internal systems is provided. The ‘tone from the top’ is very important in the development of my proposed reporting changes and so this is a very necessary component of the report.

2. Secondly, the report should summarise the processes the board (or where applicable, through its committees) has applied in reviewing the effectiveness of the system of internal control. 

These may or may not satisfy shareholders, of course, and weak systems and processes would be a matter of discussion at AGMs for non-executives to strengthen.

3. Thirdly, the report should provide meaningful, high level information that does not give a misleading impression. 

Clearly, internal auditing would greatly increase the reliability of this information but a robust and effective audit committee would also be very helpful.

4. Finally, the report should contain information about any weaknesses in internal control that have resulted in error or material losses.

This would have been a highly material disclosure and the costs of non-disclosure of this was a major cause of the eventual collapse of the company.