Northern Rock Plc
Audit Committee and Auditors
Chief Executive and Chairman
Risk Management Committee
Remuneration & Nominations Committee
Chance of another failure
In this report I am going to highlight the weaknesses in the corporate governance code of Northern Rock that lead to its downfall. Audit Committee and Auditors
According to the UK Corporate governance code the board should set up formal and obvious arrangements bearing in mind how to apply the corporate reporting internal control, and risk management rules for keeping the right relationship with the company`s auditors. The board should make up an audit committee of at least three non executive directors in the case of smaller companies at least two NEDs. The chairman can be a member in smaller companies but cannot chair the committee unless he or she was considered independent on appointment as chairman. The board should make sure that at least one the member should have recent and relevant experience in the audit committee. The board’s responsibilities are to lay out all the terms in writing and monitor the financial statement of the company, to review the financial performance and reporting. It should also review internal financial control, risk management system if not in place separately to check the effectiveness and internal function of internal audit. The board should also be review and monitor the external auditors work their appointments and re appointments, their remunerations, and more importantly the non audit services should be checked very closely. In the case of Northern rock the board and the audit committee failed to implement the above mentioned guidelines. In July 2007 the chief executive published on the website that operationally Northern rock’s first half of 2007 was a good one. He mentioned that mortgage lending in particular was strong. If that was the case then how did Northern Rock end up being nationalised in just over 7 months? Was someone checking and verifying the statements of the chief executive. The external auditor’s complacency was another issue. In their report of 2006 they gave a clean bill of health. This was later investigated by the House of Lords economic affairs committee which found that the auditors had performed their job carelessly. An effective audit committee could have spotted these problems well in advance. The reason for PWC’s complacency might either be because of the presence of Rosemary Radcliffe on the audit committee who was previously a partner of PWC or maybe they were providing other non audit services to the company and did not want to upset the board. As per the corporate governance code the number of audit committee’s members was according to the code but none of the NEDs had any financial experience. Nichola Pease had experience of fund management but not in the banking industry even that experience was not a recent one as required by the code. It seems that at Northern Rock the audit and risk committees were not taken very seriously as Rosemary Radcliffe only attended two out of four audit committee and one out of three risk committee meetings. Experience:
Northern Rock appointed a Senior Independent Director with over half the board being non-executive directors- following the combined code 2 and Basel 2 recommendations. However none of the directors were experienced enough in the field of banking not even building society. This in fact does not support the idea of having good corporate governance as it does not ensure failure or success. The above factors raised questions as to why the company’s shareholders did not question the risky business model or was it because of outstanding profits seen as the reward for taking such risk. The remuneration committee can also be held responsible for the...
References: 1. Treanor, J. (2008). Poor governance reduces profits, says ABI. Available: http://www.guardian.co.uk/business/2008/feb/27/executivesalaries.insurance. Last accessed 09 Feb 2013.
2. Roman A. Tomasic . (2009). Corporate Rescue, Governance and Risk Taking - Northern Rock and Its International Context. Available: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1417953. Last accessed 09 Feb 2013.
3. The Financial Reporting council. (2012). The UK Corporate Governance Code. Available: http://www.frc.org.uk/Our-Work/Publications/Corporate-Governance/UK- Corporate-Governance-Code-September-2012.aspx. Last accessed 09 Feb 2013.
4. Agha, M G and Qatinah, A. (). Lehman Brothers and Corporate Governance Failure. Available: http://www.slideshare.net/adnanqatinah1/lehman-brothers-case-study2. Last accessed 09 Feb 2013.
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