Supplementary memorandum by Mr Jonathan
Hayward, Independent Audit Limited (ADT 14)
Following the Committee session at which I gave
evidence, I would like to make one point regarding financial statements
While this is at first sight an interesting
and potentially attractive idea, I am not convinced that it would
work in this country. What follows is expressed somewhat tentatively,
since I am not a lawyer, but if the Committee were to consider
pursuing the idea of financial statements insurance then I would
suggest that you first obtain proper legal advice on this point.
The idea of financial statements originates
from the USA where the system of law and regulation is directed
and maintaining an orderly secondary market. The purpose of financial
statements in that jurisdiction is primarily to enable secondary
market transactions to take place at well-informed prices, which
facilitates litigation against companies whose accounts are misstated
since litigants need only show that they suffered loss through
dealing at a price which was based on incorrect information. In
this country, the legal framework for corporate reporting is based
on the idea of accountability to shareholders, and as a general
rule legal action by shareholders against directors and auditors
arises when the company itself has suffered loss.
Claims against companies in the UK because unsatisfactory
information has affected dealing prices in the secondary market
are extremely rare.
I understand, however, that it is such claims
that underpin the idea of financial statements insurance. So if
financial statements insurance were to be introduced into this
country, making it effective would necessitate a change in the
legal framework to enable investors to bring claims much more
easily against companies whose accounts were misstated.
This would be a significant change which would
be viewed by many as a severely retrograde step.
29 October 2010