What Wirecard could teach us about corporate governance

Tom Ravlic

An accounting body in Germany, the Institute of Public Auditors, has picked away at Wirecard’s carcass and has been pointing to things that the fintech had done poorly and what solutions could be implemented.

One of the interesting things it concluded is that there was no separate audit committee of the company until 2019 as a result of the optional nature of the corporate governance guidance in Germany.

The accounting body recommends that various things that are currently encouraged by guidelines, such as the creation of audit committees, be mandated in law.

The latter point is extremely interesting because Australia applies a similar approach with the Corporate Governance Council principles and recommendations that are issued under the auspices of the Australian Securities Exchange.

Those principles and recommendations adopt an approach that is an ‘if not, why not’ disclosure approach to compliance with the recommendations and principles.

Is it time to kill off that approach and hardwire some of these things in the Corporations Act 2001?

There are several issues to consider in this respect. One of the first that must be reflected on is that the auditors that run their magnifying glass over the corporate financial records each year are tethered to auditing standards that are mandatory under law.

While there is wriggle room in terms of how auditors plan their engagements, the fact is that those standards are legally enforceable despite the fact that we have not seen a string of auditors line up outside the offices of the Company Auditors Disciplinary Board to have a meaningful conversation with the board members about the need to comply with auditing standards when they conduct an audit engagement.

Auditing standards set down the principles for behaviour for auditors’ planning, conducting and reaching a final conclusion on audit work. This results in the audit opinion.

Auditors also have a code of ethics which has the force of law because it is embedded in auditing standards that must be complied with in accordance with the Corporations Act.

These ethical standards will also impact on people who are not members of professional accounting bodies but are registered with the Australian Securities and investments Commission as registered company auditors.

Auditing standards are also set by the standard setter under the auspices of the Financial Reporting Council.

Let’s now look at the ASX corporate governance council principles and recommendations.

They are not embedded in the Corporations Act like auditing standards, have an ‘if not, why not’ approach and are set by a body that does not sit under the FRC. The corporate governance council sits as a body with an affiliation or link with the ASX.

It is probably timely for the Federal Government to consider whether there should be a shake up of the reporting and governance framework that involves a body being set up to set legally binding governance principles and disclosures so that directors and auditors are treated with the same degree of severity under law.

It is a nonsense to have reporting requirements of the kind in the ASX recommendations and principles to not have legal backing in the same manner as the auditing standards and the ethical standards that impact on auditors.

Nothing has come to my attention that would suggest legal recognition for governance standards or principles that resembles that given to auditors would be inappropriate in the context of company directors and other company officers.

They are a part of the three-legged stool of governance and having the recommendations and principles set by a body that sits next to the accounting and auditing standards boards under the FRC would be entirely appropriate.

Maybe, just maybe, one of the lessons from Wirecard is for people to hardwire things in law rather than expect people to do the right thing as a matter of principle.