Critical Analysis of Cadbury Report

Cadbury committee was arranged in May 1991.It was formed by the financial reporting council of London stock exchange. Committee published its final report in the Month December of year 1992. This Committee was formed under the chairmanship of Sir Adrian Cadbury. Cadbury report was formed because of companies doing window dressing of their financial reports and due to these investors was having trust issues and also Cadbury was asked to clear the duties and responsibilities of directors and executives.

Four Major Areas

  1. BOD Role and their major duties
  2. Non-Executive Directors Role
  3. Remuneration
  4. Main Questions of Financial Reporting and Financial Control

1. BOD Role and their Major Duties

There should be balance between power and authority. And power should be exercised by the board of directors and to exercise these power effectively and efficiently regular meetings should be conduct. Firm control should be with board of directors and not only with any executive .And should decision be taken collectively by all executive and approved by the board of directors.

2. Non-Executive Directors Role

Historically non-executive directors were not the part of BOD committee and they were known to be not independent. Normally non-executive was hired by chief executive thus as a result they were under the influence and was not independent to make decisions. The court therefore suggested that they should be selected through formal hiring process e.g. initial interviews or by nomination committees and then appointee should be send to Board and Board as a whole will decide whether to hire or not. And non-executive should be hired for specific terms and time and fee should be also given against the services provided by them. And court suggested that the automatic reappointment should not be done if they wants to join again then again whole process should be repeated. 

3. Remuneration

Remuneration is decided by the remuneration committee that consists of wholly or mainly non-executive directors and this remuneration should be approved by the Board of directors of the company.

4. Main Questions of Financial Reporting and Financial Control

Balanced and understandable reports should be presented by the company to the shareholder because there would be difficulty for the shareholder to understand the report if they are complex and there should be no use of accounting technical words because it will be difficult for shareholder to understand. (rajsuman, 2017)

Main Recommendations of the Committee

  • Decision making Powers shouldn’t be given to a single executive and decisions should be taken collectively by all executive and BOD’s
  • The Role of the Non-Executive directors should be independent so that they can come up with some new innovative decisions
  • Executive should be hire for three years and this term can be only extended with the approval of shareholder.
  • Remuneration committee consisting of majority of non-executive directors should decide the remuneration of BOD’s and Executive’s.
  • And all the businesses should must report that the business is a going concern.

Responses to the Cadbury Report

Most of the early conflicting response of the order Cadbury report issued in May 1992 and was appeased by the settle of the language in December in the final report of the Cadbury. The report positioned forcefully into the Anglo American organizations heritage of recommending checks and balances to the possible hefty of statute and therefore although its directions were deeply greet  but still there was uncertainty as to how adequately these allocations would  demonstrate when organizations are under  no commitment to impose them .An inspection made about Cadbury report is that it positioned a lot of belief in the examining  powers of non-executive directors .Non-executive directors who mostly have very little engagement with the boards are depended more and are reckoned upon to stop latency damages by the executive.

financial reporting and analysis

November 18, 2018