The Pharmaceutical Journal
Vol 269 No 7206 p81
13 July 2002

The work of the Royal Pharmaceutical Society's five honorary auditors has attracted recent comment and will at some point need to be considered within the Society's modernisation programme. Ian Caldwell, an honorary auditor and a former president of the Society, discusses how to make the auditors more effective in their role as stewards of the members' financial interests

How the Society's honorary auditors can help improve financial transparency

The honorary auditors of the Royal Pharmaceutical Society's are sometimes described as an anachronism — a unit displaced in time. They exist as a result of the foresight of our forefathers, who sought probity and transparency in the Society's finances in the days before the number-crunchers got their act together. We predate the oldest accountancy body in the world, the Institute of Chartered Accountants of Scotland, by eight years. Latterly our Society appointed accountants and investment houses to manage our resources.

There are currently several layers of financial control within the Society: a pharmacist member of the Council as Treasurer, a director of resources, an Audit Committee, an external auditor appointed subject to tender and an internal auditor monitoring organisation and compliance. The Society's investments and those of its charities are in the hands of the external investment advisers.

Why do we still have five pharmacists elected as honorary auditors? Section XI:I of the Byelaws states that five members "shall be elected as auditors of the accounts of the Society and the financial statement prepared for them by Council, which, when approved, must be certified and signed by the auditors present ...". So far, so good. But what is not specified are the tools that would enable the auditors to perform their duties to their own electors' satisfaction.

I imagine that most members who become auditors expect to receive a steady flow of information from Lambeth so that their consideration of the accounts will be based on an understanding of what has gone on and why. This is not the case. Any salient points have to be gleaned from The Pharmaceutical Journal. If anyone is to blame for this situation I have to accept some of the load. When I was president, I chaired the annual auditors' meeting and I assumed from their pertinent and perceptive questions that they had access to the background to the Society's financial dealings. My assumption was wrong. The only unsolicited contact from the Society is the delivery of the draft accounts two to four working days before the annual meeting.

Who are the honorary auditors and what is their role? They may not be accountants but they are dedicated pharmacists, curious, numerate, financially literate and aware of the structure of the Society's organisation. As to their role, I would suggest that while the Council is the steward of the Society's finances, the honorary auditors are the stewards of the members' financial interest in much the same manner as non-executive directors in public company.

That may seem to be a huge claim but there is a clear distinction between the auditors and the Council; they must be seen to be at arms length because of their differing functions. The Council has not tried to dictate to the auditors and the auditors cannot try to rewrite Council policy. What the auditors can and must do is question the impact of Council policy on the Society's resources. It is unreasonable to expect this to happen unless there is a realistic flow of information relating to activities in the year under review as well as to the future strategic project of the Council. I was heartened by the reaffirmation by the Treasurer at the annual general meting (PJ, 25 May, p742) of the assurances given at the auditors' meeting on 19 April.

The devil in the detail

When the honorary auditors meet to review and sign off the Society's accounts they have before them the standard minimum required reports. These have been prepared and certified by reputable and experiences accountancy firms and must be accepted as being accurate. Hugh Mitchell, the Society's director of resources, posed the question "Is the devil in the detail?" in his article (PJ, 25 May, p745). You bet it is! However, the detail can only be elicited if the background is known.

Put another way, you can only effectively question that to which you are aware you do not know the answer. Such questioning is obviously enhanced by an ongoing information stream that is not dependent on gossip, tittle-tattle or truncated press reports. At present the only detailed, unsolicited information supplied by Lambeth relates to the investment activities of out charitable bodies. In contrast, there is no indication of budgets set, met or missed within the Society's directorates. Although budgets are not necessarily indicators of success or failure, significant variances from the expected do afford the opportunity for questions and explanations.

Of course, there are areas of commercial sensitivity that cannot be in the public domain, The Pharmaceutical Journal being one. The sale of the Medicines Testing Laboratory was another, but only up to the point where an agreement was reached. Thereafter, the honorary auditors questioned the transaction extensively by letter and extended the process at their annual meeting. It is also the case that unique anomalies can arise in the balance sheet such as the acquisition of the intellectual rights in Stockley, which again was a commercial undertaking, but one that demanded explanation. The honorary auditors were prepared to query the impact of the accountancy standard FRS17 on the Society's accounts and were pleased to note that implementation had already taken place within the existing staff resource.

It would appear that the honorary auditors have operated as five individuals in the past. If my perception is wrong then I must apologise to my predecessors, but the auditors for the term 1999–2002 made attempts to act in a more cohesive way. A mid-term meeting was organised in October 2000 with the aim of improving background information provision. This initiative had the support of the then Officers of the Society but was tragically thwarted by a rail disaster on the day of the meeting. From that shaky start there are now welcome indications that a mid-term meeting will take place this year.

There has been some comment in The Journal on an age limit for auditors and this involves subjective judgement. People reach their "sell-by date" at different ages; however, none of the honorary auditors I have known are or were less than effective, no matter what their age. I have made an arbitrary decision that this is my last term as an honorary auditor simply because I will reach the age of 70 at the end of that period. I hope I will continue to be active beyond that point but that is the line I have drawn for myself. There are other elements besides age to consider when standing as or voting for an honorary auditor. Former presidents or treasurers could be seen as too close to the "establishment" but may equally be seen as informed inquisitors — gamekeepers turned poachers, perhaps. As for sectoral or geographical representation, the same arguments apply here as apply to Council elections: elect whoever is best qualified for the post no matter what their job or origins are because, once elected, they are responsible to the entire membership.

Most professions survive without honorary auditors but this singular aspect of our Society can be a modern, meaningful entity within the current Byelaws with a few simple changes to its operation. Few members can attend the annual general meeting; indeed, less that 0.25 per cent of the membership did this year. But the other 99.75 per cent have the elected auditors to seek the answers to the questions they would probably like to ask. The honorary auditors could do this even better than if they had a regular, apposite, direct provision of information on the Society's financial activities.

My end of term report? Financial probity is not in doubt. Financial transparency can be improved.