While the US authorities were acting feverishly to curb a nosedive in confidence, Britain took a more cautious approach to overhauling governance. Today the US business community is questioning whether they went a step too far in the wake of disaster. Here leading commentators, regulators and senior accountants explain why the UK held back on reform and whether regulation can ever really stop corporate fraud

Peter Wyman is head of professional affairs at PricewaterhouseCoopers LLP

Between the height of the bull market at the turn of the Millennium and the trough in the middle of 2002, investors in US stock markets lost some $7 trillion. Much of this loss was the result of earlier ‘irrational exuberance’ and the bursting of the dot.com bubble.

Enron and Worldcom were the straws that broke the camel’s back. The political pressures at that time meant that an over-reaction was all but unavoidable. Harvey Pitt, then SEC chairman, held out for a more proportionate response and paid for his bravery with his job. Now it is US capital markets which are paying the price for the regulatory excesses.

By contrast, the British government adopted a thoughtful and measured approach. Admittedly, it was easier for them since the scandals were there, not here, but, nevertheless, many good headlines were passed up as the government sought the right, rather than the easy, policy options.

As a result, the UK continues to enjoy corporate governance, financial reporting and auditing which are second to none. And it is no coincidence that the spate of corporate scandals that rocked the world at that time were not seen, and will not be seen, in the UK.

Apart from some relatively small measures to complete compliance with the EU eighth directive, there is no requirement now for legislation or major new regulation. However, we cannot rest on our laurels.

There are a number of areas where fine tuning is required to turn a good regulatory regime into a great one and, more fundamentally, to ensure that financial reporting meets the needs of those for whom it is primarily for, i.e. the shareholders.

In particular, the audit inspection process needs to focus more on the real drivers
of quality and less on the minutia, while greater transparency of the process and the findings is needed.

The concept of ‘true and fair’ and ‘stewardship’ must be preserved even while we adopt global standards.

New forms of corporate reporting must be explored and debated; renewed debate on fraud prevention and detection is needed.

Christopher McKenna teaches corporate strategy at the Saïd Business School, University of Oxford, and is a founding member of the Clifford Chance Centre for the Management of Professional Service Firms. He is the author of The World’s Newest Profession: Management Consulting in the Twentieth Century (Cambridge University Press, 2006).

Remember when management consultants suffered because no one was interested in the work they did?

Well, that quickly changed with the collapse of Enron in 2001. Unlike other corporate failures after the dotcom crash, journalists’ descriptions of the late-night shredding of documents within Arthur Andersen and the involvement of McKinsey’s consultants in Enron’s affairs captivated the general public. Enron’s failure, and the consultants’ role, soon became emblematic of corporate greed throughout the world.

Unfortunately for the future of the large multi-disciplinary professional service firms, US officials explicitly linked Andersen’s actions to the potential conflict of interest between the firm’s payment of $27m (£14m) in management consulting fees and the $25m that Andersen earned from Enron for its audit work.

It was no coincidence that soon after Enron failed, the US Congress barred accounting firms from offering consulting services within any company in which they were simultaneously performing an audit.

Whatever one thinks of the regulatory structure mandated by the Sarbanes Oxley Act, five years after Enron’s collapse we are still living with the legacy of Enron’s demise.

For consultants, the immediate aftermath of Enron was an even weaker market for their professional services. Consulting, however, much like the market for auditing, has bounced back over the past few years to surpass the levels reached at the end of the 1990s.

Ironically, much of that new business has been driven by the regulatory demands of Sarbanes Oxley.

As shareholder lawsuits and regulatory controls have grown, however, public companies have found compliance with Sarbanes Oxley not only difficult but stifling to their business. Professional firms have created entire practice areas to help public companies deal with the new regulations, but increasingly public companies are reverting to private ownership or shifting their headquarters away from the US in order to lessen their regulatory burden.

As a result, US regulators are now calling for a renewed look at the ‘regulatory balance’ between protecting outside investors and imposing too burdensome a restraint on public companies.

The spectre of rising liability from shareholder lawsuits, however, remains a decidedly mixed blessing for professional firms.

Regulatory and legal fears may compel corporate executives to seek ever more professional advice, but that same liability has placed professionals in a tricky position. For just how much liability can they take on before their professional firms, like Andersen (and Enron), are also caught up in a crisis?

Enron and Arthur Andersen, as it happened, each benefited from dramatic regulatory changes that encouraged the growth of their professional services in the 1990s. In both cases, however, the two firms found themselves with ever increasing levels of financial liability as regulators targeted their primary markets.

Regulation, as the Enron debacle proved, can eliminate existing markets for services just as quickly as it creates them. Those consultants who wish that Sarbanes Oxley would just go away may not be so happy if US regulators suddenly grant their wish.