Will EU exorcise Enron’s ghost?

Will EU exorcise Enron's ghost?

Seperating internal and external audit remains a key issue ten years on from Enron's collpase, claims IIA chief Dr Ian Peters

IN THE POST-FINANCIAL CRISIS era, bankers have replaced Enron and WorldCom as public totems of corporate mismanagement. As a result, particularly in the UK, it is easy to forget just how significant an event it was.

When Enron filed for bankruptcy on 2 December 2001, it had a devastating effect on its shareholders, many of them former employees betting their whole 401K pension pots on the company.  There were also far-reaching, and generally more useful implications for corporate governance practices.

In the UK, some of the key lessons of the Enron collapse were reflected in changed corporate governance practices, and ultimately written into the Combined Code (now the UK Corporate Governance Code).
One of the most important of these lessons has been the separation of a company’s internal and external audits.

The US Senate Committee’s investigation into Enron’s collapse highlighted its outsourcing of internal audit to its external auditors Arthur Andersen as a major factor in the company’s downfall. They said that it created a major conflict of interest that prevented the company’s dubious accountancy practices from being exposed earlier.

Today, it is widely accepted that it is good practice to ensure that internal and external audit functions are properly independent of each other.

The UK Corporate Governance Code requires companies’ audit committees to provide an explanation of how external auditor objectivity and independence is safeguarded if the company’s external auditor also provides it with non-audit services, including internal audit.

However, in recent years there have occasionally been instances when a company’s decision to place internal audit services with its external audit provider has been challenged.

It may theoretically be possible to design adequate Chinese walls to prevent conflicts of interest occurring, but investors are entirely justified in demanding extensive reassurance on these sorts of arrangements.

In the view of many, including the IIA, there is a strong case for going further still. We welcome the debate that will ensue from the EU’s proposals announced this week to ban audit firms offering internal audit services.

Dr Ian Peters, chief executive, Chartered Institute of Internal Auditors

Share

Subscribe to get your daily business insights

Resources & Whitepapers

Why Professional Services Firms Should Ditch Folders and Embrace Metadata
Professional Services

Why Professional Services Firms Should Ditch Folders and Embrace Metadata

3y

Why Professional Services Firms Should Ditch Folde...

In the past decade, the professional services industry has transformed significantly. Digital disruptions, increased competition, and changing market ...

View resource
2 Vital keys to Remaining Competitive for Professional Services Firms

2 Vital keys to Remaining Competitive for Professional Services Firms

3y

2 Vital keys to Remaining Competitive for Professi...

In recent months, professional services firms are facing more pressure than ever to deliver value to clients. Often, clients look at the firms own inf...

View resource
Turn Accounts Payable into a value-engine
Accounting Firms

Turn Accounts Payable into a value-engine

3y

Turn Accounts Payable into a value-engine

In a world of instant results and automated workloads, the potential for AP to drive insights and transform results is enormous. But, if you’re still ...

View resource
Digital Links: A guide to MTD in 2021
Making Tax Digital

Digital Links: A guide to MTD in 2021

3y

Digital Links: A guide to MTD in 2021

The first phase of Making Tax Digital (MTD) saw the requirement for the digital submission of the VAT Return using compliant software. That’s now behi...

View resource