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
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.
In particular, the audit inspection process needs to focus more on the real
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
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
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.
Paul Boyle is chief executive of the Financial Reporting
One of the major issues raised by Enron was corporate governance,
particularly the role of non-executive directors. The US legislative and
regulatory response (Sarbanes-Oxley) was not finalised until Tyco and WorldCom
made it impossible to argue that Enron was an isolated case. The UK government
commissioned the Higgs review of the role of NEDs and the Financial Reporting
Council commissioned the Smith review of audit committees.
Higgs’ starting point was very different from that of Sarbanes and Oxley
because the UK corporate scandals of the late 1980s had already resulted in
reforms. The 1992 Cadbury Report had codified key governance principles,
including the merits of avoiding undue concentration of power in companies, of
effective audit committees and of boards reviewing internal controls. Cadbury
also devised the ingenious ‘comply or explain’ feature, which was enshrined in
the Listing Rules.
Further reforms during the 1990s included the Greenbury Report on directors’
remuneration, the Hampel Report, which led to a consolidation of the various
recommendations in the combined code on corporate governance, and the Turnbull
guidance on internal control.
Higgs reported in January 2003, arousing considerable controversy. But the
FRC, under the chairmanship of Sir Bryan Nicholson, consulted widely on Higgs’
recommendations and approved a revised version of the code which came into
effect in November of that year.
The revised code included more rigorous procedures for the appointment of
NEDs, formal evaluation of board performance and a requirement that CEOs should
not normally become chairman of the same company.
The revised code also incorporated many of the recommendations from the Smith
guidance on audit committees.
Among other points, it clarified that audit committees should have the
primary role in relation to auditor appointments and should conduct an annual
review of the independence and effectiveness of the auditors.
In 2005 the FRC endorsed a slightly updated version of the Turnbull guidance
which had been produced by a group led by Douglas Flint. The group concluded
that the guidance had contributed to a notable improvement in standards of
internal control. Companies and investors believed the costs of public reporting
on, and auditing of, the effectiveness of controls as required by Sarbanes-Oxley
were not justified in the UK.
In 2005 the FRC reviewed the implementation of the revised code and found
substantial support from companies and investors. Some minor changes to the code
were supported and these came into effect at the start of this month.
Taken together the revised code, the Smith guidance and the updated Turnbull
guidance have strengthened the UK corporate governance regime.
Some concerns were expressed in 2003 that the various enhancements might
damage the UK’s international competitive position. The opposite seems to be
The EU has accepted the ‘comply or explain’ principle. There will, however,
be some challenges for the UK in the next two years in implementing some aspects
of the revised 4th, 7th and 8th directives.
The US seems to have accepted that its post-Enron reforms did not strike the
right balance between investor protection and costs and that changes will be
Damian Wild is editor in chief of Accountancy Age
It’s accountancy’s JFK question: where were you when Enron, Worldcom and
Andersen went to the wall?
Most us have a fairly clear memory of what we were up to when the accountancy
world blew up, though, of course, it was a story that took several weeks to play
The crises, that would render Enron and Worldcom unviable, emerged in late
2001. But it was not until the following spring that the stories had properly
Andersen’s admissions began with ‘an error of judgement’, swiftly moving to
the infamous shredding confessions. After the sacking of the lead partner on the
Enron audit, talk at City drinks parties shifted from ‘there but for the grace
of God go us’ to widespread acknowledgment that the firm’s fate was sealed.
By now, much of my time was being spent in TV studios trying – vainly – to
explain that businessmen ruin businesses not auditors.
But Andersen’s admissions – and don’t forget that professional services
firms, like the Met Police, never admit liability – meant the air was thick with
the smell of blood.
If there is one date that sticks in my mind and one that changed accountancy
forever, it came a little later: 19 March 2002, when Andersen UK senior partner
John Ormerod addressed a hastily convened press conference, proposing a tie-up
Never mind that Deloitte would later pull off the deal, Ormerod – still
blinking from the harsh lights shone on him during a gruelling Newsnight
interview that week – signalled a change in the profession’s structure that
haunts it to this day.
For issues around competition, choice, independence and transparency have
never been satisfactorily resolved. No wonder the fear of a Big Three lingers:
last year’s controversy around Ernst & Young’s Equitable Life audit and
KPMG’s $455m fine for selling abusive tax schemes in the US could easily have
left us with a Big Two.
More than that, despite widespread reform, the size and scale of corporate
activity – and the lavish individual rewards on offer – mean you cannot
legislate against a determination to commit fraud especially when collusion
among senior executives cannot be ruled out.
Today, we may be acknowledging the fifth anniversary of these scandals, but
in truth I’m reminded more of a conversation that took place 12 months later.
Over lunch with Sherron Watkins in November 2002, the former Enron
vice-president ‘credited’, if that’s the right word, with blowing the whistle on
the fraud, I learned more about her CFO Andy Fastow.
‘I knew his moral compass had no true north,’ Watkins said of her former
boss, who only this month began serving a six-year sentence in a federal prison
in Louisiana for his role in the fraud.
‘His defence is almost like a mob assassin,’ she told me. ‘“I was told to
kill someone, I was only following orders”.
’It’s a much more familiar description than is normally applied to a
fraudster. In truth we all probably know someone like that. And I can’t remember
anything in Sarbanes Oxley or elsewhere about mandatory re-aligning of moral
compasses. Box-ticking only gets you so far.