Restoring faith in the numbers

The one-time head of Mirror Group left a £400m hole in his employees’ pension funds, and shockwaves across the profession.

It was seemingly unbelievable that one man had systematically duped the City into believing his success with the support of so many venerable financial institutions.Among those named and shamed in the Department of Trade and Industry report into the affair, which was published last year, were Goldman Sachs, the investment bank, Samuel Montagu (now part of HSBC) and last but not least, Coopers & Lybrand.

The firm, now part of PricewaterhouseCoopers, has paid its dues, and the profession suffered a huge upheaval as a result of the scandal.

The Accounting Standards Board was set up and several reports on corporate governance set out to promote the separation of the chairman and chief executive in order to get away from the bullying used by Maxwell to get his own way.

But now, more than ten years on, a series of corporate disasters in the States threaten to engulf the accountancy industry in the UK.

The question being asked is just what is the use of accounts?

It blew up last year with Enron’s collapse. The energy trader, long-admired for being a leader in innovation, fell apart in a matter of weeks when news began to leak out about dubious off balance-sheet vehicles used to keep debt off the balance sheet.

Since then fraud has engulfed WorldCom where a routine internal audit revealed a hole of £2.5bn while copying giant Xerox has paid dearly over its leasing accounting practices. Tyco, the conglomerate, and even Vivendi Universal, the French media group, have also been mired in apparent accounting scandals. Vodafone, the telecoms giant, fell over 6% on market concerns over its accounting, despite traders being unable to pinpoint any specific reason for the downward pressure.

Billions of dollars have been wiped from pension funds in the US, while in the UK, the continued stock market dive has destroyed share values to such an extent that life companies are now having to worry about their solvency ratios.

Robert Willens, accounting analyst at Lehman Brothers in New York, says investors have been left with little faith in the numbers. ‘We have had a total breakdown in confidence in auditors. They are seen as in league with management and not in any way looking out for the investing public,’ he says.

He says investors have been slow to realise that accounting is not an exact science and that any lingering mythology surrounding financial reporting was now being stripped away.

Regulators on both sides of the Atlantic have been quick to jump on the ‘bash the accountant’ bandwagon, variously blaming the lack of competition between the remaining Big Four and the cross-selling of consulting services for the apparent deterioration in the audit reports.

Accountants in Britain are bewildered by the accusations being thrown at them. Roger Hughes, head of assurance and business advisory services at PricewaterhouseCoopers, the world’s largest firm of auditors, sums up the feelings among his peers. ‘One minute we are being accused of being fat cats in a cartel and now we are worrying that we have competed audit fees down to too low a level,’ he says.

Willens, once an accountant in practice himself, says the image of the profession is now so tarnished only regulatory intervention will save it. He expects the Securities and Exchange Commission to force the Big Four to further separate their businesses in order to split some types of consulting from the audit function.

But is this really the only answer?

Mike Rake, head of KPMG, argues that the flaws lie in US GAAP and that convergence between international accounting standards and US GAAP would be a more productive solution.

But the firms will need to work fast if they do not want to see their businesses destroyed. Several firms are already noticing audit clients taking their consulting business away and they are worried that the Financial Services Authority could lay down the law on what services accountants can offer their audit clients.

Meanwhile, the collapse of Andersen has left thousands of clients switching firms and nobody knows what skeletons lurk in their cupboards.

And although both the Foundation and the Institute of Chartered Accountants of England and Wales are working hard with the government to try and reach a compromise, they may find that events overtake them.

Yet those in the know hark back to Maxwell as the time when Britain got its act together. They say the spate of reforms which took place at the time have never been replicated in the US. Chris Higson, associate professor of accounting at London Business School, says there is no question that accounting has been moving in the right direction, it is just that the US is seeing a ‘forest fire’ that they need to deal with.

‘It is pointlessly easy to take the line that accounting is poor and facile to argue that the structure is not working because we are having a difficult time,’ he says.Rather, commentators argue, it would be better to for the Americans to look at what has gone on across the pond since Maxwell disappeared and take the lessons learned by Mirror Group pensioners to heart.

  • Lucinda Kemeny is accountancy correspondent at the Sunday Times

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