AA in the 1990s - how the Brits started the rot

In 1991, Price Waterhouse bid for the audit of the Prudential. It produced a glossy brochure extolling the virtues of the firm and offered a remarkably low audit fee to secure the work. It also, coincidentally you realise, mentioned the fantastic consultancy services the firm could provide.

Normally such tender documents are only read by a handful of directors who choose the auditors – but the Pru’s document was different. Someone – who it has never been discovered – decided to put the tender document in a brown envelope and send it to Accountancy Age. So the readership of Accountancy Age, and many more beside, was able to learn what an audit firm was prepared to offer to secure a blue-chip client.

For a while, Price Waterhouse became Cut Price Waterhouse or Half Price Waterhouse, but the significance of the lowballing and selling of the audit soul for the good of the management consultancy fee income went beyond one particular tender and a few cheap cracks. For the accountancy profession, the PW/Pru debacle marked the low point and the end of the greed-is-good era. It ushered in the concept of corporate governance.

It was no coincidence that the PW/Pru document was sent to Accountancy Age. The issues crystallised in the tender document had been of growing concern to many in the accountancy profession who read the paper, and the editorial stance consistently reflected those misgivings.

To be fair, many of these issues were problems of success. The accountancy industry had kick-started phenomenal growth and change in management consultancy services it offered its client base. It was natural to sell those services to its existing clients who eagerly purchased the IT, strategy and financial management consultancy on top of the bog-standard audit and tax services. Suddenly audit became the poor relation, both in terms of excitement and financial return.

Audit became a commodity and we all know what happens then – the product becomes devalued and the price goes down.

Audit was facing other pressures in the early nineties. With Enron et al in the last few years, it’s easy to forget it was the Brits who invented corporate scandals. In August 1990, the Guinness Four were found guilty after a 112-day trial; Polly Peck’s offices were raided in October 1990; Robert Maxwell went overboard in May 1991 followed shortly afterwards by his business empire; and in early July 1991 BCCI was closed down by international regulators.

These were not isolated incidents, they were the worst examples of an established trend. Terry Smith in his 1992 book Accounting for Growth (detailing which quoted companies followed which dubious accounting practice) confirmed what Accountancy Age had been saying for a long time – creative accounting was a cancer eating away at financial reporting and undermining capital markets.

Auditors and finance directors seemed either unable or unwilling to stop the rot. Creative accounting schemes were touted with alacrity and if one auditor objected, you could always find another willing to ‘take a view’.

Ironically, these scandals helped the fledgling Accounting Standards Board (which took over from an exhausted Accounting Standards Committee in 1990) make the impact it did. And the Companies Act 1989 gave for the first time statutory recognition to the existence of accounting standards.

The new system of setting accounting standards no longer needed the endorsement from all the main accountancy bodies. But more crucially, there was an enforcement mechanism in the shape of the Review Panel.

In over a decade, that system has still never been fully tested in the courts. It seems ASB chairman Sir David Tweedie’s helpful picture of a gallows concentrated the minds of FDs and auditors of their possible fate if they played fast and loose with financial reporting rules. The standard-setting system got the whole-hearted endorsement of Accountancy Age.

The paper was often accused of being over critical of the accountancy industry. But its support for the ASB, especially in the early days when its position was vulnerable, was both important to the ASB and underlined the fact that Accountancy Age wanted the profession to live up to the high ideals it publicly proclaimed for itself.

The paper was attacked for pointing out the difference between the ideal and reality. But many of the reforms first discussed in Accountancy Age – and dismissed as unreasonable – are now accepted practice.

For instance, Accountancy Age called for a more transparent disciplinary procedure by the main accountancy bodies at a time when the whole process was a mystery wrapped in an enigma. The paper pointed out the conflicts of interest that firms had, many of which have now been resolved, and it called for the auditing standard-setting process to be placed at arms length from the profession – a move that has only recently taken place.

Perhaps the turning point of the nineties was the move by the fledgling Financial Reporting Council, the London Stock Exchange and the accountancy profession – with the explicit backing of the government – to set up the committee on the Financial Aspects of Corporate Governance in 1991.

The chairman was Sir Adrian Cadbury and his committee spawned the corporate governance movement.

From that point, confidence slowly returned to the British financial reporting systems. Financial reporting and compliance improved, and auditors started talking about quality and independence.

After Cadbury came Greenbury in the mid-90s, and the Hampel Committee, which produced its report in early 1998, and Turnbull on internal controls a year later.

Make no mistake, Cadbury was the brilliant idea of UK accountancy. Its original purpose was to remind shareholders of failed companies that there were other suspects in the frame rather than just auditors. Its purpose – to deflect heat from auditors – worked better than anyone could have imagined.

For the accountancy profession, the nineties started in disgrace and scandal, but through a triumph of British pragmatism ended up with its reputation restored. Its power and influence, apparently curtailed, was largely preserved.

More importantly its members’ financial interests were mostly unscathed. By the end of the decade, Accountancy Age’s headlines about UK scandals and corporate collapses was becoming an unpleasant, distant memory.

Peter Williams was the editor of Accountancy Age from 1990 to 1992.