Strengthening the foundations

In a remarkably short space of time the world of accountancy in the UK and the US has come to view the collapse of energy giant Enron and the remarkable confessions made by its auditor Andersen as a seminal event.

Rarely has an accountant achieved the level of media exposure that Joe Berardino, chief executive of Andersen, has managed over the past few weeks.

And that for his remarkable public admissions that his firm made an ‘error in judgement’ while working on the Enron accounts, and that members of his staff shredded documents relating to the company even after official investigations had begun.

These events mark a watershed for accountancy. Never before have so many clamoured for change in, and for, a profession that might otherwise have gone unnoticed by a public largely unconcerned with the dull details of doing the books.

But observers, members of the profession and regulators would already know that change has already been underway for some time and probably has some way to go. Enron and Andersen, however, have thrown all that into sharp relief.

But as they learn more, what will strike people most is how little they know about the profession and how many of its procedures appear to run against a need for transparency and accountability.

An auditor selling non-audit services to an audit client; the immense longevity of some audit arrangements (more than 100 years in the case of Equitable and Ernst & Young); the fact that so few of the firms publish their own accounts; the sparsity of information from an auditor’s report reproduced in a company’s annual report and accounts – all are well-known and, at times like these, disturb investors, politicians and regulators alike.

And that’s why Accountancy Age this week takes the step of laying out a ten-point plan for restoring faith in the profession. Because the profession is at the heart of British business, commerce and capital markets and it is now clear that action is required to make it clear that the UK profession is acting in the right interests.

That said, it was clear to many that change was desperately needed even before the catastrophe of Enron. The high-speed development of technology, increasing globilisation of markets and skills and the blurring of boundaries between disciplines such as accountancy and the law have made people sit up and think about where the profession is going, what it needs to develop and how it will get there.

Our ten points therefore would stand as relevant topics for debate even if Berardino had never made the fateful confession that Andersen had got something horribly wrong.

But in placing the identifying issues for change it is crucial that the spotlight should fall on the right issues. There’s no point in change for change’s sake.

But all professions face a need to adapt to their environment, an environment that is ever-changing. New technologies and globilisation create the demand for new skills, new procedures, fresh regulation. Nothing stands still.

It goes without saying that not everyone will agree with our ideas. Already some members of the profession have moved to take defensive action in the wake of Enron. An early day motion in the House of Commons calling for mandatory audit rotation prompted public hostility as accountants moved to make it clear they thought it was a bad idea. It remains curious, however, how so few of the most senior people in accountancy have been moved to publicly defend their profession.

But intransigence at this time is not enough. A lively and engaged debate would be the first step in sending a signal to investors and public that the profession cares and understands the need for something ‘to be seen to be done’.

Dissenters, rather than addressing the substantive issues, may attempt to cast doubt on the feasibility of these proposals, claiming there isn’t the will in the profession to see them through or perhaps that they might create unintended and unwanted fall-out elsewhere.

But these kinds of objections, we think, are easily overcome. Taking the ten as whole we are happy that each one could be brought into effect with little or no extra cost. Indeed, for some of our ten we could argue they would actually make savings, a crucial factor given the burdens that compliance with regulation and professional rules can bring.

In terms of professional will, it is to be hoped the institutes see it as their job to be concerned about the health of the profession in the areas in which it touches British business and the capital markets.

And if these ideas require legislation – a business-friendly government, as Tony Blair and Gordon Brown have often claimed it is – should not be able to put them aside given the furore and concern created by Enron and Andersen.

Fallout is difficult to predict. But at this stage there appear few, if any, side-effects from the ten points that would not turn out to be a help rather than a hindrance.

Balances would, no doubt, have to be struck, but that is the case for any worthwhile reform.

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