The Enron collapse and the events at WorldCom and the role played by the accountancy profession have raised questions about whether accountants and auditors can be trusted.
Both Enron and WorldCom appear to have epitomised an incentives-driven and greed-based culture, which sought short-term earnings and continuing growth at any price. We are not immune to the same pressures here. Your profession, which must epitomise integrity in financial dealings, holds the key to resisting this culture.
Indeed, that is why the government has established the co-ordinating group on audit and accountancy issues. The group’s purpose is to ensure the appropriate regulators are addressing the right issues and that there is thorough, thoughtful analysis of issues and a reassessment of existing requirements – rather than an ill-considered knee-jerk reaction.
The situation is serious enough to demand close government involvement and the preparedness to make further change where this is needed.
Our aim must be to reinforce the culture of professionalism and integrity within the accountancy and audit sector. Regulatory requirements may not be enough on their own. But they can provide an environment which fosters this. Confidence is priceless.
There is much other work in hand, not least within the new bodies under the Accountancy Foundation.
It must be right to look seriously at making major changes, for example, imposing a requirement for a change of the audit firm after a number of years. But our aim is certainly not simply to show how tough regulators can be.
The framework of regulatory oversight under the Foundation has taken time to establish. But now that it is in place, the Foundation bodies must show that they can inject into the regulation of your profession the independent element, which was at the heart of the original concept.
There are difficult decisions – for government, for regulators, for the accountancy profession, if we are to restore trust and rebuild confidence.
- This is an edited extract from a speech to the ICAEW last week by Melanie Johnson, competition minister
The accountancy profession and the government have responded to the US failures by exuding complacency. ‘It couldn’t happen here’ is the tone.
That should worry us more than anything. It can and probably will. Accountancy would do far better to put its own house in order, and government to push them into action if confidence is to be restored.
The factors that produced the American mess are here in spades. The Big Five, now Four, are even more powerful here and face fewer checks on their powers. They do over 90% of plc audits and use that statutory monopoly as their foot in the door to sell a host of other services on which they make far more profit.
Naive souls like me expected New Labour to make the huge, secretive concentrations of power in the big beancounters more accountable and less secretive.
In fact the government has become dependent on them, extending their power and giving them massive new markets in privatisation and PFI business, consultancies and endless reporting.
It blithely assumes they are too virtuous to feel the conflicts of interest that affect ordinary mortals and has given them everything they want from limitation of liability for their own cock-ups to regulation which doesn’t frighten them because they run it.
Independent regulation means statutorily based and neither dependent on nor dominated by the industry regulated. But we supinely accepted the industry’s self-interested Swinson proposals and set up a ‘Foundation’ financed by the industry with only general powers and sitting on top of the score or so of regulators already stumbling over each other.
The DTI and Treasury are looking at accountancy and corporate structures.
But the tradition of too little too late means we’ll see no flurry of activity from regulators, no legislative hearings, no huge fines or long prison sentences facing the wrong doers in the States.
The big beancounters and the profession aren’t going to do it for themselves so government must now force them. My worry is will they dare?
- Austin Mitchell is Labour MP for Great Grimsby.
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