Living in Enron’s shadow

December 2, 2002 marked the anniversary of the bankruptcy of the Texas-based, international energy company Enron, which was touted to prove that the era of boom and bust was over and disprove the theory that what goes up must come down. The fallout which was severe in the USA began a trend that saw legislators, regulators and even the accounting profession trying to clean up the awful mess that Enron unraveled. What was initially regarded as an American problem has begun a wave of changes around the world. No half-decent accountant would claim that the accounting rules did not contribute to the several failures which have surfaced since Enron. Indeed, one may have to thank Enron for the revelations which followed including the even more crookish bookkeeping at WorldCom and other problems at Tyco, Global Crossing, Adelphi Communication and Xerox, to name a few. It has just been reported that four of the top dogs in KPMG LLP have been sued for their role in connection with the audits of Xerox which had earlier admitted to having published wrongly reported profits for the years 1997-2001, necessitating earnings restatement of US$1.4Bn in reported income. In America, the response was swift and effective and the Republicans have been quick to put space between themselves and the “corporate crooks.” Indeed within months America passed the Sarbanes-Oxley act which is perhaps the most wide-ranging piece of business legislation since the nineteen-thirties.

Accountants however no matter how discredited will argue their case and that of their clients and were vehemently opposed to substantial reforms until the evidence became so overwhelming as to warrant a Mea Culpa. Even so, they took advantage of their still powerful lobby to dilute provisions in the bill that would have forced companies to rotate their auditors every five years on the grounds that the close relationship built up during that time could impair objectivity. All that is required by the act is rotation of the audit partner. The ludicrousness of this watered down provision has been severely exposed at Xerox where rotation was more like shuffling of the deck. The problem for the US however was that legislators had moved on to Iraq and to a lesser but more hypocritical extent North Korea, leaving the regulatory bodies almost rudderless. The Treasury Secretary had resigned and has only just been replaced by John Snow; there was no chairman of the Securities and Exchange Commission or the new accountancy regulator. Harvey Pitt, the staunchest backer of the accounting profession finally mustered up the decency to resign his position as Chairman of the SEC but, only after he had recommended William Webster as head of the new accountancy regulator. Pitt had somehow forgotten to tell the SEC appointments panel that Webster’s company was being investigated for fraud. Sounds like it is still an awful mess!

In the UK the attitude was “that it could not happen here, not with our principles-based system of accounting rules” and relying partly on the fact that they had addressed their problems in the seventies. Many however would disagree and there is a view that the profession has been molly-cuddled and given just about everything it has asked for. During the year twelve months following Enron, the Institute of Chartered Accountants of India issued no less than twelve new accounting standards and has moved the issue of audit rotation right up front. Like every where else the major firms are strongly resisting audit rotation with what is considered the typical objection - that it will reduce audit efficiency and increase costs. What nonsense!
In the Caribbean the interest has been largely academic although in Trinidad and Jamaica the accounting profession in those countries has agreed to examine the accounting standards in use in those countries. From all reports the regional umbrella accounting body, the Institute of Chartered Accountants of the Caribbean appears to have done nothing even in the form of a study to examine any weaknesses which we may be harbouring. The state of the profession in Guyana reflects the backward capitalism that Professor Clive Thomas has been writing about in his columns and is almost as tragic as our political situation. Criticisms of bad corporate governance and poor accounting practices are stifled with the threat of legal action and we recall the Editor-in-Chief apologising to Banks DIH and DDL for certain references to their companies in the Business Page series on Enron.
 
Later on, Guyana Stockfeeds Chairman and Managing Director also threatened legal action after Business Page reviewed and found it necessary to comment on some deficiencies in accounting and governance reflected in that company’s annual report. (Badal’s letter appeared in S/N October 27, 2002). In what was the most egregious example of disregard for shareholders, DDL has also failed to respond to questions from a shareholder raised both in a letter to the company as well as in the press. To make matters more laughable however, the Institute of Chartered Accountants of Guyana has spent the better part of 2002 looking for reasons to discipline Business Page contributor who is a member of the Institute. The “complaint” was made orally by a senior member of the Council of the ICAG whose zeal in pushing and influencing the case raises doubts about whether his concern is entirely professional. Surely after the great job done by Enron and its auditors Andersen, the profession is in disrepute and it would be giving too much credit to any member to suggest that he can bring the profession into disrepute. There are many lessons we can learn from Enron, the first of which is that it would be wrong to conclude that serious questions concerning the reliability of accounting information and the conduct of the auditing profession are present day  issues or that there are no more bad apples. Abuses and failures have been known to the profession and business community for several decades and have often been attributed to auditors being asleep at the wheel. At the same time one only needs to read the professional press to see the several cases of professional misconduct and legal action against the top auditing firms.

Auditor independence while always considered a foundation of the profession has never been fully possible in the past, nor indeed is it possible now. Some of the difficulties faced in practice are the inherent, close ties between auditors and the company’s management including many who are recruited directly from the audit firms, the potential conflict which arises when the audit firm derives very high non-audit fees from its audit clients and the fact that the auditor challenges the management at the risk of losing the audit or having his justifiable request for fee increases rejected. The very foundation of the profession has been shaken as financial considerations are perceived to have become dominant in the client relationship. In other words, profit before the profession. While in the past key financial positions were held by qualified accountants operating at least in theory under strict rules of professional conduct, this has changed with the rise of the business school graduates as exemplified by the former CFO of Enron, Andrew Fastow who is now facing a jail sentence for his role in conceptualizing some of the cleverest schemes in the Enron affair. In most countries the accounting profession is self-regulated i.e. it sets its own standards of entry, examinations, post qualification experience, conduct and discipline. Accounting firms check themselves and sometimes each other (peer review) and it is known that one year before the Enron scandal broke  Deloitte and Touche had given Andersen a clean bill of health following such a review. The US standards are rules-based and can often be circumvented by clever lawyers and accountants while the international standards are principles-based and are sometimes considered too loose. Enron was yes, a failure of accounting but also of many things else. Everybody got greedy and while the dividends kept rolling in and the stock prices soaring who cared whether the directors were overpaid or whether the books were cooked? The financial press failed to do its job while the politicians were all too happy to take donations in cash or kind from the business community and even, as in the case of Enron, go out there and bat for it.

Christopher Ram is a member of the Association of Chartered Certified Accountants (ACCA) and is the managing partner of Ram & McRae in Guyana, South America.