President's Page: Responding to Enron

There is no systemic failure in this country in financial reporting, auditing or corporate governance

Peter Wyman

The collapse of Enron at the end of last year has triggered a loss of confidence in corporate governance, financial reporting and auditing, not just in America, where the problems had arisen, but right around the world including here in the UK.

In spite of all this, I have been trying to convince myself that this is a good time to become president. I am reminded of a remark attributed to Winston Churchill. Just after he had unexpectedly lost the 1945 general election, a friend tried to cheer him up by saying that maybe it was a blessing in disguise. 'Well,' came the gruff reply, 'if it is a blessing, it's bloody well disguised.' I feel rather the same way - and yet there are some silver linings emerging from behind the storm clouds.

First, overnight, accountancy has lost its Monty Python dull, boring image. According to the Wall Street Journal we are now considered hip!

The way the accountancy profession is perceived is important. We must continue to attract the best and the brightest candidates to become chartered accountants, and I will devote as much time as I can to this goal in my year as president.

Indeed, maintaining the quality of our members is everything. No matter how good the training - and ours is very good - without the best people there will not be top quality professionals able, above all else, to make the right judgments in difficult, and often complex, situations. This is why we must not allow anything to be done to diminish the attractiveness of our profession to potential recruits. This attraction is built, in roughly equal parts, on the widely recognised quality of the ACA, on the depth of the training offered to our students and on the breadth of career opportunities available to members postqualification. That is why I believe we must resist any move to restrict unduly the scope of services able to be offered by auditors to their audit clients. It is the very breadth of the career opportunities open to chartered accountants that makes the profession the choice of so many of the most able young people today.

One of the hallmarks of a profession is the way in which it extends the boundaries of knowledge and understanding in its areas of expertise. From sponsorship of research through to its application often many years later the ICAEW has, for as long as I can remember, been at the forefront. Never has this been more important than now. The Institute was a leading instigator of Cadbury, and has been at the forefront in developing corporate governance ever since. I commend to you the recent Centre for Business Performance report on risk reporting as another example of our forward thinking in this area. The Company Law Review (a report whose recommendations are fully supported by the Institute), called for a mandatory operating and financial review. Better risk reporting would make a significant contribution to the understanding of a business in a way in which the mere reporting of historical financial performance cannot - important, of course, though this is.

What else needs to be done in the light of Enron? We have been working with colleagues here and overseas to develop a coherent plan designed to address the issues raised by the Enron situation. I'd like to give you just a brief overview of some of the key points. I will use my time in office - as I have done in recent months - to consult with our members and the wider business world, develop these ideas further and, where we believe that we have a viable and worthy initiative, to push for its speedy implementation.

At the top of our international agenda is the desire to see the adoption of International Accounting Standards, which are at least as good as the standards we currently have in the UK. Obtaining universal adoption of international standards represents a huge challenge. Recent visits to the US have not entirely encouraged me in this respect, although the appointments of Harvey Pitt at the Securities and Exchange Commission and Bob Herz at the Financial Accounting Standards Board respectively give us the best opportunity we are ever likely to have. The risk of political interference in standard-setting in Europe has not disappeared altogether either. I firmly believe that the adoption of International Accounting Standards will greatly improve the quality, and indeed usefulness, of financial reporting available to investors in a global economy.

In addition to International Accounting Standards, we need global auditing standards, the International Federation of Accountants' ethical code to be universally adopted and a framework of principles for corporate governance to be developed and adopted worldwide. We in this Institute stand full square behind those working on these mammoth tasks.

On the domestic front, we need to build on all the work that has been done over the past dozen or so years since the scandals of the late 1980s and early 1990s. In responding to the challenges of the Enron situation we must not lose sight of the huge steps forward made here in the UK over that time. I know from my own first-hand experience visiting the US that many of the improvements we have made here in the UK are now recognised as models for the US to aspire to and are being carefully studied to establish whether they would work in the US. However, in recognising that much has already been achieved, I also recognise that more needs to be done to keep pace with the rapidly changing market and to restore public confidence in the profession.

Our June Council meeting took a number of important decisions to strengthen auditor independence. Audit partners will now be subject to a two-year cooling off period before they are allowed to join their audit client as an employee or director. Second, the audit partner rotation rules will be tightened and, third, the framework on threats and safeguards concerning the provision of non-audit services to an audit client will also be tightened. Detailed guidance will be written over the summer, and the new rules will be our recommended best practice from 1 October of this year. I hope they will then be incorporated into the new ethical code that the CCAB is producing in collaboration with the Ethics Standard Board.

As a result of these changes, the Institute's guidance on auditor independence will comply fully with the IFAC guidance and, perhaps more significantly, the recommendations issued by the European Commission following Enron on what constitutes best practice for auditor independence. I know full well that these proposals are not universally welcomed either by the audit firms or by business. However, I believe that the advantage of being able to say that we fully comply with international and European best practice outweighs the undoubted inconvenience and disruption that these changes will cause.

And even these changes may not be enough to restore public confidence. In recent months I have been round Europe and half-way across the world, from Westminster to Washington and back to Whitehall, talking to governments, regulators, standard-setters, business organisations and professional bodies, listening to their views, and explaining everything we have done in the UK.

We must also give careful consideration to a number of other suggestions-that have been made, including; an enhanced role for audit committees, including a clearly defined role in setting policies for the awarding of non-audit work to the auditors, and not only recommending the appointment of the auditors each year, but also agreeing their remuneration; whether the attendance of nonexecutive directors at the normal meetings between a company and analysts would improve the quality of reporting, and stimulate an important two-way flow of information; how we can create greater transparency within and of audit firms themselves. At the same time, I also want to see how the Institute's regulatory functions can be made more open.

This is by no means an exhaustive list. Many other aspects of corporate governance, accounting and auditingstandards as well as our own guidance to members are being closely looked at. For my part I commit that this Institute will continue to be a positive participant in this process.

Let me repeat, however, something I have said many times in recent months. There is no systemic failure in this country in financial reporting, auditing or corporate governance. We must build on this strong platform, not knock it down to start again.

At times we - and others - will identify superficially attractive reforms. I believe that there must be one simple and over-arching test. Will the reform improve the quality of financial reporting and auditing? Quality is the litmus test we must apply, while guarding against the law of unintended consequences.

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