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Enron was the
seventh largest company and the largest known bankruptcy in
the United States of America and has since been deleted from
the New York Stock Exchange. It alone has left behind $15 billion
in debts and more than 20,000 employees without their jobs.
Accounting firms like Arthur Anderson and Merrill Lynch were
badly tainted for their unlawful handling of Enron's finances
. Not to mention the many shareholders that Enron left stranded
after its collapse. There are various investigations under way
to indict the culprits by the federal departments of Justice
and Labor, Securities and Exchange Commission, Financial Accounting
Standards Boards, National Association of Securities Dealers,
etc. The wrong has however occurred and the stock that was worth
$90 per share in January 2001 is now worth close to nothing.
WHERE ENRON WENT WRONG
The CRS report of the Congress describes the descent of Enron
as follows: The accounting techniques that went unnoticed by
all including the Wall Street analysts did Enron in. Enron used
its subsidiaries often created in foreign countries to keep
the losses from appearing in the company's financials, indicating
a false position of financial stability for Enron. This kept
the stockholders and employees from selling their shares and
allowed certain management team members to bail out by selling
their stock before its downward spiral. Financial Times has
described Enron as a virtual company with virtual profits in
its online analysis. The fall of Enron has bought to life many
auditing issues, accounting scams, corporate governance loopholes,
security analyst regulations, banking concerns and derivatives
problems. With the attention and importance Enron received,
it is hoped that the reforms it creates are sturdy and long-lasting.
Let us now examine with possibilities and reasoning if a future
Enron-like failure can or cannot occur in the United Kingdom.
AGAINST
A FUTURE ENRON - NOT A THREAT FOR THE UK
The Chairman of the London Stock Exchange, Don Cruickshank claimed
in 2002 that accounting scandals like that of Enron or WorldCom
are unlikely to occur in the UK due to better accounting profession
and superior corporate governance. He also said that though
possibilities of accounting scandals of that magnitude cannot
be completely ruled out, the probability of the scandals erupting
in the UK is much less than that in the US.
Following are reasons for why the risk of Enron-like failures
is avoidable in the UK.
REPORTING SYSTEM
The regulations for audit systems and auditors is said to be
more stringent in the UK than in the US. The fear of repercussions
is likely to be keeping the finances of firms in the UK in straight
order. The auditors follow the standards listed by the Auditors
Practice Board and the Institute of Chartered Accountants and
the accounting is conducted under the regulations set by the
Accounting Standards Board. For that matter a former chairman
of the SEC, Arthur Levitt has cited the regulatory system of
the UK as a useful example to the US.
CLOSE WATCH ON SUBSIDARIES
The unregulated groups like those of Enron are watched over
more closely by the authorities in the UK for regulatory oversight
of financial subsidiaries. It was here that Enron managed to
bury all its losses and keep them off their books.
POWER OVER AUDITORS OF FINANCIAL FIRMS
Auditors of regulated financial firms are required to report
to the UK authorities regarding any obstructions to the power
they exercise over the employment conditions of auditors. Whistle
blowing is an enforced act and one can be disqualified for failing
to do so.
STRONG CORPORATE GOVERNANCE
Most firms in the UK follow the corporate governance set by
the authorities. This governance is superior to that conducted
in the US and thereby exhibits a lesser chance of an Enron like
disaster happening in the UK. Companies in the UK can face delisting
if they do not comply with the corporate governance. The Inland
Revenue also has the ability to pass information regarding suspected
accounts to the relevant authorities.
LIMITED LIABILITY PARTNERSHIPS STRUCTURE
In the US a general partnership can become a LLP simply by filling
the requisite paperwork with the state office. In the UK, it
is not so easy. One has to incorporate a separate entity at
the Companies House and then transfer business into it.
AUDIT COMMITTEE RESTRICTIONS
Chairpersons of listed companies are expected to be denied membership
to audit committees for an attempt at avoiding an Enron-like
disaster. Non-executive directors will also be given a time
limit to the amount of time they can sit on audit committees.
FINES AND JAIL TIME
Mislead auditors can take company bosses and company staff members
to jail and have them part with substantial fines under the
planned changes to the UK laws. Even though it is already illegal
to mislead an auditor, the law stops there and is now likely
to get more severe. Directors who refuse to state that they
have not held back necessary information from their auditors
are subject to high fines.
DISCLOSURE OBLIGATIONS
In the UK, the disclosure obligations according to the Listing
Rules require a company to forewarn its shareholders of any
events that will bring changes to the value of the security.
All off-balance sheet transactions must also be disclosed accordingly.
LIMITATIONS ON DIRECTORS OF THE COMPANY
For most instances, the UK prohibits loans to directors of the
company and also requires that directors report transactions
in company securities to the company itself and the exchanges
upon which it is trading. The directors are also required to
abide by the time restrictions that do not allow them to trade
at specific time periods besides fully declaring their interest
in the company.
FOR
A FUTURE ENRON - MAY AS WELL OCCUR IN THE UK
Let us now examine the reasons indicating that an Enron-like
failure can occur in the UK.
POWERS OF AUDIT COMMITTEES
In the UK there are no fixed rules regarding the power of audit
committees. The committee's rules and regulations are set by
the agreement of the board. The audit committees are meant to
be active and preserve the interests of the shareholders. However
the code for auditors only lists that the committee should keep
under review the scope and results of the audit and its cost
analysis along with the independence and judgment of the auditors.
In this regards, the UK is threatened as it bestows too many
powers to the board to enable the auditing procedures effectively
but moving away from that would be an action against the existing
policy of 'substance over form' prevailing in the UK.
AUDITORS FREEDOM AND OBLIGATIONS
An auditor in the UK can be involved in auditing and non-audit
related services. This is an area that was highlighted in the
Enron investigation. Despite of that fact the Guide to Professional
Ethics published by the Institute of Chartered Accountants requires
an auditor to safeguard the qualities of objectivity and independence;
there is no rule in the UK governing this.
PROLONGED COMPANY - AUDITOR RELATIONSHIPS
The UK authorities are unable to do anything to stop the auditor
and company relationship from becoming too close, so as to,
have the auditor use accounting practices that mislead or misinform
the investors in any way. The audit firm can continue working
for the company as long as both parties desire but the value
of the auditing services must be declared in the company financials.
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