Free Accounting Essays - An Enron in the UK? – Will it or won't it happen?
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.
NON-FINANCIAL COMPANY’S INVOLVEMENT IN THE UK
Like Enron, it is very possible for non-financial firms to be engaged in extensive activities in financial markets and there is no regulation in place to avoid such occurrences.
NON-AUDIT FEES
Often companies have paid auditors for non-audit work which is substantially more than what they paid them for audit work, even up to 30 times more. This proves to be a deterrent in the performance of the auditors and an opportunity for greed and unlawful actions.
COMMUNICATION WITH INVESTORS
The Director of UK and European Business Development at Georgeson Shareholder states that by communicating and informing private investors of annual reports and other information via various mediums, they will not continue to tarnish the name of the company in the local media and turn the public against it.
SLOWDOWN OF THE UK ECONOMY
Businesses commit fraud when there is pressure on them in a slow economy. If the UK undergoes such an economic slowdown, the frauds can become intolerable and be exposed leading to an Enron-like debacle.
LACK OF SECURITIES AND EXCHANGE COMMISSION
The UK does not have a SEC. The substitutes for SEC like the Serious Fraud Office and Crown Prosecution Services are unable to match the regulation work performed by the SEC.
CONCLUSION
We thus see that there are two opposite views on whether an Enron-like scandal can cripple the UK. On one hand there are the stricter reporting regulations and corporate governance in the UK. On the other hand there are the auditing scandals like Maxwell and Polly Peck. No doubt that the UK scandals have not taken on the proportion of the US scandals like Enron, WorldCom and Xerox but having the potential is a threat enough. However possessing an edge over the reporting and governance in the UK is a tremendous factor for avoiding such scandals.
Even though the probability of the UK undergoing an Enron-like failure does exist, one can always look towards the lessons gained by the US companies and their path to recovery, salvation and atonement.
