Memorandum submitted by Saffery Champness
Thank you for your letter of 25 March addressed to Clive Nicholson. We welcome the opportunity to comment on the issues arising from the Enron collapse.
We believe that it is too early to draw firm conclusions on what action should be taken to prevent a similar situation in the UK. The investigations are continuing in the US, and many of the basic details which contributed to the collapse have not yet been made public.
Furthermore, once the full facts are available, it will be necessary to identify to what extent the same factors could contribute to a similar scenario in the UK, where the business and professional culture is, we believe, still very different to that in the US. It is certainly the case that our accounting, regulatory and ethical rules are not the same and it could therefore be counter-productive to attempt to revise those to meet perceived problems arising from circumstances that would not arise here. Most importantly, we believe that much harm could be done, with unforeseen and unfortunate results, by making knee-jerk changes in the UK without full consideration of all the relevant facts.
Already, commentators have suggested changes should be made urgently which we believe may not result in the expected benefits. For example, it has been suggested that public company auditors should be forced to rotate every few years. However, the layman does not appreciate that arguably audits are less effective when the auditor is learning how the business and its people operate. More frequent changes of auditor could result in more frequent audit "failures". This in turn could reduce investor confidence and undermine the financial markets generally.
Perhaps, a more effective method of controlling company failure would be the compulsory rotation of management!
The Enron situation has however highlighted a serious difficulty which does require urgent attention. As a result of mergers of the major accounting firms in recent years, listed public companies have effectively had their choice of auditor restricted significantly, to what has been known as "the big 5". As a result of the apparent failures by Andersen, it appears that the restriction will be even greater in future, with "the big 4" only remaining as options for the largest groups of companies. We believe that this trend is not healthy and should be addressed possibly through the compulsory use of "peer reviews" which could involve other firms of accountants.
The independence of auditors has been much discussed in recent years, and the Enron situation has again highlighted the apparent threat posed to auditor independence by the provision of non-audit services by the auditor. We agree that there should be concern when there is a perception that auditor independence is compromised, as this undermines confidence in the results of audits and therefore the markets generally. However, we believe that an appropriate balance needs to be struck, as it is often advantageous and efficient for the knowledge of the business gained by the auditor to be used in providing other services. A blanket ban on audit firms providing non-audit services is likely to increase costs for business and reduce the effectiveness of the services provided.
In summary, we suggest that it is necessary to keep financial regulation under review, and to make changes where necessary and where the advantages to be gained are clear and certain. However, we caution against making radical changes hurriedly, where the results are uncertain and potentially undesirable.
4 April 2002