Toothless regulation of the accountancy profession, together with its increasing commercialisation in the UK, leaves Britain more at risk of major auditing scandals than the US, according to Prem Sikka, professor of accountancy at Essex University.
Sikka, who publishes a critical book on the accountancy profession this week, said: “At least in America the Securities and Exchange Commission is trying to do something about things.
“It took the SEC five months to organise a case, bring a prosecution and secure a conviction against Arthur Andersen over the collapse of Enron. Here, it took 10 years for Department of Trade and Industry inspectors to publish their report on Robert Maxwell. In the case of BCCI, the biggest banking fraud of the 20th century, the DTI has not even ordered an investigation.”
Tomorrow Professor Sikka will launch his book Dirty Business: The Unchecked Power Of Major Accountancy Firms, in the House of Commons with co-author Austin Mitchell MP. The book is billed as a devastating critique of the “Big Five” accountancy firms and the professional bodies that regulate them. “In it, we will reveal how the big five accountancy firms operate cartels, launder money, obstruct enquiries and participate in bribery at an international level.”
Sikka — seen by some chartered accountants as having extreme views on the alleged venality of their profession — argues that audit reports published by the big five firms are “not worth the paper they are written on.”
The pressures on accountants to turn a blind eye to companies that are seeking to “massage” their accounts and “manage” their earnings have grown as accountancy firms have branched out into a panoply of additional services including tax advice, corporate finance, management consultancy and even law. Audit is often used as a loss leader to get a foot in the door and sell these other services to clients.
Sikka said: “As Enron demonstrated, audit firms cannot run client companies’ internal audit departments and accounting systems, recruit company executives and devise their salary packages, advise companies on mergers, create offshore subsidiaries, design tax-avoidance schemes and then pretend that somehow they can report on the same in any objective manner.
“By selling consultancy to audit clients, audit firms become extensions of corporate finance and planning departments — no different from an employee, or a company division. By blowing the whistle, audit firms risk losing fees. They cannot risk being questioned about their role in devising opaque corporate structures and offshore subsidiaries. It is hard to think of a single case in which company auditors collected consultancy fees and blew the whistle on questionable corporate practices.”
Last week Accountancy Age estimated that the industry earned fees of £7.4 billion from its clients in the UK last year.
There are also concerns about the self-regulating nature of the UK profession. Regulators such as ICAS, ICAEW, the Joint Disciplinary Scheme and the recently established Accountancy Foundation are funded by the industry. Many feel this makes it impossible for the regulators to take an independent stance.
“JDS is a useless organisation,” said Sikka. “It took 10 years to investigate the Maxwell scandal and then blamed a Coopers & Lybrand partner who was already dead.”
He suggests that the 23 separate organisations that oversee the accountancy profession in the UK should be swept aside and replaced by a single, independent regulator with real teeth.
Sikka said: “If accountants really thought their industry was clean they would have no objection to an independent industry regulator.”
He added: “At the moment the auditors’ only duty of care is to the [client] company. If they had the slightest interest in reform, ICAS and the other professional bodies would seek to amend this to include individual shareholders, creditors, employees, pensioners. All the accountancy firms have colluded in ensuring their only duty of care is to companies — notably through the 1990 Caparo vs Dickman case in the House of Lords.”
That seminal case ruled that an audit was an essentially private transaction between auditor and their client. The upshot is that — just as the accountancy profession’s lobbyists desired — investors who rely on published accounts to make their investment decisions have no recourse in law against the auditors if the accounts turn out to be inaccurate, or even false.
Senior British accountants play down what they regard as Sikka’s pessimistic outlook, arguing that a tightening up of accounting rules since the Robert Maxwell, Polly Peck and BCCI scandals means the UK is in fact much better protected than the US.
This article was published in the Sunday Herald on 30 June 2002. It was the first time I spoke to Professor Prem Sikka.