‘We can’t wait to fix the Financial Accounting Standards Board. It’s been broken and it’s been broken for too long.’ Harvey Pitt, chairman of the SEC, thus revealed his contempt for the body that sets US accounting standards when he testified to the Senate Banking Committee in late March. FASB, it seems, is fair game in the wake of the Enron scandal.
But while Pitt may be right to charge FASB with lamentable complacency, he should also be taking a long hard look at the system of national regulation in which he plays a key role. It’s not just the US at fault here – although its failure to see much farther than the Canadian border certainly has a part to play.
The fallout from Enron has been global in scale, yet financial regulators continue to react within the safety of their national boundaries. Sure, the bulk of affected employees and investors were within the US, but a good chunk of them sit in other markets. And, yes, the accounting profession in the US may need to pull its socks up, but you’d be hard-pressed trying to tell Andersen executives in London that their business has not been drastically affected too.
Mind you, speak to accountants in other markets and you’d think they were living in another world. The Institute of Chartered Accountants in England & Wales is busy telling people that Enron is something that just wouldn’t happen under its jurisdiction. ‘There is a world of difference between the US and the UK,’ says Peter Wyman, deputy president of the ICAEW – failing, perhaps, to notice that the Atlantic really isn’t that big. ‘A lot of these problems were never problems in the UK. The US has a very rule-based approach while we have more of a judgmental approach, which asks: Do these accounts provide a full and fair view? Without wanting to sound complacent, there is no systemic failure in the UK.’
Maybe not. Not yet, anyway. The systemic failure may lie in the nature of cross-border regulation. The International Accounting Standards Board (IASB) remains relatively weak – largely as a result of the intransigence and self-interest of national regulators.
Despite the assurances of those national regulators, Enron has highlighted issues that really need to be dealt with on an international scale. There is, after all, little point deciding that companies in the UK should not be forced to rotate their auditors every five to seven years, if the US comes to a different conclusion. Such regulation offers little protection for the UK employees of, and investors in, the next Enron.
Better international regulation could also temper knee-jerk responses. There is a real likelihood that several markets will now resort to an all-out ban on auditors carrying out consultancy work for the same client. While there are definite conflicts of interest inherent in the equation – and some action does need to be taken – there is also a need to take a step back before imposing draconian measures. For example, a total ban might prevent auditors from alerting clients about weaknesses in their accounting systems as such a tip-off could be seen as consultancy work. It could also prevent the auditing firm with its prior, in-depth knowledge of a company from preparing reports for transactions such as an acquisition or rights issue.
The IASB has been working with national regulators to examine the quality of existing accounting standards in the light of Enron. But it, or some newly created supranational body, needs to be given more power and jurisdiction in today’s global financial markets. Unfortunately for some, that means national regulators being prepared to cede a degree of their own power to a higher authority.
Mr Pitt should listen up and take heed. The system has been broken and it’s been broken for too long.
