Given the pressure to break up the audit oligopoly in the wake of the Carillion crisis, what will the likely impact be on audit in the UK in general? We interview Nigel King, the Chief Strategy Officer for SafePaaS and Lecturer in Information Technology at Nottingham Trent University. Nigel lived through the wake of the Enron collapse, the demise of Arthur Anderson and the process that gave rise to Sarbanes Oxley. We talk through the similarities and range of outcomes that Carillion gives rise to.
Nigel, what do you see as the similarities?
People may not remember what a titan of industry Enron was in its heyday. People really thought they had discovered new ways of doing business, new ways of creating markets. They were this shining light in the business world.
When the whole thing came crashing down, everyone was thinking, “How could we have believed such stuff?” and the Auditor for Enron kind of took the fall for our collective guilt. That is the other name that is connected to the Enron collapse that is notable, Arthur Anderson. They were also a titan of their industry. I was personally a bit angry that the qualifications that I had worked so hard for were brought into disrepute.
So, what did you think would happen what you saw Enron collapse?
I had been fortunate to work in a few companies that skirted with disaster in my professional career, and I saw a pattern. The volume of sales was well short of predictions, but the profit numbers always came in on forecast.
The finance director would be searching for any reserves or provisions that he could argue that he did not need. Eventually the cupboard is bare and a less than stellar result is published. Then we have a new finance director.
And then we have a terrible result as the reserves and provisions get re-established. Then the pattern restarts. It became clear to me that the only way that this cycle gets broken is to force the auditor to change often which in turn meant that the processes of audit had to become both more rigorous and more automated.
Are there any differences that you see between what has happened after Carillion and what happened after Enron?
Yes. The policy debate after Enron was amazingly transparent. You could see the lineage from the public complaint to the policy being adopted. I have been amazed at how quiet the policy debate has been after Carillion and how relatively unscathed the auditor has been. After all, one of the few precepts that you have drilled into you as an auditor is that you are valuing a company as a going concern. You have to state, not only that the accounts represent a True and Fair View, but that the true and fair view is based on the assumption of the company being a going concern. It seems a pretty major failure, to make that claim with a company that represents such a large portion of the UK economy for it to be irrecoverable 6 months later.
Are there things that you expected to happen that have not?
Yes. There were certainly actions brought by many parties against the auditor and they were just dismantled. There were also cases brought against the executives. As an accountant by profession, it was very interesting to see the arguments of what was, legal, what was ethical and what was purely an accounting device. I think the exposure of those things was useful for the public’s scepticism, which is what keeps those schemes from gaining traction. I do not see the same sense of learning in the UK.
What impacts do you think this will have long term on the Audit Profession in the United Kingdom?
Well, we are seeing the pressure to break the oligopoly. It would be worth examining as a culture, why the industry itself tends toward oligopoly and what measures we should have in place to ensure that someone checks the work of the checker.
Given that regulations, similar to Sarbanes have now been enacted in many jurisdictions, do you think there is likely to be a UK SOX in the way that there is a J SOX derivative?
I think there are already enough regulations in the UK. It does seem that the emphasis in the UK is toward the board of directors taking more responsibility. As a culture, if we demanded more of our boards, if they were visible and could be seen to be engaged with the audit profession it would correct.
Nigel, thank you for taking the time to join us.