Questions raised in City over reliability of leading British companies' accounts

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The Independent Online

Although the recent spate of corporate scandals has predominantly involved American companies, it has left hanging one nagging question: "Could it happen here?"

Although the recent spate of corporate scandals has predominantly involved American companies, it has left hanging one nagging question: "Could it happen here?"

Queries have been raised about certain accounting practices at UK companies ­ Cable & Wireless and Boots are two examples ­ though no fraud was involved in either case. But more serious questions have been raised in the City about the quality and reliability of the accounts of other British companies, though for legal reasons they cannot be named here.

An auditors' report is supposed to certify that the company's accounts represent a true and fair view of its profits and financial position. It is also supposed to highlight failings.

But auditors cannot protect investors if they themselves are misled by a company. Last summer the Serious Fraud Office launched an investigation into Independent Insurance. The company, headed by Michael Bright, had collapsed after admitting it faced unquantifiable losses because claims had allegedly not been entered into its accounting system. The inquiry could take up to three years.

In the United States, there have been concerns that company accounts are not as clear, or transparent, as they should be. There have been complaints ­ also expressed in Britain ­ that corporations are resorting to financial jiggery-pokery to present a constantly improving profit line.

Some accountancy experts believe the WorldCom fraud should provide "a wake-up call" to Britain. The Association of Chartered Certified Accountants said: "Suggestions that this is a US problem which cannot be repeated in the UK are unfounded and complacent." The association said conditions which encouraged "aggressive earnings management" at WorldCom ­ complex accounting, overhyped market expectations and management remuneration based on short-term performance ­ can happen anywhere.

But other professionals believe Britain has some protection from the worst kind of corporate excesses because of its stricter accounting standards and more robust guidelines on boardroom structures.

Peter Wyman, president of the Institute of Chartered Accountants, said: "It is highly unlikely this could happen here but you have to accept that the UK is not immune from fraud." He added that Britain suffered its share of corporate scandals in the late Eighties and early Nineties with the Maxwell affair and the failure of BCCI and Polly Peck. Rules and regulations were tightened.

The Cadbury report on corporate governance recommended the separation of the roles of chairman and chief executive to avoid power being concentrated in one person, as happened at WorldCom. It also recommended a mixture of executive directors and genuinely independent non-executives to ensure proper scrutiny. In the US, the roles of chairman and chief executive officer are frequently combined.

Accounting standards also differ internationally. The United States has a complex, rule-based approach, which can provide "a road map to abuse" and encourages rogue executives to demand of their auditors "show me where it says I can't do it".

Britain adopts a more "substance-based" approach where auditors are required to look beyond the letter of the law. For example, Britain has an accounting rule called FRS5 that would have barred the unorthodox debt manoeuvre which proved the undoing of the collapsed energy trading group Enron.

There are moves to harmonise international accounting standards. The United States has dragged its feet about adopting the international standards which operate in Britain. But that case looks weaker as each fresh scandal is unearthed.

Mr Wyman said: "I have been asked to go to the US twice in the past few months to see the Securities and Exchange Commission, the US regulator, and congressional committees. They are saying, 'We need to follow what you've done in the UK. Explain to us how it all works'."

In Britain, the Government is trying to do its bit. The Department of Trade and Industry and the Treasury are reviewing British auditing practices. It is also involved with the Financial Stability Forum which is working with American investigators to establish what lessons can be learnt from Enron.

The British system still has weaknesses. It is common practice for large companies to recruit the head of their audit team as their finance director. The same auditors are then expected to remain independent of their former boss. And accountancy firms offer audit work to clients for low fees so they can gain lucrative consultancy work.

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