When it comes to making sure that company accounts are as honest as they can be, nothing proposed by Patricia Hewitt can match the incentive effect of the liquidation of Andersen, one of the world's largest accounting firms.
The Secretary of State for Trade and Industry yesterday reheated a number of proposals for strengthening the independence of auditors in an attempt to persuade us that the Government is doing something about the Enron, WorldCom and Xerox cases.
Of the ideas that Ms Hewitt floated (or refloated) yesterday, the most important was a proposal to ban accountancy firms from providing consulting services to the companies that they audit. Auditing is a regulatory function, providing reassurance to shareholders that accounts are true and fair. It should not be confused with the desire to make a profit from providing other services to the company. In practice, the potential conflict of interest has caused remarkably few problems in this country, but it is unsatisfactory in principle that the accountancy profession should police itself.
Less persuasive is the idea that auditors should be appointed by non-executive directors at arm's length from the managers of a company, which is almost too trivial to bother with. The suggestion that companies should be forced to change auditors every seven years or so has more merit. It would be expensive, because a new team would have to start from scratch, but that is part of the point.
None of this, however, will have nearly as much impact on the attitudes of auditors as the shockingly sudden end of Andersen. While some of the accounting rules in the US seem laxer than ours, no one can dispute that, since the Enron fraud was discovered, the law has operated as it should and with commendable speed. The Andersen partnership has paid the ultimate price for wrongdoing by a few of its number in colluding with fraud and shredding the evidence.
That ought to be the surest guarantee that auditors will discharge their duties to shareholders more diligently in future.
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