The government will give the accountancy profession a generally clean bill of health today after a year-long investigation. It has concluded that the structure of Britain's auditing firms, the rules governing their conduct and the nature of their relationship with clients are sufficiently robust to eliminate any immediate risk of an Enron-style corporate collapse here.
However, Patricia Hewitt, the trade and industry secretary, will impose some important changes as she unveils the findings of the investigation.
She will make it clear that vigilance is critical to guard against lapses in professional standards, and will demand greater transparency from the big accounting firms. She will insist on clear procedures to ensure auditors do not develop cosy relationships with their clients, and transfer regulation of the profession from the accountancy federation to the more independent financial reporting council. But the firms will not be forced to ditch lucrative non-audit work for clients – notably providing tax advice – unless conflicts of interest threatening the auditor's independence are identified.
Today's report is the third tranche of new rules to be introduced on both sides of the Atlantic in only 10 days – all aimed at improving corporate governance and strengthening auditor independence to ensure there are no more Enrons.
First came the parallel reports from Derek Higgs and Sir Robert Smith; then the securities and exchange commission's introduction of new regulations to implement more of the Sarbanes-Oxley legislation; and now the government has weighed in with the findings of its own inquiry. That the accountancy profession has emerged relatively unscathed from such a wide-ranging examination of its role and responsibility, conducted against a political backdrop of fear and retribution, is being attributed to the role played by Peter Wyman, the president of the Institute of Chartered Accountants in England and Wales.
For the past year, Mr Wyman has been engaged in shuttle diplomacy between London, Washington and Brussels. He has persuaded legislators, ministers and officials that the accountancy profession will not shirk its responsibilities to shareholders, and has argued eloquently that any changes to the structure of the profession must be designed to improve the quality of the audit and enhance the integrity of auditor independence.
“A large part of what I've been trying to do is calm everyone down,” said Mr Wyman. “These are very important issues. We've got to deal with them in a carefully considered way.” He is confident that today's government findings will continue his own philosophy of sensible reform.
“A huge over-reaction would simply damage business by trying to solve a problem that didn't exist,” he said.
Mr Wyman is not merely battling to preserve the status quo. As one of PricewaterhouseCoopers' brightest tax partners, he has learnt the importance of constructive dialogue aimed at delivering tangible improvements. He has already overseen the pre-emptive introduction of measures to enhance auditor independence without undermining audit quality.
“There is a great risk that we take auditor independence to an illogical extreme by having incredibly independent auditors that are completely unable to do the job,” he said. “Then quality goes down rather than up.”
The ICAEW has already introduced measures to guard against auditors becoming too cosy with clients. It has a five-year rotation of lead audit partners, and has established the concept of an independent review partner who can oversee the audit but who does not know the client. Even on the vexed question of no-audit services, the profession can report good progress towards ensuring that the lust for lucrative contracts does not affect the audit relationship with the client.
Mr Wyman insists that turning the big firms into purely auditing businesses will have negative implications for the quality of the audit. Mindful of accountancy's less-than-glamorous image portrayed in the Monty Python sketch of the accountant who wants to be a lion tamer, he gives warning of recruitment shortfalls if the profession becomes purely audit-based.
“In the longer term, I would worry because no one would want to be an accountant. If we created an audit-only profession we wouldn't be able to recruit. Twenty years from now, we'd not have the same quality of staff as we do today.”
In the short term, he also fears that the quality of the audit would decrease if auditors could not call on the specialist staff who provide important support on complex and technical issues.
My Wyman has been able to persuade legislators of the dangers of introducing rules that are made counter-productive.
One accountant said: “He's done a great job of making the point that any reform has to be effective. The great shame is that he steps down as president in June.”
Mr Wyman is less concerned about his own role in the debate, preferring to focus on how that debate is shaped.
“The most significant change on both sides of the Atlantic is the enhanced role for the audit committee, which changes the fundamental relationship between auditors and their clients by bringing the interests of auditors into direct alignment with the interests of shareholders,” he said.
“This may all seem quite subtle stuff, but I think the change of the audit relationship will be quite deep-rooted. This will be the biggest change and it will deal with both the perceptions and reality of auditor independence.”
Ms Hewitt may well go out of her way in parliament today to argue that the accountancy profession is not getting off lightly. Mr Wyman will not be depriving her of the chance to demonstrate the government's commitment to preventing an Enron happening here. No one is prepared to say it could never happen here, but after the reforms, that is less likely.