Digby Jones Urges Calm in Wake of WorldCom Storm; as the World Reels from Yet Another Accounting Scandal Business Editor John Duckers Reflects on the Whole Picture Past and Present

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Byline: John Duckers

A s investors reel from a string of huge accounting scandals, it is easy to forget that the art of cooking the books is as old as the books themselves.

But that is no comfort to CBI director-general Digby Jones who is urging the Government not to overreact to corporate collapses.

He said: 'No amount of regulation will prevent dishonesty.

'For more than 20 years Arthur Andersen was a beacon of excellence to which young accountancy and legal professionals aspired, it was not so long ago that the brash corporate success of Enron was envied by many and WorldCom was a respected telecoms giant.

'How things change! 'Staff at WorldCom wait to hear how the latest self-inflicted business disaster will effect them and the harm done to the reputation of business in the eyes of the already suspicious public is incalculable.'

Dramatic events, he points out, all too often provoke an equally dramatic knee-jerk response from legislators. Hence the need to avoid simplistic all-embracing, regulation-based solutions should changes in corporate governance or accountancy standards be insisted upon, he suggests.

He went on: 'British business has learnt a great deal from the severe problems it went through at the end of the 1980s and the recession-hit early 1990s.

'The creation of the Accountancy Standards Board and the Auditing Practices Board overhauled accounting practice. Business put its own house in order and led the world in establishing codes of good practice for listed companies. As a result, Britain now has a system of corporate governance and accounting procedures that, while not perfect, stands above the regimes in others parts of the world.

'Take the US system. This is based on a rule-book, tick-box approach, in which the auditing process is largely controlled by lawyers who try to ensure that the rules are respected - even if the spirit is ignored. As far as we know, the Enron accounts complied with the applicable US accounting standards. But did they reflect a true and fair view of the company's affairs - the mandatory test in a UK audit but not in the US?

'It is significant that Robert Herz, the incoming chairman of the US Financial Accounting Standards Board, the accounting profession's top rule-making body, has indicated that the US should at least move its financial reporting to a principles, substance-based approach, which would bring it more into line with the UK.'

The Enron debacle has led to calls in the US - and now in Britain - that businesses should be made to rotate their audit firms.

'That would be a big mistake,' claimed Mr Jones. 'The upheaval involved in such regular changes could leave companies - and auditors - exposed. Indeed, it would probably lead to even greater audit failure because of the long period it takes to understand the complex structure of modern businesses.

'A much better solution is to rotate an audit partner and his or her colleagues within an audit team, which some firms already do.'

Should there be restrictions on additional services such as taxation advice and consultancy provided by the auditor?

Absolutely not, maintains Mr Jones.

He said: 'At present, companies rightly have to disclose in their annual report the total amount paid to their audit firm. But there are many circumstances in which companies want to seek the services of different advisers and it is vital that they have the widest possible choice. There are only four global accounting firms left. To limit a company's choice further still would be wrong.'

Even so, he acknowledges, an auditor should not audit the work carried out for clients by other parts of his own firm.

Mr Jones went on: 'The role of audit committees is essential here. It - and the remuneration committee - should consist exclusively of a company's nonexecutive directors. …