October 2002

1
CIPFA in the Midlands Annual Regional Seminar

• October 2002

Scarman House
2
The Impact of Enron on the Public Sector
Vernon Soare CIPFA
3
THE IMPACT OF ENRON - COVERAGE

• Setting the scene Enron and the domino effect
• The regulatory response Co-ordinating Group on
  Audit and Accounting issues (CGAA)
• Implications for the public sector
• What CIPFA is doing
• The way forward

4
SETTING THE SCENE ENRON

• Filed for bankruptcy December 2001 after
  restating financial statements to reflect charges
  mainly relating to off-balance sheet partnerships
• Issues raised by companys policies on revenue
  recognition, off-balance sheet items, financial
  instruments, and more
• Role of auditors, Andersen, highlighted
• At the time Enron was the worlds largest
  bankruptcy

5
AND THE DOMINO EFFECT

• Enron caused investors to thinkwho else?
• WorldCom took the dubious honour of the worlds
  largest bankruptcy July 2002. 3.8 billion of
  operating expenses had been incorrectly recorded
  as capital expenditure
• Others under the spotlight, eg Global Crossing,
  Tyco, Xerox, Halliburton, Qwest
• Major examples all USA-based, but implications
  felt worldwide

6
A UK REGULATORY RESPONSE?

• A US problem, so why should the UK do anything?
  But
• Increasing globalisation of markets
• Complacent to assume that an Enron could not
  happen here. UK has had its fair share of
  scandals in the past
• Concerns about reputation of the profession
• Improvements made to UK regime for financial
  reporting and auditing, but need to review. Much
  work already underway before Enron, including

7
REGULATORY WORK IN HAND

• Work in hand and/or planned by Accountancy
  Foundation Review Board and other Foundation
  bodies
• CCAB bodies own work in response to new
  regulatory arrangements
• ASB pressing ahead with international convergence
  agenda
• Financial Services Authority plans for review of
  Listing Rules
• Treasury Select Committee inquiry
• But a need to co-ordinate, hence

8
CO-ORDINATING GROUP ON AUDIT AND ACCOUNTING (CGAA)

• CGAA set up February 2002 by Secretary of State
  for Trade and Industry and Chancellor
• Purpose to oversee and co-ordinate UK response
  to issues raised by Enron and other corporate
  failures
• To ensure that UK regime reviewed thoroughly for
  effectiveness
• CGAA made up of Government and appropriate
  regulators
• Interim report Summer 2002 final report end 2002

9
CGAA INTERIM REPORT COVERAGE

• Auditor independence
• Corporate governance
• Regulation of the profession
• Financial Reporting and Auditing Standards
• Company Law reform
• Other issues, including competition
• International developments, especially in the USA
• CGAA AUDITOR INDEPENDENCE
• Provision of non-audit services by the auditor to
  audit clients
• Rotation of auditors (firms/individuals) and
  re-tendering
• Auditor and client relationships
• Appointment of auditors
• Public sector implications

10
WHATS THIS GOT TO DO WITH CIPFA?

• Hallmark 3 Upholding Highest Standards
• An Institute which exudes and promotes the
  highest standards of probity, conduct,
  professionalism and equality of opportunity
• Hallmark 4 Influential in the Profession
• An Institute which is acknowledged to be a
  significant influence within the CCAB in the UK
  and the Republic of Ireland, and internationally

11
WHY CIPFA NEEDS TO RESPOND

• Recent history effects of Maxwell, BCCI, Polly
  Peck
• CIPFA regulated by the Accountancy Foundation and
  a member of CCAB
• Charter responsibility to promote good public
  sector practice
• Professional reputation key to effectiveness of
  accountants
• RQB applications

12
RESPONSE OF THE ACCOUNTANCY PROFESSION

• IAS and (in UK) FRS 5 Reporting the Substance of
  Transactions significantly reduce the likelihood
  of Enron type collapses
• Need for global acceptance of principles based
  IAS, including the US
• Review of effectiveness of corporate governance
  arrangements
• Shareholders to be educated in incentivisation
  schemes
• Think global, act local

13
HOW HAS CIPFA RESPONDED TO DATE?

• Firm support for Accountancy Foundation
• Overhaul of professional disciplinary scheme
• Revision of Standards of Professional Practice
• Submissions to inquiry bodies
• Report for Review Board on wider application of
  public sector external audit model
• CD Rom CIPFA Handbook in preparation

14
IMPLICATIONS FOR CIPFA / UK PUBLIC SERVICES

• CIPFA
• Quality assurance of CPFAs
• Mandatory CPD
• Increased regulation
• UK Public Services
• Accounting Standards
• Governance arrangements

15
THE WAY FORWARD

• CGAA final report scheduled around end 2002
• Work being taken forward in all areas identified
  in interim report
• Accountancy profession needs to rebuild
  credibility
• All members have a part to play in encouraging
  and upholding the highest standards