Business Page February 24th, 2002


Lessons Of Enron
- Part 2

Introduction

In Part 1 of this article published two weeks ago, we looked at the demise of Enron, one of the largest companies in the United States, and the actions by its executives, auditors and professional advisers that are reported to have precipitated the collapse. No day seems to go by without further revelations involving one or the other of the Big 5 Firms, each of which casts a pall of uncertainty and suspicion over the entire accounting profession. PricewaterhouseCoopers has been added to the Enron probe for its role in providing consulting advice to Enron on one of the now notorious off-balance sheet partnerships in which Enron had a stake while it was simultaneously providing tax advice to two of those very partnerships. And everyone is now asking how it is at all possible for Deloitte & Touche to have given Arthur Andersen a clean report following their recent peer review of (Andersen). Then during the week, Ernst & Young was subpoenaed to attend an SEC hearing into the failure of one of its banking clients with the name PNC Financial Services Group.

It would be naive to believe that the profession and businesses in Guyana are insulated from the shenanigans playing out so far mostly in the United States. Four of the Big 5 operate in Guyana through correspondent-type relationships while the fifth has full member firm status. The parent company of GT&T, whose accounting practices have been questioned on a number of occasions, is audited by Arthur Andersen. All of our major companies, financial institutions and insurance companies are audited by a firm connected with the Big 5 which set the standards of quality of audits and integrity for all their associates. The attempt by Andersen in the UK to distance itself from the misfortune of its US arm is particularly disingenuous since Andersen, like the other top firms, prides itself on its worldwide, seamless service.

Few people have any confidence in the standards of morality in the public or private sector Guyana and everyone knows about the absence of regulatory mechanisms to curb improper and illegal practices in those sectors. Corruption is so widespread that it is taken for granted in a society that demonstrates extreme forbearance for illicit behavior. Indeed, we place our professionals on a pedestal even as rumours abound of their failure to demonstrate the kind of ethical conduct to be expected from our leaders. As a percentage of their membership, more accountants have been granted national awards than any other group of professionals, a clear if mistaken acceptance of the high ethical standards which accountants assert as the hallmark of their profession.

Fortunately, for this purpose, we have few public companies but is it not time that we ask ourselves whether the audit reports presented to shareholders at the ritual which passes for the annual general meetings do give a true picture of the company's operations and financial condition. Is it not just possible that by our tolerance, we are encouraging our own mini-Enrons? Is it not time that we review the disclosure requirements of the Companies Act and compliance therewith, the quality of governance in our public companies and the free rein given to accountants to regulate themselves? The problems of Enron started when it announced some restatement of prior years earnings, a situation which has surfaced on numerous occasions in Guyana whenever there was a change of auditors. If accountants are following the same rules, why should a change of auditors result in different profit figures?

Unfortunate Professional Oversight?

No society can survive without a credible system of accounting and reporting and pre-Enron, the accounting profession had boldly protested its integrity and stoutly defended its rights to regulate itself. But that right must not only be earned, but its foundation rests entirely on the maintenance of public trust. Auditors are expected to be able to provide objective, professional opinions and therefore the public must be assured that their actions and conduct are of the highest order.

They are expected to behave above reproach in all their professional dealings but regrettably some leading practitioners fall short of the ideals and values which ought to be their hallmark. One firm carries a particularly misleading advertisement in the Telephone Directory while another which has recently changed its relationship with one of the Big 5, not only still sports the billboard of its previous incarnation but has failed to make the professional announcement which normally accompanies such a change. While these may be no more than oversight, they contribute to public misgivings that the profession can be left to define integrity and ethical conduct which are clearly public interest issues. They also raise questions within the profession as to whether accounting and auditing are now seen as business with profit as the major objective.

At the other end of the spectrum, the poor standard of work of some of the firms which are recognised by the Companies Act and which are granted practicing certificates by the Institute of Chartered Accountants of Guyana (ICAG) is well known in professional circles but nothing is being done to correct this situation. So bad did this situation become that one of the country's leading commercial banks found it necessary to establish its own rating system of the firms.

Pressures On Auditors

As this article will show conditions and practices in Guyana encourage Enron type behaviour. The position of the auditor is a difficult one. The law requires that even the smallest cake shop, once it falls under the Companies Act must have its books audited by a member of the ICAG, even if the rudimentary systems make those books unauditable. While the new Companies Act provides mechanisms to protect the auditor's independence, very little has changed in practice and the auditor is expected to be the poodle of the directors whom he dare not offend for fear of losing the client and fees. One not so leading public company fired its auditors because they insisted that the disclosure requirement of the law be met and deliberately misled its shareholders as to the reason for the change. The Private Sector Commission in its eagerness to change auditors has ignored all the provisions of the law and at this stage is still without a functioning auditor for the year 2001. Both these cases arose because of audit-related disclosure issues and encapsulate the attitude of local Directors to accurate reporting. Worse, it says something about the profession that there seems to be other auditing firms that are only too willing to collude in such improper behaviour.

Sometimes though no pressure is required. There was the case of the internal auditor of a local public company whose serious approach to his job was more than the CEO could take. To get rid of the poor chap, the CEO requested the external audit firm to employ him. Instead of resisting, the firm readily agreed.

Directors

Non-executive directors are usually drawn from a pool of exclusive individuals with considerable influence and prestige in society and no one questions their actions and competence. They design schemes which guarantee them pensions and in many cases a position on the board long past their useful lives. So pervasive is this attitude to non-interference in board appointments that even where the law requires it, the regulators have shown striking reluctance to intervene as in the case of Financial Institutions Act. (FIA) One hopes that in the post-Enron/ Globe Trust era directors would be more careful in discharging their statutory and fiduciary responsibilities to shareholders and third parties and that regulators will take action in appropriate cases.

Directors' remuneration

This area has a wonderful parallel with the Enron case where at best Andersen relied on legal counsel for comfort in respect of the off-balance sheet transactions. In Guyana, despite compelling counter-arguments and the provisions of the Companies Act, many companies do not disclose the emoluments paid to their directors. That the shareholders have no clue of the emoluments paid to their executive directors makes a mockery of the very basic principles of corporate governance.

Very conveniently, the Institute of Chartered Accountants of Guyana is relying on an advice that disclosure is required only of payments made in the capacity of directors and not of managers. Is it not a complete farce that the fees of a few thousand dollars paid to the directors whether executive or non-executive has to be disclosed while the hundreds of thousands received as an executive director remain a closely guarded secret? Whose company is it anyway and do they not have a right to know?

(To be continued next week)