The sooner we begin treating white-collar crime as we do other crimes, the better

We’re finally getting around to holding directors of large companies accountable for their financial statements but it won’t be easy, more needs to be done, writes Chris Blackhurst

The London office EY, formerly Ernst & Young, accountants to electronic payments fraudsters Wirecard (AFP via Getty)

A BBC Radio 4 programme this week brought me up short.

In A Bad Business, presenter Lesley Curwen recounted how it is 20 years since the fall of Enron. Twenty years.

My mind went back to before the fraudulent Texan energy giant’s collapse, to a Labour Party Conference. Tony Blair was in his pomp and Enron’s senior team were in town, accompanied by an entourage of lobbyists and promoters. The Americans were expanding internationally and they had come to make their pitch.

I was introduced to them and this was my first encounter with anyone from this super-ambitious corporation. The second was some years later when I sat in a hotel lounge in London with Sherron Watkins, the Enron executive and whistle-blower, who brought them and their ultra-aggressive business down.

As well as discussing her bravery in speaking out we talked about the likelihood of lasting change occurring, of there being “other Enrons”. This was also the central theme of Curwen’s well-put-together broadcast.

Curwen remembered how she covered the US Senate hearings into Enron’s failure, how it was exposed for hiding huge losses. Critical to the scheming of Kenneth Lay, Enron’s chairman and Jeffrey Skilling, its CEO, both tried, and convicted, of fraud, was the role of Arthur Andersen, the company’s accountants. Andersen was meant to pore over the books but clearly didn’t, or at least it did not see fit to ask the right questions. Today, Watkins says that “Enron was able to push Andersen around”.

Andersen fell apart because of the Enron implosion and the US government passed the Sarbanes Oxley Act preventing auditors of public companies from supplying them consultancy services as well as the accounting and requiring CEOs and chief finance officers to personally vouch for the accuracy of accounts.

In the UK meanwhile, we did… precisely nothing. We still allow accountants to provide all manner of different types of lucrative advice to the companies they audit. They’re supposed to take a rigorous view of the numbers but when you’re tied into the client, when you’re charging fees for other services as well as the audit, that becomes difficult. It moves nearer to a relationship of dependence from the one of independence it’s supposed to be.

So much for change. Since 2001, we’ve seen in the UK a series of corporate disasters accompanied by accusations that accountants were not doing their jobs properly. BHS, Patisserie Valerie, Carillion are just three that come to mind.

In Germany, the enormous Wirecard scam was exposed by Financial Times journalist Dan McCrum over six years of dogged persistence. Finally, last year, the electronic payments giant admitted that £1.6bn of cash it claimed to have received “probably did not exist”. McCrum says that, “most of Wirecard’s profits and about half of their sales, were simply made up”.

McCrum had to rely upon whistle-blowers to reveal the deceit, same as what occurred with Enron. Wirecard’s auditors were accountants EY, one of the “Big Four” global firms. EY said the fraud relied upon “a highly complex criminal network designed to deceive everyone including auditors”.

That sounds rather like complacency to me. The reason firms such as EY can charge the fees they charge is because they claim to be so brilliant at dealing with highly complex matters. Not so, it seems.

We should throw the book at the companies: at their directors and their accountants and other advisers. Not fine, not a rap across the knuckles, but jail

So, what’s to be done? In the UK, we’re finally getting around to holding directors of large companies accountable for their financial statements. We’re setting up an independent regulator of auditing. And the Government is exploring forcing the Big Four to share audit work with smaller rivals. The intention is that the large company audits are farmed out to a broader range of firms, the tie between company and one firm is not so tight and that eventually, having audited larger companies and gained experience, the Big Four becomes a Big Five or Six or more. This bears the hallmarks of being a nice idea in theory but unworkable in practice. Quite how one of the Big Four is expected to sit back and watch as a challenger grabs a slice of its business remains to be seen. Also, we are, at last, going to separate auditing and consulting.

The US, too, has had its share of corporate outrages, post-Enron. “This story was supposed to be a game-changer,” said Curwen of Enron. “US Senators, regulators and business leaders told me that it was a watershed moment for global business, that rules would be re-written and corporate culture changed for ever. Twenty years after Enron’s demise, I wonder what has actually changed.”

There are ways to make a difference and that is to take corporate fraud more seriously, to devote greater resources to investigations and prosecutions and to accelerate the legal process – and not allow it to be so easily obstructed by lawyers.

We should, too, throw the book at the companies: at their directors and their accountants and other advisers. Not to fine, not to rap across the knuckles, but to jail. The sooner we begin treating white-collar crime as we do other crimes, the better. That means not only targeting those in the company who were responsible but also those who enabled them. They should be obliged to prove ignorance and if they can’t, prison will result. It is the only punishment they will understand – that will make them sit up and take notice.

We must reward and protect courageous folks like Watkins, to motivate others to come forward. The rest is tinkering and without radical change, in the next 20 years there will be further Enrons.