Together, the impact on investors was devastating. Many of Enron’s shareholders were employees who lost pension pots. During that period, $15bn of fines and shareholder compensation was paid and top executives of the companies concerned went to prison.
The investigation into Enron’s collapse highlighted the outsourcing of internal audit to its external auditors, Arthur Andersen, as a major factor in the company’s downfall. This created a conflict of interest that stopped dubious accountancy practices being exposed sooner.
In the UK, some of the lessons of the Enron collapse were written into what is now the UK Corporate Governance Code or the guidance issued under the Code. For example, the Guidance to Audit Committees requires them to provide an explanation of how external auditor objectivity and independence is safeguarded if the company’s external auditor also provides it with non-audit services, including internal audit.
In the wake of the 2008 financial crisis, external audit’s role as a tool to rebuild investor confidence is again a central theme. The EU’s proposals to reform the audit market, announced last week, include a ban on audit firms offering non audit service, including internal audit, to their external audit clients.
Many say there’s a strong case for supporting this, to improve the quality of external audit. We support the proposal because it will help improve the quality of internal audit. Internal and external audit must be independent of each other for good corporate governance to flourish and renew trust amongst investors. It’s owed to those affected by catastrophic governance failure before and during the financial crisis to ensure that nothing stands in the way of effective corporate governance. Lessons learnt must not be forgotten.
Ian Peters, CEO at the IIA