What is the Enron effect?

Last week's verdict marks another milestone in the fallout from the energy giant's collapse

As Enron’s former chief executive and chairman, Jeffrey Skilling and Kenneth Lay wait to hear whether they will spend the rest if their lives in jail, it became clear, in the UK at least, that the only verdict that would have surprised the profession was if the jury in Huston had returned a not guilty verdict.

Instead, after five days of deliberation, the verdict came back as guilty on 25 of the 34 charges the pair faced in relation to the collapse of Enron in 2001. One Big Four partner tells Accountancy Age: ‘The biggest surprise would have been if the verdict had gone the other way, especially given the weight of evidence.’

It seems that if Skilling and Lay had walked free from court it would have given rise to some concern too, because of what it might have meant for the existing mountain of business regulation that exists currently as a direct result of Enron’s collapse.

‘The worry was that if they were found innocent, regulators in the US would have felt the need to bring in even tougher laws,’ says the partner.

That eventuality was headed off by the jury’s decision to send the Enron pair to jail, but there is no hiding from the fact that the regulatory world in which business operates here in the UK, and in the US, is much tougher than it has ever been.

The Sarbanes-Oxley Act, written to directly tackle the problems identified in the Enron collapse, has changed the regulatory landscape for good. Companies listed in the US, whether they originate from there or are foreign registrants, now face vast swathes of regulation that emerged from the aftermath of Enron.

Companies like Lastminute.com have delisted from the US markets as a direct of the cost of compliance with these more stringent rules . The people who run the markets have complained that the US laws are now driving business away to places like London.

Indeed, only two weeks ago Isabella Schidrich, the managing director of Nasdaq International, was in London to assess the impact of Sarbox on the market’s clients here.

‘Sarbox has certainly had an impact on our business,’ she said at an ICAEW corporate finance conference. ‘We are surveying our clients on the issue and will take those views to the Securities and Exchange Commission. We should will be able to influence the US authorities.’

What they want is a toned down version of Sarbox so that the regulation is much lighter touch and foreign companies can return to US markets. Ask anyone dealing with Sarbox regulation in the US and UK and you will hear the same refrain: ‘The pendulum has swung too far.’

The UK government, by contrast, managed a more measured response. While the pressure was on to take drastic action for fear an Enron-style scandal could happen here, the government sounded out the profession and finance directors and finally came up with a selection of policies it felt represented a more ‘proportionate’ reaction.

The Higgs and Smith reviews made amendments to the combined code on corporate governance and the decision was made to reform. This decision meant self regulation for accountants was removed and independent oversight, through the Financial Reporting Council, could be ushered in.

But there remains some unfinished business, which Enron left for the UK. The demise of Andersen means that the world does not have enough big auditors with global scope, according to a joint government-FRC commissioned study.

There is still some wrangling to be done over the inclusion in the company law reform bill of a new criminal penalty for auditors who knowingly produce misleading audit reports. And the investigation of Lord John Wakeham, a former non executive director of Enron and ICAEW member, is still to be concluded by the accountants Joints Disciplinary Scheme.

Perhaps the most sobering thought in the wake of last week’s verdict came from a senior and long serving lawyer who specialises in fraud investigation. He was asked by Accountancy Age if an Enron-type event could still happen here. ‘Definitely,’ he replied.