President George W. Bush signs the Sarbanes Oxley Act of 2002 PHOTO DOUG MILLS ASSOCIATED PRESS

Business journalist Harry Mottram says it is time directors and auditors were held accountable for company audits which fail to spot imminent collapses costing creditors and workers billions of pounds and bringing the process into disrepute.

Recent disasters like Thomas Cook and Carillion that crashed leaving thousands high and dry despite having been audited weeks before shows this country needs a law along the lines of Sarbanes-Oxley passed in the USA.

Under George W Bush’s presidency in 2002 the Sarbanes-Oxley bill to make auditing accountants and directors more accountable was introduced by Senator Paul Sarbanes and Representative Michael Oxley. The bill quickly became abbreviated as SOX and aimed to prevent the disasters of Enron and Worldcom. Those accounting scandals cost investors billions of dollars when the share prices of affected companies collapsed, and shook public confidence in the US securities markets.  

Similarly in this country suppliers, customers and those who worked for Thomas Cook and Carillion and many other defunct outfits lost billions of pounds bringing auditing processes into disrepute and raising questions over how the big four accountancy firms of Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers operate.The criticism is that the directors, financial managers and those charged with auditing the firms walk away from the mess without being held to account. Yes, parliamentary committees can summon them to explain themselves and the administrators can point to the causes of a collapse and name names but essentially they are free to go.

Speaking on BBC Radio 4’s Today programme on Tuesday, December 17, 2019, Dominic O’Connell raised the matter as he said there could be a move in January to introduce a similar scheme to make company directors personally responsible for their accounts.

Michelle Hinchcliff of KPMG discussed the idea with Dominic. She said: “The first review into it was by Sir John Kingman which looked at the role of the regulator and the next review is by Sir Donald Bryden whose report will be released in the second week of January. That is looking at the audit product.”

She agreed that a SOX law could work in this country but it wouldn’t be the same as the one in the USA as their system is ‘rules based’ while ours is ‘principles based.’ Dominic O’Connell said initially the USA firms disliked the new system as it created a huge amount of extra work but it has now been accepted as part of the auditing process and financial governance. Michelle Hinchcliff said the current system of auditing was too black and white and tended to look backwards implying that future trends were not being spotted. This could explain why a firm’s books appear to be fine but potential issues of over-reaching themselves in the future or repaying historic debt are missed.

The Independent Review into the Quality and Effectiveness of the UK Audit Market, led by Sir Donald Brydon was commissioned by the Government in response to a perceived widening of the “audit expectations gap”  the difference between what users expect an audit to deliver, and what auditors’ responsibilities actually entail.

With thousands of jobs lost with company collapses like BHS clearly something needs to be done and done quickly. A British version of SOX is needed to prevent the erosion of trust – something that KPMG’s Michelle Hinchcliff agrees with. She said: “I believe there’s absolute value in a British version of SOX but I don’t think it should be an exact replica of what’s in the US.”

She added that there’s a lot of support for a UK version of SOX from audit committee chairs.

ICSM Credit would like to see Sir Donald Brydon’s report bring in a UK SOX as it could protect suppliers who invoice large firms and as creditors rarely see any payment when a major company goes bust. The proprietor of ICSM Credit Ian Carrotte said that only this summer members of ICSM were desperately trying to get settlement of their accounts with Thomas Cook as the firm slid towards its September crash.

“It was an open secret the travel firm was in trouble,” he said, “as invoices were not being paid to several companies. We encouraged suppliers to chase hard for payment despite the company’s assurances. The audit this year should have brought confidence, but instead it did the opposite. A SOX in the UK can only be a positive move and hopefully will bring some reforms to the auditing process.”

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