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Cook the books

BILL KIRKMAN

There have been many examples of corporate failure. Restoring public confidence `in the system' must be a priority.


The rot in the corporate world is out in the open ... a New York Times Square zipper.

IN the wake of the succession of financial scandals in the United States, the British Secretary of State for Industry, Patricia Hewitt, is planning radical changes to the auditing profession. In essence, her proposals, if carried through, will distance executive directors of companies from appointing company auditors. There are also suggestions that firms will be obliged to appoint different auditors at intervals, though as the number of major international auditing firms diminishes such an obligatory rotation may in practice have limited effectiveness.

Predictably, the Confederation of British Industry, through its Director General Digby Jones, expressed some reservations about Patricia Hewitt's proposals.

It is of course true that over-reaction to the U.S. situation, and excessive additional controls on the activities of business, could be damaging. The problem, however, goes far deeper than the collapse of two huge companies, and the criminal activities of some industrial leaders, with the connivance of crooked auditors (though that is serious enough). Indeed, media comment underlines just how serious it is. Fortune, for example, referred to "the daily drumbeat of news about horrifying corporate behaviour", and the San Francisco Chronicle commented that "it also seems as if capitalism itself is self-destructing before our eyes". In Britain, the left-wing New Statesman remarked that "the top echelons of Anglo-Saxon capitalisms have colluded to create a culture that allowed them to cook the books", adding that "these are more or less the same people who lecture the world on corruption".

All this underlines the deeper problem, which is that overall public confidence in the business world has been severely shaken. The current instances of fraudulent accounting have obviously played a large part in producing that loss of confidence, but they are not the only cause.

In Britain, certainly, there has been a growing hostile reaction to many recent instances of behaviour by senior business people which are not illegal, but which demonstrate excessive greed, and contempt for public opinion. Directors have been awarding themselves grossly inflated salaries and bonuses, even when — one could almost say particularly when — the businesses which they lead have been failing, or performing very badly. The perception frequently is that incompetence and failure are highly rewarded, and it is a perception that is well grounded in recent reality.

Add to that the cosy relationship which has often developed between large corporations and their auditors, and the dubious and unhealthy links between major auditing firms and their consultancy associates, and you have a climate in which it is easy to see why the present crises have developed.

Proper regulation of auditing procedures is clearly necessary, and it is also clear that the present safeguards are almost certainly inadequate. Introducing such safeguards is intrinsically necessary, but it is also necessary if a total collapse of public confidence in business is to be averted.

There is no doubt that capitalism is facing a crisis, and it is reflected in the weakness of the world's stock markets. The crisis, according to the American economist J.K. Galbraith in an interview in the Independent, is attributable partly to the complexity of modern corporations, partly to the fact that they have "grown out of effective control by the owners — the stockholders — into nearly absolute control by the management".

This rings true. Many of the problems that have arisen are problems caused by lack of accountability, which permits irresponsibility and greed to flourish. The urgent need is not to dismantle the capitalist system, but to ensure that it works properly, and that requires rigorous independent control of processes, and a change of climate so that paying people for failure becomes unacceptable.

It would be healthy, too, if as a society we in Britain became a little less ready to assume that big business, and the people who run it, have the answer to everything. The continuing difficulties on our railways illustrate the point well. Safety has been compromised by the privatisation scheme which put the track into a company which needed to make profits, when manifestly, responsibility for railway safety needs to be in the hands of railway experts.

There have been many such examples of corporate failure, quite apart from the dramatic cases of criminal collapse. Restoring public confidence in "the system" really must be a priority. Proper, independent, effective regulation is crucial, and that is necessarily the responsibility of governments. There is a requirement also, however, for a change of attitude on the part of many practitioners. They need to engage with all humility in a little navel-gazing.

The writer is an Emeritus Fellow of Wolfson College, Cambridge. E-mail him at wpk1000@cam.ac.uk

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