Select Committee on Treasury Minutes of Evidence

Examination of Witness (Questions 257-259)




  257. Good morning Lord Sharman. Thank you very much for taking the opportunity to come and give us your views on our inquiry into the financial regulation of public limited companies. You have very helpfully sent us a paper which we have all read and it forms the basis of our questioning. Could you introduce yourself?
  (Lord Sharman) I am Lord Sharman, a Member of the House of Lords. Until September 1999 I was the International Chairman of KPMG, one of the so-called Big Five then, now Big Four. In addition to my responsibilities in the House of Lords I am now a non-executive member of the boards of five public companies and I chair the audit committees of three.

  258. In your paper you identified a litany of failures in the Enron case involving a wide range of factors. To what extent are these same factors present in the UK arrangements and regulatory system? We had WorldCom last week and we had Enron. Some people have told us that the situation which applied in the United States will not happen here. Can we bank on that?
  (Lord Sharman) The short answer to that is no. I see the situation in Enron and WorldCom as being quite different. In the case of Enron, there was a situation which was engineered financially, where a whole series of structures was used to support the growth and development of a business which was fragile in the extreme so that when something went wrong in the first instance the thing collapsed very rapidly. They were using techniques such as securing debt with their own stock, which was dependent on the stock being at a certain level which meant that once the stock price began to fall the thing unwound very rapidly. If you look at the Enron financial statements and take note of what was said as far back as March of last year by Fortune magazine, the accounts are very nearly unintelligible. I have to say that I find them very, very difficult to interpret. That was one set of circumstances. As I said in my speech, there there was a failure of management compounded by a failure in governance compounded by a failure in auditing. I know little about the detail of the WorldCom case other than what I have read in the reports. What you seem to have here is straightforward cooking the books, in the sense that a group of people decided to book something quite differently: they treated it as capital when it should have been revenue and I believe then embarked on a process of cover-up. In that case there was clearly a failure in auditing because subsequently it appears that it was found by an internal audit. One would expect that mis-statements of that magnitude, particularly of the nature in a developing company, would be found, so there was quite clearly a failure of auditing there. The difference between Enron and the United Kingdom is that the accounting rules in the case of Enron are rules based and therefore when you have a rules based system you tend to develop an industry which is designed to get round the rules. If you have a principle based accounting system, it is much more difficult because you have to look at the substance. The big difference between Enron and the UK is that it is unlikely that the Enron off balance sheet special purpose vehicles would have been able to survive scrutiny here. That does not mean to say that things like WorldCom could not happen: they could.

  259. Because of booking expenses.
  (Lord Sharman) Yes. Anybody can decide to book capital instead of expense and try to cover it up and hope the auditor does not find it.

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