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The Financial Director interview – Double Whammy

Richard Timmins could hardly have joined Big Five firm Andersen as finance director at a worse moment. With the slowdown in the economy, transaction work was already coming off the boil, affecting the flow of corporate finance deals, due diligence projects, tax assignments, even legal engagements. In the year to 31 August 2001, the UK firm clocked up 15% growth, but the second half of that period had been much slower than the first. In fact, for UK business as a whole, the number of transactions completed in the third quarter of last year was more than 40% below the number completed in the second quarter.

Then came the US terrorist atrocities. Timmins’s first day at Andersen was 13 days later: 24 September. “It was an interesting baptism,” he says with remarkable understatement. So while busily getting his feet under the table, finding out “what makes the firm tick, what are the key drivers” and getting to know his 100-strong finance team, Timmins also had to “look at what our trading position was in light of the situation”. There was – to quote David Sproul, Andersen UK’s managing partner, operations, who shares this month’s interview slot – “a degree of turbulence”.

And then along came Enron. “It soon leapt to the top of my priorities, to start to understand what some of the implications of this might be,” Timmins says.

Surprisingly, perhaps, this is one FD who claims not to be doing any scenario number-crunching, trying to work out what the maximum downside is and how – or indeed, whether – Andersen can cope. “What we’re doing at the moment is tracking what’s going on very carefully, monitoring the situation, thinking through potential scenarios. I think it’s too early to do detailed modelling,” he says.

But if Timmins isn’t giving much away, then Sproul does little better. Timmins reports to Sproul, who is, in effect, the UK firm’s chief operating officer, making him the number two to UK managing partner John Ormerod.

The process of working out the litigation costs is really being done in the US, Sproul says. “We don’t know what the outcome is other than the firm is very clear that financially that isn’t something that they’re overly concerned about. But it isn’t something that a great deal of time has been spent on in the UK,” he says.

This seems to be remarkable sang froid from a partner in a firm that suffered the double whammy of being Enron’s auditor and being caught shredding documents. The litigation and regulatory penalties the firm seems certain to face are bound to be on a scale appropriate to the largest corporate collapse in history.

Exactly how the UK partnership will be affected is unclear, however.

Each country has one or more partnerships – in the US, the firm trades as a limited liability partnership; not so in the UK – while the Andersen Worldwide organisation, the “coordinating governing entity”, has set up agreements between the various national partnerships to cover issues such as technology and cost sharing. And liability sharing? “There is little to say because we don’t know what liabilities there will be, whether liability will arise, and if so where it will arise. Clearly we’ll have to look at our position when it arises,” Sproul says. “There isn’t a black-and-white answer that says either it stays in one place or it’s shared globally.”

What does seem probable is that there isn’t any insurance cover provided by a third party. A partner from a competing Big Five firm says large audit groups simply can’t buy professional indemnity cover at anything like reasonable rates – certainly not on a scale to provide for the likes of Enron – so each has to rely on self-insurance funds that have been topped up over the years: when they’re gone, the only thing left is the partners’ cufflinks.

It’s no surprise that part of Timmins’s role now is to help colleagues understand how they will be affected by the crisis. “Certainly partners want to understand the implications,” he admits. “They also know that we’re financially very strong, that we’ve taken relevant precautions in terms of insurance, etc.”

Both Timmins and Sproul have a more immediate issue to address: the concerns of Andersen’s clients and ensuring that Andersen staff remain committed and focused. “Clearly there is a potential impact on our reputation if we don’t act,” Timmins says. “We need to work with our clients, to help them understand the issues. Similarly, our people: to explain to staff what’s been going on, keeping them motivated. I’ve been really impressed with the way Andersen has dealt with both the client issue and the people issue. Internal communications have been excellent and I think our communication with our clients has been good. We’ve had some good feedback from them.”

Sproul adds: “No one is pretending that it is the ideal situation to be in, but it will get dealt with – and the longer we’re not on the front page of The Sunday Times the better.”

Neither Enron nor Andersen would be generating quite as much media coverage but for the fact that people from both organisations were caught shredding documents. So was that Andersen’s biggest mistake? “Good question,” says Sproul. “It beggars belief. That isn’t Andersen. Enron is a business failure and to the extent we’re responsible, that will come out over time and we’ll have to take our share of the blame. But document shredding is just totally unacceptable. We can demonstrate that it was a one-off event. It was nothing at all to do with the business failure at Enron. Who knows why that happened? But it clearly is not something that anyone in the organisation either understands or accepts.”

The shredding episode seems all the more bizarre given that, thanks to technology, it will have been an almost entirely pointless exercise – though another Big Five partner suggests to us later that the hand-written scribbles and annotations on the audit working papers might have been just as interesting as the stuff that was printed off from the computers.

Timmins has the advantage of being able to take an outsider’s view: he was FD of Thomas Cook Financial Services for three years until he and the rest of the management team tripled shareholder value by selling it to Travelex earlier last year, thereby doing himself out of a job. So if he were an FD at an Andersen client, what would he want Andersen to tell him? “I would have wanted to understand what the audit firm felt were the reasons for it all happening. And I’d want to know whether there was anything in what happened that would have an impact on me or my company and the way that Andersen dealt with my audit.”

He admits, too, that he would be concerned about the morale of auditors who are being personally affected by the scandal and the possible impact on their careers. “Certainly I’d want to be talking to the audit partner and their teams to make sure that their eye doesn’t go off the ball,” he says. “I’d be prepared to give them the benefit of the doubt if I felt that all the indications were they were still focused on my business. If I was seeing signs that the quality of the audit was dropping, then I wouldn’t find that acceptable.”

And let’s face it: there may not have been any good reason for the shareholders to vote down the resolution at the recent Airtours plc AGM to reappoint Andersen as auditors – but it isn’t going to be easy to win any new business.

In the current climate, what company chairman is going to recommend the appointment of a firm whose audit skills have been so publicly disparaged?

“Certainly there’s an extra hurdle for us to go through in that respect,” Timmins agrees. “However, many of the key decision-makers and those who are making the recommendations to shareholders are very well informed about our organisation, they know the quality of the people, they know the quality of the processes we’ve got, and therefore they’ll be able to see through that.”

One of the issues Andersen – and every other accountancy firm, for that matter – will have to address is the impact on the business from possible changes in the way accountancy services are regulated in future so as to maximise auditor independence. The two hot ideas at present are compulsory rotation of auditors (which is quite strongly supported by readers of this magazine: see survey page 17) and a ban on non-audit work by audit firms (which is quite decisively opposed by readers).

Again, Timmins’s experience as an FD from outside the profession will probably help shape Andersen’s approach. He recalls that when Thomas Cook switched from Ernst & Young to PwC (following a change of ownership) the new audit team faced teething difficulties.

“It’s their first time so you end up spending longer managing that process. They’re all on a learning curve,” he says.

But – again, drawing on his own experience – he’s not concerned about the risk of a run-down effect during the last year or two of an audit firm’s tenure. “I detected absolutely no reduction in the quality of the outgoing audit,” Timmins says. “If anything, they knew somebody else was coming in so they were very keen to make sure everything was in order.”

As for non-audit work, the key question is, where do you draw the line?

“There are many different functions that, as an FD, you look to your auditor to provide, which are far more efficient for your auditors to be providing,” says Timmins. “This is particularly true of transaction work – they know the business straight away, it’s easy for them to go off and do that. The board and the audit committee of an individual company are very well placed to manage these issues. From my experience, I never felt that any additional work that we were doing with our auditors was in any way taking the audit team’s eye off the ball.”

There are other lessons to be learned from Enron, Timmins suggests: a tightening up of the US regulations that allow special purpose vehicles to carry off-balance sheet debts and more frequent reporting, perhaps even ultimately moving towards real-time auditing. But on the big questions of auditor rotation and non-audit work, neither Sproul nor Timmins are prepared to hazard a guess as to how it will all pan out. “I wouldn’t want to speculate,” says Timmins. “I don’t think that at this stage we have a view,” says Sproul, “but we’ll definitely be part of the debate.”


Richard Timmins Finance director, Andersen UK
Timmins joined the partnership in September 2001 after a three-year stint as finance director of Thomas Cook Financial Services. Qualified with CIMA while at HM Treasury.

David Sproul Managing partner, operations
Sproul qualified with a mid-tier London firm and moved to Andersen 18 years ago as an auditor, then moved into the tax practice. Assumed current role as Andersen’s UK number two a year ago.

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