Yet another Enron?

I suppose it was only a matter of time.

Writing our forthcoming report on consulting in the financial services sector, I’ve been struck by just how much went on hold during the recession. We all know that demand for consulting plummeted and that, in the immediate aftermath of the financial crisis, almost the only things companies were interested in were survival-related services. As the crisis eased, things changed, fuelling a wave of strategy work across the sector as companies re-evaluated their businesses. This is now giving way to more operational, outsourcing and technology work, as the same companies look to implement their plans. Only now do organisations have the space and money to consider business-as-usual consulting.

One of the things financial services companies have been keen to do is understand why the crisis happened and what can be done to shore up their defences against future crises, a process that has meant picking over the bones of the crisis again. At the time we blamed the bankers, but now the bankers are fighting back: they’re blaming the accountants and consultants.

Some years ago I wrote a report on the impact of Enron on the consulting industry. One of the questions I was keen to answer was why some scandals could bring, not just a firm, but an entire industry to edge of destruction, and others didn’t. I used as my model Malcolm Gladwell’s book The Tipping Point, as I was essentially interested in what “tipped” a small scandal into a big one. Gladwell highlights three factors which determine whether a book will become a bestseller, a film a blockbuster or a virus an epidemic:

• The power of context – when the timing with which a change emerges may be more or less helpful to its propagation.
• Stickiness – the extent to which the impact of a change is lasting.
• The law of the few – where a small number of people behave in a way that, intentionally or not, increases the take-up of the change.

Applying these deceptively simple ideas to the consulting industry highlighted two decisive points: Enron’s demise didn’t engulf the consulting industry because:

• It wasn’t seen as part of a systemic problem in consulting (though it was in accounting).
• There was no equivalent of Senators Sarbanes and Oxley, willing to pursue the regulation of the consulting industry.

With each negative press article, the consulting industry gets closer to the first, but we can take comfort from the fact that no one, let alone any US senators, appears keen on the prospect of regulation. But my report highlighted something else that perhaps should give us pause for thought. It doesn’t really matter what the truth of the situation is (accounting firms will point to Sarbanes Oxley: most clients do not buy consulting services from their audit firms), if the mud flies, some of it will stick.