Corporate Collapse “Virtually nothing is to be learned from studying individuals involved in...

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Corporate Collapse “Virtually nothing is to be learned from studying individuals involved in corporate failures, no matter how exciting their lives may be.” Frank Clarke and Graeme Deane

Transcript of Corporate Collapse “Virtually nothing is to be learned from studying individuals involved in...

Page 1: Corporate Collapse “Virtually nothing is to be learned from studying individuals involved in corporate failures, no matter how exciting their lives may.

Corporate Collapse

“Virtually nothing is to be learned from studying individuals involved in corporate failures, no matter how exciting their lives may be.”

Frank Clarke and Graeme Deane

Page 2: Corporate Collapse “Virtually nothing is to be learned from studying individuals involved in corporate failures, no matter how exciting their lives may.

Classic Symptoms Preceding Collapse or “I reallly should have

known”.• Overstatement of the value of assets, and

understatement of liabilities in financial reports.

• Use of related party transactions to disguise the reality, e.g. to create a false impression about earnings.

Page 3: Corporate Collapse “Virtually nothing is to be learned from studying individuals involved in corporate failures, no matter how exciting their lives may.

• continuing financial losses and cash flow deficiencies• weak management • inadequate management succession planning • looming debt payments & concealment of bad debts• inadequate capital expenditure programs• lack of adequate information systems• shareholder disputes

Page 4: Corporate Collapse “Virtually nothing is to be learned from studying individuals involved in corporate failures, no matter how exciting their lives may.

See also Clarke and Deane p 149-151

• declining sales or margins & attempts to increase market share at expense of profits

• delays in financial reporting • over-leveraged capital structure • high-cost debt • negative publicity in the financial and business

communities • deterioration in asset quality and values leading to

reduced liquidity

Page 5: Corporate Collapse “Virtually nothing is to be learned from studying individuals involved in corporate failures, no matter how exciting their lives may.

Vulnerability of accounting standards to manipulation

• Capitalising expenses, e.g. interest charges and taxes (Rolls Royce in 1970s)

• Use of accounting fictions such as Future Income Tax Benefits (able to be written off by Bond Corp in the 1980s and HIH recently) that are in accord with Accounting Standards.

Page 6: Corporate Collapse “Virtually nothing is to be learned from studying individuals involved in corporate failures, no matter how exciting their lives may.

The remedies do not treat the disease

Corporate governance theory has concentrated on producing transparency and accuracy through greater compliance with existing rules. Clarke and Deane argue that the rules are the problem - at least in accounting.

Page 7: Corporate Collapse “Virtually nothing is to be learned from studying individuals involved in corporate failures, no matter how exciting their lives may.

An example: the audit committee

The audit committee, composed of non-executive directors, should ensure compliance with Accounting Standards.

But a purely technical compliance with the Standards ensures that accounts are regarded by auditors as true and fair, even if in the professional judgment of the auditors they are not. So compliance does not guarantee transparency. There is no true and fair override on data quality.


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