Question

In recent years there have been a number of major corporate collapses that have led to criticism of the accounting profession. To what extent has the accounting profession been at fault in these situations? Explain. To what extent have other factors contributed? In your discussion refer to ethical issues.

Answer 1

Clarke, Dean, and Oliver have gathered convincing evidence from three decades of corporate collapses in Australia to question the role played by the accounting profession and the accounting regulators in most of these financial disasters. Although this is a book about Australian corporate history, it should be of interest and relevance to readers in other countries, particularly those countries that espouse an Anglo American accounting philosophy. Reference is also made to similar collapses and therefore similar problems in the U.K. and U.S. The first sentence in the preface sets the agenda and leaves the reader in no doubt as to the authors’ thesis: “Over more than three decades of corporate collapse, continued criticism of accounting is the result of ineffective action by regulators in general and the accounting profession in particular” [p. xii].

In the first of five parts, the authors develop their argument that current accounting standards and regulations do not provide useful information for investors or creditors and particularly do not predict impending collapse. Strict adherence to standards has, in fact, enabled directors to confuse and mislead about the true state of financial affairs of the corporation. The hue and cry after every major collapse blames incorrect application, not the system itself. However, the authors observe that “virtually none of the commentaries attack the organisational and accounting fundamentals — virtually all imply that current standards have not been applied adequately. None observe that even if they had been, it would not have solved the problem” [p. 12]. The reaction of regulators is inevitably the prescription of more rules. Such a response is not new; the Royal Mail collapse in the 1920s evoked a similar reaction.

The middle three sections of this book are devoted to a history of major corporate collapses. Each of the nine chapters covers the events of a single corporate collapse. The collapses included are Reid Murray, Stanhill, H. G. Palmer, Minsec, Cambridge Credit, Associated Securities, Adsteam, Bond, and Westmex. All had highly complex group structures which contributed to the misleading information published in their accounting reports. The authors have analyzed the contemporary materials and given a commentary on these data and reactions at the time. These are engrossing reading for all those interested in accounting and corporate history. History is not, however, the authors’ main concern. Each tale is a liturgy of blaming the individual, the highflying entrepreneur, and sometimes the auditors. The system is never at fault; problems arise because individuals fail to apply the accounting standards with enough rigor.

The final section is devoted to addressing the problems inherent in the current regulatory structure and advancing possible solutions. The authors contend that all the collapses discussed display very complex structures and that the accounting standards for consolidations have created misleading information. Regulations encouraged more complex groups which resulted in more confusing reports and the failure to differentiate between public and private interests.

The authors’ solution is “(i) proscribe whollyowned subsidiary companies and accountfor the decentralised operations as if they werebranches; or, failing that, (ii) require an aggregation of group assets based on the market price of assets” [p. 225]. Thus, they support Chambers’ exitpricing approach as the resolution to defects in current accounting standards. The question of control becomes irrelevant if market prices are used to value assets, including shares in partly owned subsidiaries. This approach requires “an accounting mechanism in which period balance sheets contain data from which aggregations of the money and money’s worth (selling prices) of the physical assets and the amount of the liabilities can be determined and articulated income statements produced” [p. 230].

Ethics is a key component of good governance (Perry et al. 2014) and has significant potential to affect public trust in all forms of government (Joyce 2014). Previous research has identified a number of factors that can shape standards of conduct within an organization, among which the role of leadership has attracted significant attention (Grojean et al. 2004; Steinbauer et al. 2014). Indeed, the ethical behavior of leaders has come to assume global importance, with leaders being implicated in high?profile ethical scandals and integrity violations (Hassan, Wright, and Yukl 2014; Tonge, Greer, and Lawton 2003).

Researchers are identifying an array of beneficial outcomes arising from “ethical leadership,” including increased willingness of employees to use voice to improve their organization, greater employee job satisfaction and sense of well?being, and increased trust in organization leaders, both from employees and the public (see, e.g., Bedi, Alpaslan, and Green 2015; Hassan 2015; Wang and Van Wart 2007). Much effort has also been applied to delineate the actions and behaviors that leaders can undertake to enhance ethics, including aspects of leadership style that create a culture in which good conduct is maintained.The personal moral credibility of leaders can be very important in enhancing the effectiveness of formal ethics regulation.