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The Unaccountable & Ungovernable Corporation

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The Unaccountable & Ungovernable Corporation Downloaded by [New York University] at 04:30 24 August 2016 ‘This work should take pride of place on the bookshelves of boardrooms throughout Western economies. Building on their previous and authoritative publications, especially Corporate Collapse and Indecent Disclosure, the authors develop a compelling argument that systemic flaws in accounting and reporting regimes (as well as fraud and poor corporate governance practices) contribute to business failures and jeopardise market integrity and confidence. In particular, the treatment of the “true and fair” conundrum, the exposure of the use and misuse of labyrinthine corporate groups and the call for a re-examination of fundamental notions of corporate personality and limited liability deserve close consideration by all who depend on the proper operation of the market system – and that is practically everyone.’ The Hon Neville Owen (HIH Royal Commissioner, 2001–03), UK ‘A thought-provoking study of recent global corporate scandals which condemns the current corporate form itself and offers pragmatic solutions. A welcome addition to the literature questioning the role of the 19thcenturycorporationinthe21stcentury.’ Jane Gleeson-White, author of ‘Double Entry: How the merchants of Venice shaped the modern world’ Downloaded by [New York University] at 04:30 24 August 2016 This page intentionally left blank Downloaded by [New York University] at 04:30 24 August 2016 THE UNACCOUNTABLE & UNGOVERNABLE CORPORATION The corporation is a major vehicle of business activity worldwide. It incurs social costs and generates benefits that continually change – hence, whether it still provides a net benefit to society is contestable. Evidence-based observations of the last decade of corporate sagas and the role of accounting and auditing suggest that a serious rethink is needed about how commerce is pursued and, in particular, whether the current corporate form has passed its use-by date. The authors of this new book – including internationally renowned accounting scholars – argue that the two major governance tools of accounting and auditing require major makeovers. Beginning by analysing the global sweep of deregulation that corporations have experienced since 2000, the authors go on to discuss the var- ious scandals and crises that characterized the subsequent period, culminating in yet more calls for further deregulation. Having thoroughly assessed the status quo, they provide a series of urgent recommendations for reforms designed to bring the cor- poration back to the real world and restore its purpose. This book will be of great interest to students and academics across accounting, business, law and finance, especially more advanced students at undergraduate and Downloaded by [New York University] at 04:30 24 August 2016 postgraduate level. Frank Clarke is Honorary Professor of Accounting at The University of Sydney, Australia, and Emeritus Professor at the University of Newcastle, Australia. Graeme Dean is Emeritus Professor of Accounting at The University of Sydney, Australia. Matthew Egan is Lecturer in Accounting at The University of Sydney, Australia. This page intentionally left blank Downloaded by [New York University] at 04:30 24 August 2016 THE UNACCOUNTABLE & UNGOVERNABLE CORPORATION Companies’ use-by dates close in Frank Clarke and Graeme Dean, with Matthew Egan Downloaded by [New York University] at 04:30 24 August 2016 First published 2014 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2014 Frank Clarke, Graeme Dean and Matthew Egan The right of Frank Clarke, Graeme Dean and Matthew Egan to be identified as the authors of this work has been asserted by them in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Clarke, Frank L. The unaccountable & ungovernable corporation: companies' use-by dates close in / Frank Clarke, Graeme Dean and Matthew Egan. pages cm Includes index. 1. Corporations. 2. Corporations–Accounting. 3. Corporations–Auditing. 4. Corporate governance. I. Dean, G. W. II. Egan, Matthew. III. Title. HD2731.C53 2014 338.7'4–dc23 2013031879 ISBN: 978-0-415-71912-4 (hbk) ISBN: 978-0-415-71914-8 (pbk) ISBN: 978-1-315-86757-1 (ebk) Typeset in Bembo by Taylor & Francis Books Downloaded by [New York University] at 04:30 24 August 2016 CONTENTS List of illustrations viii Acknowledgments x List of abbreviations xi Prologue 1 1 Corporations: soulless, heartless creations? 9 2 Ethos abandoned – heritage lost: recovering true and 29 fair 3 Regulation misplaced 58 4 Mission impossible: auditors on the rack 81 5 Executive snouts in the trough 103 Downloaded by [New York University] at 04:30 24 August 2016 6 Group accounting shenanigans 122 Epilogue 150 Bibliography 159 Index 167 ILLUSTRATIONS Figure 6.1 Preliminary analysis of the Patrick Corporation/MUA ‘September Transactions ’ 133 Table s 2.1 Selected dates in the history of the true and fair quality criterion 42 6.1 Summary of fi nancial positions and aggregative financial performances of H Ltd, A Ltd and B Ltd under CoCoA as at 30 June 2014 142 6.2 Parent company statement of fi nancial position and subsidiaries’ statistical summary under CoCoA as at 30 June 2014 143 6.3 Inter-entity indebtedness matrix – Hooker Corporation 147 Boxes 1.1 No heart and soul in the pitiless corporate body 13 Downloaded by [New York University] at 04:30 24 August 2016 1.2 Taking a bath can be financially indecent 21 1.3 Public pain private gain 24 1.4 NABs ’ nemesis: over-governance 25 2.1 Fresh focus trueon and‘ fair’ 32 2.2 Uninformed prone to shocks 35 2.3 Double standards: a diff erent take on true and fair 39 2.4 Accounting for a company ’s whole story 48 2.5 Toxic plan is nothing but humbug 50 2.6 Accounting – telling it as it is 52 3.1 ASIC is wounded – time for a rethink 72 Illustrations ix 3.2 Watchdosg ’ bark has hollow tone 75 4.1 One.Tel ruling proves solvency a thorny issue 84 4.2 High cost for audit software a mystery 89 4.3 Lapping it up and ignoring the evidence 91 4.4 On the money to study corporate capers 93 4.5 A ‘mission impossible ’ for auditors 97 4.6 Standards hobble auditors 98 5.1 Share scheme proposal exposes salary setting 109 5.2 Golden handshakes have a strong grip 114 5.3 Harsh light may shine on non-executives 117 6.1 Group structures win the corporate games 130 6.2 Group system more hindrance than help 135 6.3 Group fi gures the underlying ferals 137 Downloaded by [New York University] at 04:30 24 August 2016 ACKNOWLEDGMENTS We are indebted to our Sydney School of Accounting colleagues, especially the late Ray Chambers, who stressed the need for research to be drawn from observations of commerce and accounting’s role within it; and for accounting to be useful or, as we note, serviceable for the uses ordinarily made of it. This latest work draws on the observations of corporate practices and the role of accounting and auditing in dis- closing them. It draws on reports of failed companies, business biographies, reports of takeovers, of employees left without their entitlements when their company was placed into administration after unexpectedly failing, and inquiries and reports into the effects of price and price level changes. Observations up to the middle of the last decade had been catalogued in two earlier books, Corporate Collapse: Accounting, Reg- ulatory and Ethical Failure and Indecent Disclosure: Gilding the Corporate Lily. These are augmented here by subsequent observations up to the present. Our families have continued to endure our working on this project and such earlier ones. For that we are most appreciative. As always the critical copy-editing skills of Carl-Harrison Ford are much appreciated, as are the typing skills of Nichole Orth. We also thank Neal Arthur and Martin Lawrence for their suggestions upon reading earlier draft chapters. Downloaded by [New York University] at 04:30 24 August 2016 Finally, we thank Routledge Commissioning Editor Terry Clague and his assistant Sinead Waldron for their interest in this project, and Routledge for their commitment to it. Frank Clarke Graeme Dean Matthew Egan ABBREVIATIONS AASB Australian Accounting Standards Board AAT Administrative Appeals Tribunal (Australia) ABCP asset-backed commercial paper ACSI Australian Council of Superannuation Investors ACTU Australian Council of Trade Unions AFR Australian Financial Review AGM annual general meeting AIFRS Australian International Financial Reporting Standards APESB Accounting Professional and Ethical Standards Board APRA Australian Prudential Regulation Authority ASAu Australian auditing standards ASIC Australian Securities and Investments Commission ASX Australian Stock Exchange BCBS Basel Committee on Banking Supervision BCCI Bank of Commerce and Credit International BIS Bank for International
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