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Corporate Collapses in Australia: Case of Harris Scarfe

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Corporate Collapses in Australia: Case of Harris Scarfe Journal of Economics, Business and Management, Vol. 5, No. 1, January 2017 Corporate Collapses in Australia: Case of Harris Scarfe O. Kavrar and B. Yılmaz Abstract—The corporate collapses in the early years of 2000 II. BACKGROUND INFORMATION in Australia showed that accounting and auditing professions have noticeably been less good than how they are supposed to be. A. The History about Harris Scarfe As a result of the previous downfalls, there is no doubt that According to the information in the Company’s web site, auditors grab most of the attention. There are a number of issues regarding auditors/audits that will be examined to discover Harris Scarfe traces its history to 1850, when the founding where the irregularities came up from, such as management partners in the business arrived in Adelaide South Australia to responsibilities, internal control, audit committee, ethics, and establish a hardware and ironmongery business. Harris Scarfe the auditor’s legal liability. This paper aims to explore the grew to become a major supplier of a broad range of implications of the previous corporate collapses on Accounting household, agricultural and industrial items. During World and Australian business and the Auditing profession in War 2, when the Australian Government enforced price Australia by focusing on the case of Harris Scarfe which was collapsed with a debt of $265 million dollars in 2001. A number controls, it used the Harris Scarfe catalogue as the price guide. of scholarly articles and journals related to this area have been After World War II, Harris Scarfe's prosperity grew with reviewed. This study also confirms the strong relationship South Australia, as it supplied building materials during the between corporate failures and the role of auditors. post-war building boom. According to different media, in 1971, Baradeen Quest Pty Index Terms—Accounting profession, auditing, corporate Limited, a subsidiary of Investment and Merchant Finance collapses, harris scarfe. Corporation Limited ("IMFC") made a successful takeover bid for Harris Scarfe Limited, which at the time was a I. INTRODUCTION company listed on the Adelaide Stock Exchange. Charles Davis Limited, a listed Tasmanian company controlled by Sir Harris Scarfe Limited has experienced one of the biggest Donald Trescowthick, acquired control of Harris Scarfe in corporate collapses in Australia with debts of $265 million. 1976, when Charles Davis took over IMFC. The Undoubtedly, the results of this collapse have negatively Trescowthick era started with growth and ended with collapse affected on the accounting profession as well as the auditing in 2001.In 1994, Harris Scarfe opened its first store in profession in Australia. At that time in Australia, in the suburban Adelaide, at Parabanks in Salisbury. Following this beginning of 2000s and 2001, other collapses occurred as well. successful store opening (in a former Venture store), Harris For instance, the collapse of HIH Insurance, OneTel and Scarfe acquired more sites in South Australia, as well as Ansett Australia all happened over and over in a short time expanding its activities to other States. In 1995, Charles Davis span in the beginning of 2000s. The recent debate about the Limited changed its name to Harris Scarfe Holdings Limited, corporate collapses and accounting scandals had a main point and it then focused on its department store activities- about the need for structure to assure that financial disposing of all of its other businesses and investments. declarations contain dependable information for decision In March 2001, conflicts were found in the company’s making. Investigations revealed that the main source of the stock position. The auditors were told to investigate the collapses is due to expectation gap. This term accommodates company’s weakening net asset to six years. During the early deep and wide range of issues related to corporate governance six years the differences were not picked up by neither the and auditor independence. The prime focus of this paper is to board nor the auditors. The board said that it was completely provide scope for research in this area by examining the issues unaware of the irregularities and had acted in good faith on such as Audit Committee, Auditor independence, Ethics, financial information provided to it by the senior management. legal liability related to Harris Scarfe. In addition, it will be The conclusion was that the board appointed voluntary discussed that how regulatory bodies including the Australian administrators to the company in April 2001. It is a story of parliament inquiry, Ramsey Report, CLERP 9 and the ASX how a major Australian company survived floods, droughts, can shorten the expectation gap and prevent for any kind of bushfires and two world depression only to fall to poor fraud. Lastly, amendments in Corporate Law Economic management. Reform Program and its new implementation will be Year 2001 did not come up just with Harris Scarfe collapse; explained. it was a tracker and the forerunner for the collapses all around Australia. Therefore, year 2001 can be treated as the year to expose the reasons behind the running collapses. Manuscript received October 28, 2016; revised December 23, 2016. B. Main Reasons behind the Collapse Ö. Kavrar is with the Economics Department, Selcuk University, Konya, Turkey (e-mail: [email protected]). Before analysing the issues which cause Harris Scarfe to B. Yilmaz is with the Business Administration Department, Selcuk collapse, it is healthier to find out the reasons behind the University, Konya, Turkey (e-mail: [email protected]). doi: 10.18178/joebm.2017.5.1.477 12 Journal of Economics, Business and Management, Vol. 5, No. 1, January 2017 company’s decline. The main reason for the collapse is reasonable assurance that financial statements are free of basically about the fraudulent set of company’s records and its material misstatement. Therefore, an audit is not a guarantor wrong expression to all stakeholders. According to Lorsch [1], of the financial performance. That’s because the external following case reveals the fraud in the set of company’s auditors rely on the information given by management. As a books. result, an expectation gap emerges. “A former Harris Scarfe accountant, Anthony Wight, At the end of the judgement of Harris Scarfe regarding its yesterday testified at the Adelaide Magistrates Court collapse, Alan Hodgson, the Chief Financial Officer of Harris committal hearing of Adam Trescowthick that the Scarfe, convicted for a six-year jail. On the other hand, former falsification of accounts started five years ago before Executive Chairman, Adam Trescowthick, charged for acting Trescowthick became executive chairman”. dishonestly, unethical and for failing to do for the best of the Another question comes up after this statement above. The company. Moreover, Court didn’t take any action against question is why Harris Scarfe seemed that company has not audit firms. The only responsible party found as the Chief got any financial problems until 2001 and why company Financial Officer and the Executive Chairman of the company. suddenly went to a voluntarily liquidation due to the As mentioned earlier, management is responsible for giving cash-flow problems. Following statement explains this true and fair information regarding the company and the audit conflict: firm is responsible for providing reasonable assurance in “In the early days it was easy for Hodgson to make a few accordance with the statements and reports taken from book entries to inflate the stock and keep the profits rolling. management. But when trading didn’t pick up at the next balance date, After getting the knowledge of Court’s decision regarding bigger entries were required, and so on” [2]. Harris Scarfe collapse, our investigation will solely focus on As can be seen from the telling above, Harris Scarfe’s main the issues about the management and what went wrong in the problem behind its collapse is the fraudulent set of company’s corporate governance and how the second set of books books and the representation of the profit higher than its real prepared in the company. These issues are all related to issues value. In this case, main points that we need to clarify are in the corporate governance. We will not blame the audit which parties didn’t perform its duties. The parties subject to firms for a fraudulent arrangement with the company’s our investigation are the management and the audit firms management, except for not assessing the fraud, because the which audited the company’s books. From this point of view audit firms are not found guilty according to court’s decision. now we have to focus on the responsibilities of the B. Internal Control management and the auditors’ as well as the issues regarding corporate governance. As the corporate governance issues are An effective internal control mechanism prevents any kind complex, the issues under corporate governance will be of fraud in the company. Providing an effective internal treated under different sub-titles. control is the responsibility of the management as well as the The impacts of the Harris Scarfe case as well as some other directors’. Internal control enables the risks to be identified collapses including HIH, One.Tel, and Ansett, have led to and exposes if the certain laws and regulations are followed in momentous force on management, auditors, accountants, record keeping. Management of Harris Scarfe is in lack of accounting profession, government, and regulatory bodies providing an effective internal control. As a result, fraudulent oversight role to reconsider the issues such as ethics, financial reporting existed. On the other hand, external independence, audit committee, and legal liabilities. In the auditors have to understand how effective the internal control following pages our investigation will focus on these issues in is in a company. Therefore, the audit firms, Ernst and Young more detail regarding Harris Scarfe collapse.
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