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6.5 X 11 Threelines.P65 Cambridge University Press 978-0-521-82684-6 - Corporate Collapse: Accounting, Regulatory and Ethical Failure, Second Edition Frank Clarke, Graeme Dean and Kyle Oliver Excerpt More information PART I Accounting in Crisis – a Farce to be Reckoned With © Cambridge University Press www.cambridge.org Cambridge University Press 978-0-521-82684-6 - Corporate Collapse: Accounting, Regulatory and Ethical Failure, Second Edition Frank Clarke, Graeme Dean and Kyle Oliver Excerpt More information CHAPTER 1 Chaos in the Counting-house Corporate accounting does not do violence to the truth occasionally and trivally, but comprehensively, systematically, and universally, annually and perennially. R.J. Chambers, 1991, p. 19. When Bond Corp first announced its loss of almost $1 billion in October 1989 it surprised most of those who felt that they had their finger on the pulse of Australian corporate life.1 Perhaps it shouldn’t have been such a surprise, for it had all happened before, many times, over many decades, all around the world. Different charac- ters, different settings, different companies in different industries – but in similar circumstances – a common pervading regulatory philosophy – procedural input processing rules within a capitalisation-of-expenditure model coupled to sanctions for non-compliance, even when non-compliance made more sense in reporting an entity’s financial state of affairs. And it would happen again. Happen again, indeed! In mid-2001 it hit with added force as the media grappled with Australia’s contribution to the tech-wreck – the dot.com collapses of telcos such as One.Tel. But it was not only the new economy companies that were falling over. HIH, one of Australia’s old economy companies and largest insurers, had collapsed unexpectedly in circumstances rivalling the collapse of Bond Corp. HIH’s collapse was claimed to be Australia’s largest corpor- ate collapse. Typically it embroiled the affairs of many of the big names in commerce and the accounting profession. It would produce Australia’s first accounting-related negligence litigation against the federal government and its prudential regulator, APRA. Several months later in the United States the ‘reported’ superstar Enron would become its largest bankruptcy up to that time, with asset book values in excess of US$60 billion and an estimated deficiency in shareholder value of over US$63 billion. No sooner was Enron’s enormity grasped than it was eclipsed by WorldCom’s US$103 billion bankruptcy,2 the demise of several technology companies, including Adelphia Communi- cations, Global Crossing, and by the alleged massive ‘accounting irregularities’ at several large US companies in 2002, such as Disney, WorldCom, Xerox, Merck and Qwest Communications, forcing ‘earnings restatements’. Again, the stellar performers at the sharp end of town were in disgrace. 3 © Cambridge University Press www.cambridge.org Cambridge University Press 978-0-521-82684-6 - Corporate Collapse: Accounting, Regulatory and Ethical Failure, Second Edition Frank Clarke, Graeme Dean and Kyle Oliver Excerpt More information 4 ACCOUNTING IN CRISIS Back in 1989 it had been the turn of Alan Bond, one-time Australian ‘Businessman of the Year’, then ‘Father of the Year’, and local folk hero for bankrolling the 1983 America’s Cup challenge that had seen the famed cup unscrewed from its Rhode Island mantelpiece and sent to Australia. Bond Cor- poration’s assets (it seemed) were not as gold-plated as they had been rep- resented to be. Indeed, it was being said that they were mostly water. One top-value asset, the accounting-created Future Income Tax Benefits had a massive $453.4 million written off it. Unbelievable! Well, at least it was to those who had an inadequate understanding of the annals of corporate history. And that included, it seemed, almost everyone. In 2001–02 some of the contemporary corporate high-fliers were under a similar cloud: in Australia, Williams, the doyen of the insurance industry; Rich, the entrepreneur extraordinaire; and other ‘big’ names such as Keeling and Cooper. Household names such as Murdoch and Packer were hitting the headlines by virtue of their association with One.Tel. In the United States ‘Chainsaw’ Dunlap of Sunbeam, Lay, Fastow and Skilling from Enron, Ebbers from WorldCom, Tyco’s Kozlowski, the Rigas family from Adelphia, were all making the news; President Bush’s time with Harken and Vice-President Cheney’s stint at Halliburton also enjoyed considerable print space. It had become a familiar story. In its time, the 1990s aftermath of Bond Corp’s announced ‘record reported loss’ had a lot in common with its antecedents too. Media commentators would zoom in on the personalities, intrude into their private lives, pick up and high- light the gossip regarding their peccadillos. A regulatory theatre provided old refrains of indignation and outrage, promises of retribution to offenders, justice to the aggrieved. The cult of the individual would be revived. Connell, Yuill, Goldberg, Bond, Skase, Goward and other major players in the 1980s failures would be labelled ‘corporate cowboys’ and their life in the saddle exposed. Huge sums would be spent attempting to bring the high-fliers to ground, extract them from their hideaways. Skase was chased to Majorca, where he even- tually died in 2001. Following his death the attention continued – witness the ‘Spurned Skase heirs dob in Pixie’ headline.3 A decade after his time as leader of the Liberal Party, John Elliott was being questioned over his role as non- executive director of the insolvent Water Wheel Ltd.4 Of course, the search for scapegoats has been time-consuming. But again, attention has been on individuals – individual auditors, individual accountants, or the firms of which they were partners; individual directors, or the Boards of which they were members; individual bankers and financial intermediaries, or the financial institutions which they headed. Their business morality, their ethics, would be raked over and called into question. Ethics would be equated with corporate governance. It is an exemplar of what Neil Postman described as Amusing Ourselves to Death – entertainment! But it is entertainment that © Cambridge University Press www.cambridge.org Cambridge University Press 978-0-521-82684-6 - Corporate Collapse: Accounting, Regulatory and Ethical Failure, Second Edition Frank Clarke, Graeme Dean and Kyle Oliver Excerpt More information CHAOS IN THE COUNTING-HOUSE 5 is reduced to the point where the seriousness of the affairs is lost from sight in the short term and completely forgotten in the longer term. Whilst resources were increased in the early 1990s to assist regulatory bodies, virtually nowhere would there be concerted attention paid to rectifying the system that permitted it all to occur, even facilitated it – the generic imper- fections in the mechanisms supposedly regulating corporate activities, their financial reporting, permissive corporate structures under Australian law, or the pervading ideas on corporate governance. A decade on and the refrain continues. The major collapses of HIH, One.Tel, Ansett, Harris Scarfe, Centaur and the financial difficulties at Pas- minco in Australia, and similar headline grabbers – Enron, WorldCom, Xerox, Adelphia and Qwest Communications (especially) in the United States – have rekindled interest in the arcane world of accounting and auditing. Size is obviously a drawcard. Just prior to their collapses or financial dilemmas, HIH was one of Australia’s largest insurance companies; Enron was the world’s largest buyer and seller of natural gas and the seventh-largest listed US com- pany; WorldCom was once the sixth-biggest corporate borrower in the United States and Xerox was synonymous with business copiers. Déjà vu is pervasive. Consistent with our descriptions of the ‘cult of the individual’ during earlier periods, the media inquiries quickly honed in on the lives of HIH’s Ray Williams, Rodney Adler and Brad Cooper; One.Tel’s ‘Rich Kids’ – Jodee Rich and Brad Keeling – and heirs to the business dynasties, James Packer and Lachlan Murdoch. A scapegoat had to be found for HIH, One.Tel and other collapses through the HIH Royal Commission’s deliberations, Liquidators’ hearings and regulatory court actions. Initial cries of ‘Where were the auditors?’, ‘How could such entities collapse so suddenly?’, ‘Accounting in crisis’, ‘How crooked is Wall Street?’, ‘Who can you trust?’ ‘Accounting in chaos’, emerged right on cue. Calls for changes to auditing practices thundered – quarantine audit and non-audit services, compulsorily rotate auditors and impose a mandatory audit committee regime! A new Audit Independence Supervisory Board was proposed. Other regulatory layers have been proposed, including: ‘independence boards’ within audit firms to monitor potential conflicts of interest, criminal sanctions for company employees and officers who provide misleading information to auditors and to the public res- pectively. All of this in the guise of seeking to make auditors more independent, and presumably, to avoid future unexpected corporate collapses. And while the profession has pursued the limitations of auditors’ liabilities individual audit firms like PricewaterhouseCoopers have changed the wording of their audit opinion to achieve that result.5 In the United States the SEC and Congress have head-hunted too. Few have been spared. The Enron fallout blanketed the corporate vista from CEO Kenneth Lay, President Skilling and CFO Fastow to the US President’s mother. © Cambridge University Press www.cambridge.org Cambridge University Press 978-0-521-82684-6 - Corporate Collapse: Accounting, Regulatory and Ethical Failure, Second Edition Frank Clarke, Graeme Dean and Kyle Oliver Excerpt More information 6 ACCOUNTING IN CRISIS US president George W. Bush and Vice-President Cheney have had to weather alleged questionable conduct of their involvement as executives in Harken and Halliburton respectively. Champion CEO ‘Chainsaw’ Al Dunlap has been cut down for his shenanigans at Sunbeam. Enron’s CEO Kenneth Lay and President Jeffrey Skilling, WorldCom’s Bernard Ebbers and Tyco’s Dennis Kozlowski have each incurred a hefty ‘going over’.
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