Corporate collapse: accounting, regulatory and ethical failure

This Volume is the second edition of a work which first appeared in 1997. Although it escapes comment from the authors, it is significant that they have reordered the subsidiary title from the hitherto "regulatory, accounting and ethical failure" to lead with "accounting" failure, appropriately, given

Moving past the title page, the most substantial change in this new edition is the addition of two chapters dealing with the "new millennium", extending the previous coverage which finished with the 1980s. The resulting 19 chapters comprise (i) a mixture of essays on various aspects of financial reporting, and (ii) case studies consisting of micro-histories of corporate collapses, although there is considerable overlap between these genres through the essays frequently referring to actual corporate failures and the reiteration of essay themes in the case studies.

Part I, subtitled "accounting in crisis - a farce to be reckoned with" consists of a pair of essays. The first, "chaos in the counting house", outlines the extent, impact and unexpectedness of corporate failures in Australia, the US and UK. In the following chapter, "creative accounting - mind the GAAP", the suddenness of these corporate collapses is attributed to misconceived accounting standards which allowed companies to report healthy profits and receive unqualified audit reports at the same time as their real financial positions were deteriorating to the point where failures were inevitable.

In Part II, the chronological material commences with the 1960s by means of an overview essay on "dubious credit and tangled webs". There follows case studies of the failures of financier Reid Murray and electrical-goods retailer H.G. Palmer, and an account of the infamous "round robin" transactions through which cash was removed from public companies in the Stanhill group in favour of the private interests of Stanley Korman, its controlling figure, a tactic later refined by Alan Bond.

In Part III coverage moves to the 1970s, for which the theme is "going for broke", illustrated by chapters analysing how share trader and would-be mining house, Mineral Securities, and property developers Cambridge Credit and Associated Securities, achieved this "broke" status. The treatment of Mineral Securities illustrates well the authors' general approach. The company's failure was ostensibly triggered when it was forced to correct an earlier earnings statement upon advice that a profit of $6.6 million arising from the sale of shares by the parent to a subsidiary, by means of an intermediary, breached consolidation principles. The main villain in the authors' view is not the clique that attempted the manipulation but the absence of a "mark to market" requirement which would have forestalled their action.

Part IV covers the 1980s, seen as the "decade of the deal", illustrated by how conglomerates Adsteam, Bond Corporation and Westmex Ltd, dealt their stakeholders losing hands. The questionable deals themselves were often intragroup and related-party transactions, not based on market values, which were deliberately used to distort financial statements to report good news when the reality was that the underlying positions were desperate.

Curiously, the 1990s is the missing decade in the authors' coverage. For whatever reason - perhaps they couldn't fashion one of their punning/mischievous titles for this period - they move to Part V the "new millennium" with its theme, "life in the farce lane", which comprises one essay, "crisis in accounting and audit" and a single case study of insurer HIH. The latter was written as it was happening, perhaps explaining the uncharacteristic textual errors: eagle-eyed readers will know that it was Rodney Adler (not Alder as on p.244) who was a non-executive director of the firm. Similarly, they will note the reference to the defects of the corporate system on the next page.

Part VI, which concludes the collection, introduces the concept of "regulatory reforms", with descriptions of the "byzantine structures", adopted by companies such as Hooker Corporation, Rothwells Ltd, and Lang Corporation, which all created bewildering mixes of public, private and associated companies and other entities, seemingly contrived to complicate the interpretation of transactions occurring remote from markets, giving full scope for "creative accounting". The essay which follows, "group therapy - consolidation accounting", deals with the practical and conceptual problems of complex groups, albeit at a somewhat abstract level.

In the penultimate chapter, the "attrition" referred to in "fatal attrition - accounting's diminished serviceability", refers to the diminution of professional accounting and auditing judgments in the modern accounting environment. The authors are true believers in the historic "true and fair" concept, which they consider has been usurped by the proliferation of misguided accounting standards, UIG rulings, and governance requirements. The collection concludes with "ethos abandoned - vision lost", a provocative examination of ethical issues.

Failure is always more interesting than success. When failure is massive and associated with high-profile individuals, the hubris is compelling. The participants in the authors' saga are fools and knaves but never heroes. The fools are the accounting standard-setters and regulators who devise and monitor incoherent financial reporting regimes. In this scenario, auditors are on fools' errands - "missions impossible" - in having to make judgments based on what the authors regard as the flawed "capitalisation-of-expenditure" model of financial reporting. Ostensibly the knaves are the miscreants - the Adlers, Bonds, Connells et al., - whose actions resulted in corporate collapses. However, the authors are surprisingly sympathetic to these individuals as illustrated by their analysis of the Minsec collapse (see also p.319), seeing them as fools as much as knaves, in effect awarding them culpability remissions because the accounting environments in which they operated were hostile to truthful financial reporting.

On second thoughts, there is a hero (or at least an anti-hero) present in these pages in the person of the late Professor Ray Chambers. The authors would doubtless take it as a badge of honour to be regarded as devotees of Chambers' ideas. Inevitably, their Chambers-influenced view is that all (or at least most) would be well in the financial reporting world if financial statements adopted "mark to market" concepts whenever feasible (in compliance with accounting standards which also adopted this concept). The consequences of this proposition would include prohibiting the preparation of group accounts (as these entities are currently interpreted) and tax-effect accounting.

This is not the place to examine the practicality and conceptual validity of Chambers' vision, and to be fair to the authors, they acknowledge some difficulties with the "mark to market" concept (see pp.106 and 278). If all history is partial, then, arguably, this history is particularly partial. In focusing on failure. Corporate Collapse is open to the charge of "non-survivor bias". Most corporations contemporary with those analysed by the authors did not fail. Although the authors consider that a "time bomb" of potential collapses lurks in the corporate sector due to pervasive financial mis-reporting, this proposition defies proof. We cannot be sure that their examples are not total outliers.

The authors attempt to illustrate the macro-economic impact of corporate collapses is weakened by the inclusion in their analysis (on p.217) of enterprises such as News Corporation and the National Australia, ANZ and Westpac banks, which made large single-year losses in the 1993-2002 period but did not fail. These firms are grouped with high-profile failures such as Ansett, HIH, and Bond, which rather weakens the case.

Yet while Corporate Collapse is unashamedly history as advocacy, its micro-histories of failed corporations are truly excellent and demonstrate thorough research. We learn of their origins, the nature of their business practices and those of their contemporaries, the accounting treatments which obscured impending collapses, and something of the individuals involved. In this respect. Corporate Collapse is an important addition to the historiography of business and accounting practices in the post-1960 period in Australia, complementing more general works such as Trevor Sykes' The Money Miners (1978) and Bold Riders (1994), and Paul Barry's Rise and Fall of Alan Bond (1990) and Rich Kids (2002) that cover some of the same ground. The authors' particular contribution is to bring accounting and legal expertise and a crusading zeal to their analysis. They have produced a provocative, stimulating and eminently readable work that deserves a wide audience. Whether it brings about the changes they desire remains to be seen.