Corporate Collapse

1
Corporate Collapse

• Virtually nothing is to be learned from studying
  individuals involved in corporate failures, no
  matter how exciting their lives may be.
• Frank Clarke and Graeme Deane

2
Classic Symptoms Preceding Collapse or I reallly
should have known.

• Overstatement of the value of assets, and
• understatement of liabilities in financial
  reports.
• Use of related party transactions to disguise the
  reality, e.g. to create a false impression about
  earnings.

3

• continuing financial losses and cash flow
  deficiencies
• weak management
• inadequate management succession planning
• looming debt payments concealment of bad debts
• inadequate capital expenditure programs
• lack of adequate information systems
• shareholder disputes

4
See also Clarke and Deane p 149-151

• declining sales or margins attempts to increase
  market share at expense of profits
• delays in financial reporting
• over-leveraged capital structure
• high-cost debt
• negative publicity in the financial and business
  communities
• deterioration in asset quality and values leading
  to reduced liquidity

5
Vulnerability of accounting standards to
manipulation

• Capitalising expenses, e.g. interest charges and
  taxes (Rolls Royce in 1970s)
• Use of accounting fictions such as Future Income
  Tax Benefits (able to be written off by Bond Corp
  in the 1980s and HIH recently) that are in accord
  with Accounting Standards.

6
The remedies do not treat the disease

• Corporate governance theory has concentrated on
  producing transparency and accuracy through
  greater compliance with existing rules. Clarke
  and Deane argue that the rules are the problem -
  at least in accounting.

7
An example the audit committee

• The audit committee, composed of non-executive
  directors, should ensure compliance with
  Accounting Standards.
• But a purely technical compliance with the
  Standards ensures that accounts are regarded by
  auditors as true and fair, even if in the
  professional judgment of the auditors they are
  not. So compliance does not guarantee
  transparency. There is no true and fair override
  on data quality.