Regulators are to blame for corporate collapses
Enron, WorldCom, HIH, Harris Scarfe, Paramalat, One.Tel. Bond Corp, Westpoint, Fincorp, AWB, James Hardie, and the like are now household names. They are known universally as much by the notoriety of their alleged corporate malpractices, as for their products or services.
Corporate notoriety has achieved for them a place in economic history that advertising alone could not.
Now a new book from two accounting professors at the University of Sydney - Indecent Disclosure: Gilding the Corporate Lily delves into the circumstances underpinning that notoriety, and unmasks the unjustified confidence in official regulatory mechanisms.
Unlike the previous commentaries on those companies sourcing the problems to human failure, Profs. Frank Clarke and Graeme Dean show the problem to be endemic of the manner in which business activity is governed by unnecessarily complex rules and regulations.
The new suggestions of how to fix the system by the new ASIC head show promise, a proactive approach. But closer examination exposes patching that suggests ultimately it will be more of the same, stated the authors.
Professors Dean and Clarke allege public debate has had a misplaced focus on the actions of individuals alleged to have conspired to mislead investors the likes of Kenneth Lay, Ray Williams, Alan Bond, Jodee Rich, etc. rather than on how and why companies' disclosures can so readily be made to produce a misleading picture.
Their research for the book has produced four key findings:
Companies' compliance with the accounting standards does not necessarily produce financial statements that disclose their wealth and progress.
- Misleading financial statements are more the result of compliance with the accounting rules - with the best of intentions, rather than deviation from them with the intent to mislead. Auditors have a near impossible task
- The raft of knee-jerk corporate governance mechanisms imposed following recent high-profile failures are directed at appearances than rectifying the problems
- There is increasing evidence that the current complex group structures which organise corporate activities are incapable of effective regulation.
According to Dean and Clarke, financial disclosures labour under misrepresentations caused by various national regimes of accounting standards, and the resulting national applications of the international prescriptions.
Conventional, auditor-certified financial disclosures are misleading, notwithstanding the best of intentions of accountants and auditors, stated the Professors.
There has been almost no contemplation of whether those formulating and enforcing the ineffective disclosure rules and standards are equally (perhaps more) culpable than those signing and issuing companies' financials.
Clarke and Dean propose a system of mark-to-market accounting and reinstatement of the true and fair criterion as practitioners' primary principle.
They suggest a system of financial disclosure where:
- The guessing necessary for NPV exercises plays no part
- Depreciation of an asset is properly taken to be the decrease in price not accountants' nonsensical allocation of cost
- Accruals are determined to accord with legal capacity to recover the amount accrued, not anticipated future revenues.
- Money spent is reported gone, not as an asset, somehow still possessed
- The legal separateness of individual companies is always recognised, and related companies' aggregated data are arranged sensibly to provide the insight into the possible financial implications of the relatedness.
According to the Professors, this leads them towards a disclosure system not so much principles-based as a principle-based financial disclosure free of accounting artifacts, free of the counterfactual, where indecent disclosure always requires the deliberate intent to mislead, not the mere compliance with the compulsory prescriptions.
14-Aug-2007