Unbalanced sheets

Corporate Collapse
March 26, 1999

Are you sitting comfortably and thinking about investing your savings in portable pensions? Perhaps you have already taken the plunge and invested your savings in company securities and have been persuaded to believe that audited company accounts would give you worthwhile information to monitor company performance. Then take a deep breath and read the book by Frank Clarke, Graeme Dean and Kyle Oliver. It seeks to show that the visible hand of accountancy has played a major part in corporate collapses, or at least in concealing trouble from the public.

Corporate Collapse is written by two highly respected Australian academics and a research student. Its main message is that company accounts do not, and more importantly cannot (or perhaps will not), give information that can be regarded as truthful, honest or even fair. Each chapter shows that accounting is so flexible that from the same data a wide range of profit/loss and asset/liability positions can be constructed. This is because accountancy as a discipline is immature.

The book consists of five parts and 18 chapters. Each part carefully analyses major (mostly Australian) cases in which some entrepreneurs published accounts that were massaged, cooked and even roasted to show record profits. The accounts complied with the extant accounting standards and were audited by some of the world's largest accounting firms. Yet within weeks of publishing healthy profits, the companies were bust and all the profits were declared to be illusory. The 1960s problems are exemplified by companies, such as Reid Murray, Stanhill and HG Palmer. The 1970s are exemplified by Minsec, Cambridge Credit and Associated Securities. The markets did not learn anything from these episodes. The 1980s, the decade of the deal, gave rise to the accounting fiascos at the Adelaide Steamship Company, Hooker, Westmex, Parry Corporation and the mother of Australian bankruptcies - the Bond Corporation, with ignominy for Alan Bond. The same pattern has continued into the 1990s. Despite a plethora of accounting/auditing rules and regulations, the promised quality of financial information remains elusive. Indeed, the authors suggest that there appears to be some kind of a positive correlation between the increase in accounting rules and the number of accounting failures.

Although the book is primarily concerned with Australian cases, its main message is equally relevant to their UK equivalents: BCCI, Maxwell Communications, Atlantic Computers, Polly Peck, Yamaichi, Sumitomo and others. The authors note that after each collapse, a "blame game" is played. The media and significant others blame bad management, greed and non-compliance with accounting rules for corporate collapse. So the stage is then set for further tweaking of accounting rules and making a series of "motherhood-and-apple-pie" statements about ethics. The more accounting fails, the more it is demanded. There has been no critical scrutiny of the general structure of accounting or the basis of accounting knowledge even though failures of accounting continue to make headline news.

The authors find plenty wrong with the conventional way of thinking about accounting and suggest some ideas for reforms. They argue that accounting as a "product" should be subjected to the kind of "quality controls" that are routinely applied to consumer goods and services. "Recourse to the consumer law's notion of merchantable quality (fitness for use, serviceability) in the context of accounting is aptI In the same way that peanut butter must be fit for ordinary use - safe for consumer consumption - data for published financial statements might reasonably be expected to be fit for the uses we know are ordinarily made of them", say the authors.

In a consumer society, such calls are understandable. However, the concept of "quality" is highly elusive. Many pensions and farming companies claimed to have "quality" control procedures, but now with the pensions mis-selling episodes and BSE, we know differently. Like other constructs, "quality" is a social construct and its meaning depends on the politics and conventions of the time. From this perspective, the "quality" question needs to be reinterpreted as "what kind of politics" of accounting are desirable and all the methodological issues that go with it. One gets the feeling that the authors are more interested in reconstructing accounting within positivist traditions. If the real culprit of accounting scandals is the capitalist ethos of profits, and the relative absence of any moral guide to (capitalist) conduct, as the authors hint, it is difficult to see how the "quality control" approach can conquer the pressures to massage accounting numbers. A major problem might be the construction of our subjectivity, which persuades us to believe in the regulation of society through accounting numbers. However, the book is not concerned with such reflections. I guess the authors would not claim to have the answers to the deeply ingrained problems of accounting at their finger-tips. Nevertheless, their analysis and observations are helpful in engendering a debate.

Despite its Australian bias, Corporate Collapse can be used for undergraduate and postgraduate accounting courses. It should be read by anyone with an interest in financial matters.

Prem Sikka is professor of accounting, University of Essex.

Corporate Collapse: Regulatory, Accounting and Ethical Failure

Author - F. L. Clarke, G. W. Dean and K. G. Oliver
ISBN - 0521 58523 6
Publisher - Cambridge University Press
Price - £15.95
Pages - 294

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