Australia’s corporate regulators may be the real culprits behind the spate of recent corporate collapses, according to a new book written by two Sydney academics.
The book, Disclosure: Gilding the Corporate Lily written by professor Frank Clarke and professor Graeme Dean, suggests that complex rules and regulations imposed by corporate regulators must share part of the blame for the corporate collapses seen in recent history.
Professor of accounting at The University of Sydney Graeme Dean said that greed and individual malpractice is not the only reason behind the collapses of HIH, Westpoint and others, and claims there is an unjustified confidence in official regulatory mechanisms.
“While Enron has become the poster boy for corporate wrongdoing, in many cases it is not necessarily the intention of the parties to be acting in an untruthful way,” Dean said.
“Most commentaries on these companies source the problems to human failure and the greed and immorality of managers, but the real issue is the manner in which business activity is governed by unnecessarily complex rules and regulations.”
The book’s research found that a company’s compliance with accounting standards imposed by regulators does not necessarily produce accurate financial statements and that misleading statements are more the result of a compliance with misunderstood accounting rules, rather than intended fraudulent behaviour.
“Conventional, auditor certified disclosures are almost certainly misleading, not withstanding the best of intentions of accountants and auditors,” he said.
“Especially with consolidated accounting practices, trying to get a mirror on what’s going on within a company is a near impossibility.”
Dean said that following these high profile failures, the corporate governance mechanisms imposed by regulators are only for appearances and do not address the inherent systemic problems.
“The latest suggestions of how to fix the system by the new ASIC head initially showed promise of a more proactive approach. But close examination exposes ‘patching’ that suggests ultimately it will be more of the same,” Dean said.
According to Dean, in order to prevent future HIH-type corporate collapses the financial disclosure system should be reformed with ‘mark-to-market’ accounting in order to eliminate the subjectivity inherent in fair value valuation.
“We would argue all of the items in the balance sheet that have no money referent should be eliminated. This includes all unidentifiable intangible assets such as deferred tax benefits and goodwill, which are generally shown as some expensed amount rather than at market value,” he said.
