Accounting scandals in Australia since the late 1980s
Garry D. Carnegie, Professor of Accounting, School of Business, University of Ballarat and Brendan T. O’Connell, Professor of Accounting, School of Business,
James Cook University
Introduction
Corporate failures and accounting scandals are often interrelated. History has repeatedly shown that accounting failure is frequently a determinant of unexpected corporate collaps. As sharply illustrated in the early 2000s with Enron and WorldCom in the United States and with HIH Insurance in Australia, such a phenomenon is not ancient or quaint. In respon to instances of accounting failure, legislative and other reforms are typically adopted to ensure that such instances do not ari again in future. Notwithstanding the reforms, corporate failures are perennial, especially during periods of economic downturn, and typically leave the accounting profession defending itlf, repeatedly, leading to yet further governance reforms that are intended to ensure, as far as possible, that errors, misjudgements and negligence of the past do not recur.
Corporate scandals up to the time of writing in Australia have not been unusual in the n that such failures reflect the excess of human behaviour, specifically in the commercial/corporate world, where greed and hubris can assume prominence, especially during periods of rapid economic development or transformation or extended economic growth periods. Such conditions are exacerbated during times where there is little or no effective company regulation, especially where the accounting and audit provisions of relevant company legislation, if any, are shown to be inadequate. Such circumstances were evident in Eastern Australia during the early 1890s major economic depression which brought the boomtime that had been experienced since the 1870s to an abrupt end. Since that time other rounds of corporate failure have been experienced in Australia, most notably during the 1960s, 1970s, late 1980s/early 1990s and early 2000s. Lately, corporate failures have not necessarily arin as a conquence of tight or vere general economic conditions, but have occurred largely due to poor or ineffective management, including inadequate corporate governance, accounting and financial reporting, combined with
concerns about the lack of perceived independence of auditors, in general, and about the perceived lack of independence of certain audit practitioners, in particular.
Australia is part of the developed world as a resource-rich industrial country. It is known as the “luck
y country”. As Australia once comprid six British colonies until Federation took place on 1 January 1901, Australian institutions and legislation were shaped by Britain as the “mother” country. Its regulation of companies across time has been specifically influenced by spates of corporate collaps in Australia. In addition, major corporate failures in Britain, which have often resulted in the passage of corrective laws in that country, have subquently influenced the form of Australian laws on companies. More recently, US legislative reforms have impacted developments in Australia, particularly the Sarbanes-Oxley Act of 2002, while International Accounting Standards/International Financial Reporting Standards of the International Accounting Standards Board have been adopted in Australia, since 2005, as Australian International Financial Reporting Standards (AIFRS).
The remainder of this chapter is structured as follows. There follows an overview of corporate and accounting scandals in Australia during particular periods, as outlined above, dating from the 1890s economic depression. In the next ction, further attention is placed on four specific corporate scandals, namely Adelaide Steamship, Bond Corporation, Harris Scarfe and One.Tel that occurred either during the late 1980s and early 1990s or in the early 2000s. A detailed examination of the collap of HIH Insurance, which collapd in 2001, and the aftermath follows. Thereafter, the implications of such scandals for corporate governance oversight and regulation in Australia are briefly examined. The conclusion then follows.
Overview of accounting scandals during and since the 1890s
According to Sykes (1998, pp. ch. 2), the first major corporate collap in Australia, when known as New South Wales, was the Australian Auction Company which failed in Sydney in 1841. This collap came during the country’s earliest economic downturn after European ttlement and followed a major speculative land boom and excessive consumer spending during the 1830s. While there were a number of other major corporate collaps during the period until the early 1890s, such as the Royal
asdlBank of Australia in 1849 (Sykes, 1998, pp. ch. 3), the Bendigo Waterworks Company in 1860 (Sykes, 1998, ch. 4), the Bank of Queensland in 1866 (Sykes, 1998, ch. 5) and the Provincial and Suburban Bank in 1879 (Sykes, 1998, ch. 6), the first major calamitous period in Australian corporate and accounting history in Australia came in the early 1890s. This dramatic decline followed a spectacular land boom, where optimism and speculation reached almost staggering heights during the 1880s (e, for example, Blainey, 1958, ch. 10; Butlin, 1961, ch. 12; Butlin, 1964; Cannon, 1967 and Boehm, 1971).
The Colony of Victoria was made prosperous by the gold rush of the 1850s and, following mass imm社会实践活动记录表
igration and rapid pastoral industry expansion, boom times were experienced. Victoria’s capital, Melbourne, became known as “Marvellous Melbourne” during the 1880s and, by 1892, it was Australia’s largest city with half a million inhabitants (Briggs, 1977, p. 278). Eastern Australia of the period has been described as one of the most concentrated examples of the laisz-faire “boom and bust economy” (Cannon, 1967, back cover). The year 1888 is recognid as the “insane miraculous year” (Serle, 1971, p. 247). The inevitable economic depression that followed a silver boom and a period of excessive land speculation was catastrophic and gripped Eastern Australia during the early 1890s. This period brought havoc and witnesd the collap of many banks, building societies and land finance companies. For a brief time during this period, two-thirds of the country’s banking asts were frozen (Sykes, 1998, p. xi). According to Sykes (1998, p. xi), this crash brought the wor wave of collaps experienced in Australia’s history in terms of “personal grief and economic disruption”. In distributing blame for the collap, the accounting profession was not immune from harsh criticism.
Particular attention was focusd on the state of auditing around the time, which was described by various commentators as a farce. A report in the Age newspaper of 14 December 1891, for example, stated “… the urgent demand for a better system of audit is conspicuous. Existing auditing
arrangements have been proved in numberless instances to be farcical” (p. 4). Commentators were especially critical of the clo personal ties between directors and auditors, the incompetence of certain auditors and the focus by too many auditors on the arithmetical accuracy of books and the balance sheet (Waugh, 1992, p. 377) rather than exercising their professional judgment on key
matters such as the collectability of debts and loans and the dependability of the monetary values attributed to asts (e, for instance, the Australasian Insurance and Banking Record, 1891). According to John B. C. Miles, President of the Sydney Institute of Public Accountants (1894), the auditors in many cas were unable or unwilling to provide “diligent examination of the accounts … and they were, in all probability, friends of the directors, who acquiescent minions they voluntarily became” (Miles, 1895, reproduced in Carnegie and Parker, 1999, pp. 207-226).
The Australasian Insurance and Banking Record (AIBR) was as scathing as Miles on standards of accounting and audit (Carnegie and Parker, 1999, p. 17). The journal’s considered views on the auditing aspects of the 1890s financial crisis are contained in a two-part article in its February and March 1892 issues. It was explained in the first part of the article that:
The disasters which have recently overtaken some of the financial institutions
doing business in Melbourne and Sydney, have caud the subject of audit to
be brought more prominently before the public than has hitherto been the ca.
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At some of the meetings of shareholders it has been more than hinted that
collap could have been averted had the auditors appointed to examine and
certify to the correctness of accounts performed their duties in a less
perfunctory manner (AIBR, 1892, p. 81, reproduced in Carnegie and Parker,
1999, pp. 182-184; also e Waugh, 1992, pp. 377-388).
While the last two decades of the nineteenth century witnesd incread demand for accounting and audit rvices due to growth in company formation and the beginnings of the organid accounting profession in Australia (Carnegie and Edwards, 2001, pp. 305-306), the 1890s scandals were a vere test for the fledgling professional accounting bodies and their members. Notwithstanding the impact of the scandals, Davison (1978, p. 112) put the view that “a popular fear of bad bookkeeping … gave accountants their new professional status”. The 1890s scandals al
祖狄闻鸡起舞so resulted in the passage of the Victorian Companies Act of 1896 which was the first legislation on company auditing in Australia (Gibson, 1971, pp. 39-47; 1979, pp. 24-25; 1988, p. 24 and Chua and Poullaos, 1998). This Act required public companies to issue an audited balance sheet which disclod a minimum range of information.
The 1890s crash demonstrated that “big crashes follow big booms” (Sykes, 1998, p. xi). This phenomenon was not the ca during the Great Depression of the 1930s as
Australia had not experienced a sizeable boom during the 1920s. While the Great Depression was the worst ever economic depression to be experienced in Australia, it was not marked by a wave of corporate collaps as companies and other entities as well as individual business operators toughed out the turmoil. The early 1960s witnesd a rapid expansion in consumer spending fuelled by the easiest credit terms in living memory following an influx of European ttlers to Australia from 1949 and, ultimately, brought about a Commonwealth government impod credit squeeze. Companies which failed during this period included Reid Murray, Stanhill Development Finance, Cox Brothers, and H. G. Palmer (Consolidated). Conventional accounting practices, once again, come under strong criticism (e, for example, Birkett and Walker, 1971; Chambers, 1973 and Clarke, Dean and Oliver, 2003, p. 49-
50). One commentator stated “one point that does emerge clearly from the results
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[i.e. failures] is that veral companies have very misleading statements of profits in the previous year’s accounts and in interim statements last year” (Australian Financial Review, 22 January 1963). It was also indicated that stock exchange officials asrted that “poor accounting … brought about the situations” (Australian Financial Review, 22 January 1963; also e Birkett and Walker, 1971). A 1966 report by the General Council of the Australian Society of Accountants (ASA), entitled Accounting Principles and Practices Discusd in Reports on Company Failures, while responding to criticism of certain accounting practices and the profession generally following the failures, strived to exonerate accounting from playing a key role and instead identified management and management practices as the main culprits (ASA, 1966). On the other hand, the Institute of Chartered Accountants in Australia (ICAA) appears to have virtually remained silent, thus illustrating another form of “respon” to this testing period for the local accounting profession. Notwithstanding the ICAA approach, “the [accounting] profession was
陆军军医大学‘stirred’ by the company failures of the 1960s” (Birkett and Walker, 1971, p. 136).
The next boom in Australia during the early 1970s was led by the mining industry and was known as
“the nickel boom” (Sykes, 1998, p. 384). This period witnesd the demi of Mineral Securities Australia, Mainline Corporation, Cambridge Credit Corporation, Gollin Holdings and Poidon NL among other failed companies. Following a major share market downturn in October 1987, the “frantic boom” of the 1980s was over and there resulted the “cond worst” wave of corporate collaps to
have ever been experienced in Australia (Sykes, 1998, p. xi). This pre-recession period has been described as “the dreamtime casino” (McManamy, 1990) and was fuelled by the notion that “greed is good” (Barry, 1990, p. 286). The period prior to the 1989 to 1992 recession was marked by excessive borrowings, especially involving the u of substantial debt in financing takeovers at high or excessive prices. Failures included Adelaide Steamship, Ariadne, Bond Corporation, Hooker, Judge Corporation, Parry Corporation, Spedley Securities, Tricontinental and Westmex as well as the State Bank of Victoria and the State Bank of South Australia. According to Green (1991, p. 145) “everyone had their eyes” clod during the 1980s boom period while Sykes likened the emingly inevitable collap to the events of the 1890s in stating “clearly by the 1980s we had forgotten the lessons of the 1890s” (1998, p. xi).
The early 2000s, especially the year 2001 which shockingly brought global terrorism to the fore, also 推荐看的书
brought another round of corporate failures in Australia, which included Antt, Centaur, Harris Scarfe, HIH Insurance, One.Tel and Pasminco (e, for example, Bosch, 2001; Clarke and Dean, 2001; Clarke, Dean and Oliver, 2003, pp. 215-221; Fabro, 2001; Johnson, 2004b, pp. 1-16) Such failures coincided with the shock failure of Enron and WorldCom, which were causing much anxiety in international financial markets and within the worldwide accounting profession (e, among the others, Brewster, 2003; DiPiazza and Eccles, 2002; Fox, 2003; Hamilton and Micklethwait, 2006, and Jeter, 2003) with implications for popular conceptions of accountants and accounting (Carnegie and Napier, 2006). In January 2002, an Australian press story headline stated “Judges face busy time as watchdogs pounce” (Hepworth, 2002).
Unlike earlier failures in Australia, as outlined above, this ries of collaps did not eventuate in the immediate aftermath of a boom period. Instead, the boom in Australia which commenced following the 1989 to 1992 corporate shakeout has continued virtually unabated since 2001 to the time of writing. Kohler (2001, p. 21), in commenting on the role of auditors in the early 2000s failures, argued:
Auditors once again have a lot to answer for. Every time there is a wave of
collaps, auditors shuffle into the firing line. It has happened again, with
auditors once again saying that the problem is not their performance but the
“expectation gap” – this is, we all expect too much of them.
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