Indecent Disclosure: Gilding the Corporate Lily

Citation

Staunton, J. (2009), "Indecent Disclosure: Gilding the Corporate Lily", Journal of Accounting & Organizational Change, Vol. 5 No. 1, pp. 115-117. https://doi.org/10.1108/18325910910932241

I recall that Allan Barton titled one of his texts “The Anatomy of Accounting”. The Clarke/Dean text (C/D hereafter) takes the analogy with medical research and applications (p. 62) a stage further; this time lessons being learned from “Autopsy‐like examinations of corporate collapses” (p. 75). The lessons are many and wide‐ranging for all interested in accounting and auditing.

While in current times much research is based on macro‐type data, (one may wryly smile when researchers complained mid‐2007 that share market trends were up to 15 standard deviations away from the norm), C/D takes a more micro‐type approach and provides much evidence of the malaise and needed changes in corporate governance, so that audited financial statements become the quality control device originally intended. At the same time, these statements offer, as output, part of the data needed for the varied and interested parties (including investors, regulators, researchers, professional bodies and practitioners).

As pointed out in the Acknowledgements (pp. xx‐xxi), C/D builds on previous works including Corporate Collapse: Regulatory, Accounting and Ethical Failure (1997, 2003 with Oliver, K G) and other related publications. They follow the path established by Ray Chambers and the “Sydney School” (of which this reviewer was a member 1966‐1973) in advocating reforms to accounting, especially as regards corporate reporting.

The Prologue (pp. 1‐13) provides a setting for much of the later argument – one of corporate governance (p. 3) in which disclosure of a company's performance and position provides one key governor while the audit of those disclosures provides another. These are “essential to the proper functioning of market economies” (p. 7). However, C/D argue that critical issues remain, including “whether the conventional corporate form … can indeed be governed adequately” (p. 7) and “the questioning not only of the rules directing how companies account and report, but also whether the system should remain rules‐based or become a more principles‐based system” (p. 8). Such issues, being relatively current, provide the setting for four themes which C/D follow:

1. 1.

   conventional accounting provides the required disclosure only by chance;

2. 2.

   current corporate governance regimes “do not offer remedies for … ills evident in history and repeated in the recent past”;

3. 3.

   auditors face a “near impossible task”; and

4. 4.

   “the prevailing corporate structure needs radical modification” (pp. 12‐13).

Chapter 1 of C/D (pp. 14‐32) provides evidence of how the “System” – both in general and in accounting in particular – suffered from “a deep malaise” (p. 15) within which the “unravelling [of] the financial and other affairs” had become a “mission impossible”. The history of the system, both long‐past and very recent, would show “nothing new” (p. 16). Current reforms were “a repeat of history” (p. 17). While it was thought by some that in principle mark‐to‐market control was in use, a mark‐to‐model technique (using conventional accounting data) was found instead. The sections headed “Corporations and change” (pp. 21‐7) and “Corporate regulation – advent and purpose” (pp. 27‐32) briefly sketch the history of corporate governance and its role. Here, it is argued that important issues are too easily forgotten by some in the current debates.

In Chapter 2 (pp. 33‐50) C/D argue that debates on and especially the current “reforms” regarding the independence of directors and auditors tend to focus on the wrong issues. Certainly, it is argued, the “Invisible hand of self‐interest” (pp. 40‐4) has a major part to play in the modern corporation and its governance. Thus, in Chapter 3 (pp. 51‐64), it is argued that a case of corporate governance and information overload is found and that simply patching the system will not overcome the malaise. Chapter 4 (pp. 65‐84) deals with accounting issues like links between research and practice (pp. 65‐66) or the input/processing orientation of conventional accounting (p. 67) rather than a serviceable type output. Accounting cases currently found under the Trades Practice Act are introduced (p. 69) with their potential implications for the serviceability of the output provided as financial statements. Chapter 5 (pp. 85‐105) links the earlier arguments relating to the serviceability of the output to those of concern to auditing. The “inherent defects in the accounting data that auditors face” (p. 85) are seemingly not seen as in need of reform. Instead, the current reforms emphasis seems to be placed on auditing processes as though these are the sole problem. Arguments are linked to the qualitative standard of “true and fair” (p. 86) and the “expectation gap” debate (p. 96).

Chapter 6 (pp. 106‐27) returns the debate to that of accounting, being based on conventions (p. 109) and “users” rather than “uses” (p. 115) and suggested it is in need of major reform. The argument follows Chambers' CoCoA and its development over a lengthy period of time. C/D have used Chambers' archives and other sources to be able to relate some most interesting stories (pp. 119‐26) of political intrigue found in the life of 1970s and 1980s accountants which some outsiders see as being quite “dull”!

Issues arising from accounting for corporate groups are covered in Chapters 7 (pp. 128‐59), 8 (pp. 160‐86) and 9 (pp. 187‐210). Applications of “commerce without conscience,” (p. 128) where managements of companies are able to avoid obligations to other employees or consumers by using the holding‐subsidiary relationship to eventually hive off former subsidiaries with obligations/liabilities but no assets which are safely found in other related companies are outlined. As C/D point out, this is not new, but the management of the modern corporation in times of globalisation often faced other stakeholders who react in a hostile manner. A series of issues are listed (p. 147). “Groupthink” is introduced (p. 160) and heavily criticised. The suggested reform of Deeds of cross‐guarantee is discussed in detail (pp. 161‐81) as are suggested improvements (pp. 181‐86). Next, C/D provides an alternative group accounting (pp. 201‐10) to conventional consolidation techniques. The workings are probably too brief for some as is the treatment of liabilities – but several references in the End Notes provide opportunities for further reading. Chapter 10 (pp. 211‐19) provides an excellent summary of the arguments presented, supported by the stated evidence, for major reform. A series of themes are listed (pp. 216‐17) which underlie the reform.

Criticisms of the arguments presented by C/D will probably follow conventional lines which tend to be inbred along institutional influences. Some may hone in on a particular issue which, in debate, allows a hijacking of the spirit of the original argument. Some with a particular barrow to push will build criticism around that issue not being given centre stage. These will include those who see audited financial statements as ends in themselves, with the emphasis being given to data input and processing rules – the compliance only debate (p. 68). This end‐in‐itself group may also include those who see audited financial statements as an avenue of disinformation – once termed “creative accounting”, now condoned as “earnings management” or “aggressive accounting” (pp. 15 and 70). As C/D suggest, these manipulations can easily become “feral” in nature (p. 111). Teachers at various levels will find the text most useful as it provides instances of problems faced in accounting and auditing which may be adapted to questions for tutorial purposes. Students involved in research units should find the development of research questions and research hypotheses for testing much easier after a careful reading of the text.

It is somewhat ironic that the arguments of C/D regarding accounting and auditing continue well into 2008 and even beyond. Well into 2008, the sub‐prime loans scandal with its asset valuations based on mark‐to‐model and collateralised debt obligations with which conventional accounting seems unable to deal with has developed into a credit crunch with major implications for the economy, for even prime loans, leading to spectacular collapses worldwide which are now being cited. At a different level, the scramble for local councils, along with a number of charities, hospitals and individuals, to recover monies invested in sub‐prime financial instruments, allegedly following “indecent disclosure”. Arguably, some of the management of various banks/financial institutions did not really understand the risk being assumed nor what they were buying, especially when it turned out there was no “market” for the so‐called “investments”. Beyond is found a need to account for a national trading scheme for carbon emissions. One certainly wonders whether the “system” is able to be governed here as well, but that may be simply a case of the “smart” management who is always trying to stay at least one stage ahead of those who have the task of developing the standards/rules/norms – a problem faced in many areas as well as accounting and auditing.

One final point for the interested reader – do not forget to read the End Notes. Much information is found there as well!