Corporate Governance in Relation to the Collapse of Ansett Airlines and Harris Scarfe

Corporate Governance and the Nature of Accounting in relation to the collapse of Harris Scarfe and Ansett Airlines. The corporate collapses of the last decade have had both positive and negative effects on Australia, especially the collapse of Ansett Airlines and retailer Harris Scarfe in 2001. These collapses have been positive in that they have highlighted the importance of corporate governance and the need for guidelines for companies to follow. These collapses along with other major ones across the world like Enron and WorldCom have triggered a global consciousness to clear out the problems.
Since the collapses in Australia there has been increased focus on disclosure and the independence of auditors and directors and the need for the board to act in the best interests of the stakeholders, not themselves. From research it was found that the demise of Ansett was due to the lack of the board members to act favourably to the stakeholders. The demise of Harris Scarfe was due to financial issues and the lack of auditor independence.
After these collapses the Australian government introduced a new reform (CLERP 9) to provide guidelines on corporate governance issues. Although the new regulations are not as strict as the US version (Sarbanes- Oxley Act), they have decreased the effect of corporate governance issues on companies. Corporate governance has become one of the most commonly used phrases in the current global business vocabulary. It is defined as the framework of rules and practices by which a board of directors ensures accountability, fairness, and transparency in the firms relationship with its stakeholders (business dictionary.com, 2009). It is the system by which companies are directed and controlled for the benefit of shareholders (Murry Steele, 1999). Good corporate governance is vital to the integrity of corporations, financial institutions and markets, and central to the health of our economies and their stability (organisation for economic cooperation and development, 2009). Until fairly recently, corporate governance was not a topic that attracted much public attention. It was a topic reserved for discussion in the Board room or in academic environments. The collapse of Australia??™s Ansett Airlines and retailer Harris Scarfe has focused increased attention on company failures and has put corporate governance on the front pages of our main newspapers. This has had beneficial effects. In particular, it has highlighted the important role that corporate governance plays in a modern economy and the consequences of doing something wrong. It has also strengthened the incentives for directors and policy-makers to reassess the structures needed to produce high quality corporate governance is write my essay online legit (Alan Bollard, 2003). Nations around the world are instigating programmes for corporate governance reform and establishing greater definition and clarity concerning the nature of corporate governance (Jill Solomon, 2007).
Subsequent to the corporate collapse of Ansett Airlines and Harris Scarfe retail there has been increased attention on disclosure, the role of auditors and audit independence, the need for an independent board and independent non- executive directors and a need for greater consumer and investor financial education. If these issues were focused on more highly the collapse of Ansett and Harris Scarfe could have been prevented or decreased. After such collapses as Enron and WorldCom in the United States, the US government introduced the Sarbanes- Oxley Act to improve corporate governance practices. This Act had a great effect on Australian companies and initiated the Australian government to follow their American counterparts and introduce their own version- the Corporate Law Economic Reform Program Act (CLERP 9). This Act has improved Australia??™s economic system. Ansett was an Australian airline company based in Melbourne. The airline was placed into administration in 2001 after ultimately suffering financial collapse. The Ansett collapse was attributed to a failure of governance to act in the organisation??™s (stakeholders) interests. The appointed board did not oversee the company and its interests. The decision by Air New Zealand (who already owned half of Ansett) to ???block??™ Singapore airlines entry into the Australian market did not allow competition to enter the airline market. Singapore airlines wanted to own the other half of Ansett Airlines, but Air New Zealand did not allow this. This directly resulted in the corporate collapse of Ansett Airlines (James. C. Lockhart, 2005). Ansett did not collapse due to financial issues, but due to commercial causes and the board??™s egos. (Edmond Roy, 2001) Harris Scarfe was a major department store founded in Adelaide. In 2001, Harris Scarfe??™s suppliers and customers, and even a large number of the company??™s staff, were shocked when the thriving business was suddenly faced with cash-flow problems. The company soon entered voluntary receivership, and its shares were withdrawn from the Australian Stock Exchange. Examination of the company??™s books revealed that assets had been re-valued well above market value in an effort to conceal its spiralling losses. This practice had left the company with multimillion-dollar debts. In relation to the Harris Scarfe collapse, bad management lead to bankruptcy. The CFO of the company had altered the accounts and had authorised changes to meet required profit results. The auditors of Harris Scarfe were sued due to negligence for failing to uncover discrepencies and irregular entries. It was discovered that the auditors had two sets of books and the auditor committee had an insider. (Graham Bowrey, Accy 342 lecture) The demise of Harris Scarfe shows how important auditor independence is. The auditor of the company would have been influenced by other parties and there would have been a conflict of interest. The auditor did not warn investers that Harris Scarfe did not present a ???true and fair??™ view. Shareholders in the company later sued as these deceptive statements resulted in shareholders paying more then the true market value of the shares. (Graham Bowrey, Accy 342 lecture) Corporate finacial disclosure and continuous disclosure have been key priorities for the Australian Securities and Investment Committee since the corporate collpase of compaines like Ansett Airlines and Harris Scarfe. There has been increased focus on disclosure to protect investors. To improve disclosure, we need to appreciate that unless investors have confidence in the integrity of the market, we will have difficulties in attracting and maintaining investor support for our markets. We need to address the underlying attitudes towards disclosure, and we need a commitment from all market participants towards changing those attitudes and developing a ???culture??™ of voluntary disclosure and compliance, supported by effective regulatory sanctions against those who offend (Jillian Segal, 2001). The current Australian disclosure framework (under the ASX Listing Rules and the Corporations Act) demands continuous disclosure by listed companies, to ensure that investors have access to price-sensitive information affecting a companys securities. (Luke Dale, 2005) There is no doubt that recent events??™ surrounding the collapse of high profile companies has brought the role and performance of auditors back to the forefront of all our minds. The issue is about changing attitudes and developing a ???culture??™ within the business community about the value of an audit and its contribution to shareholder value and security (Jillian Segal, 2001). In the case of Harris Scarfe, auditor independence was not maintained and this jeopardized the relationship between the retailer and its investors, eventually leading to the company??™s demise. Audits improve the reliability of financial statements, make them more credible and increase shareholders??™ confidence in them. (Shaun F O??™Malley, 2000) Those reports would not be credible, and investors and creditors would have little confidence in them, if auditors were not independent. To be credible, an auditor??™s opinion must be based on an objective and disinterested assessment of whether the financial statements are presented in a ???true and fair??™ view with generally accepted accounting principles. (Shaun F O??™Malley, 2000)
The Australian Securities and Investments Commission plays a role in ensuring that auditors of Australian companies remain independent by enforcing those provisions of the Corporations Act which deal with the independence of auditors. Director independence from a corporations management is one of the most important themes in corporate governance. In most cases it is the boards responsibility to determine whether a director satisfies the independence tests. Many boards have struggled with whether the companys outside advisers or former executives can really be seen to be independent of management (Carol Hansell, 2003). If this classification is not followed it can lead to the demise of the company. Independent directors broadly fit into the overall structure of corporate governance and are necessary to ensure effective, balanced boards. If an independent director is not appointed, agency problems may arise due to conflivts of interest between the shareholders and the executive managers. In relation to Ansett Airlines, its failure was due to the directors not acting in the best interests of the companies stakeholders. They did not allow healthy competition to enter the Australian airline market. This competition would have meant lower fare prices for consumers and more choice on airline companies. In October 2001 (after the collapse of Harris Scarfe and Ansett Airlines), the Australian Securities and Investment Committee designed an education program for consumers and investors. ASICs consumer education strategy was focused on helping consumers actively look after their money and their financial future. Not only are were they concerned with ensuring that consumers have access to independent advice, but were also concerned with ensuring that consumers have a better understanding of the financial services sector and the products that are being offered to them. The program was designed to improve the ability of consumers to make financial decisions and increase their financial literacy. (Jillian Segal, 2001) There became a need for a program like this after the collapse of Harris Scarfe in particular. Investors and consumers were putting their money into a bankrupt company and it was going nowhere.
In light of the recent Financial Crisis, it has become increasingly apparent that greater education for consumers is needed in relation to financial markets and investing. Consumers buy most products on credit. They should be taught basic economic concepts, such as budgeting and saving, and skills such as planning ahead. (European Commission, 2009) This could have decreased the huge affect the Financial Crisis had on many consumers.
Since the corporate collapses of Ansett Airlines and Harris Scarfe in 2001, the Corporate Law Economic Reform Program (CLERP 9) was introduced in 2004. It states that CEO??™s must provide written declarations on financial statements declaring that the financial statement apply with accounting standards and provide a true and fair view of the current financial position of the company. These new rules give consumers and investors greater financial information so that they can appropriately decide on where to invest their funds. It keeps the external parties more educated as to the dealings of the company. In 2002 the US introduced the Sarbanes- Oxley Act to establish stringent new laws dealing with enhanced corporate governance and disclosure, auditor independence and accounting reform, and substantially increased the accountability of directors and senior company officers. The Sarbanes- Oxley Act has heavily influenced trends in Australian corporate governance regulation since it was enacted in July 2002. Australian legislators, regulators and the ASX have been mindful of the Sarbanes- Oxley Act reforms when introducing the CLERP 9 amendments to the Corporations Act in 2004. (Luke Dale, 2005) These new Australian reforms have also responded to the high profile corporate collapses of Ansett Airlines and Harris Scarfe.
The Sarbanes- Oxley Act implements a strict and inflexible set of prohibitions on external auditors and audit functions. By contrast, the Australian CLERP 9 subjects Australian companies and their external auditors to detailed provisions governing auditor independence. The Australian version is more of a guideline that is flexible and can be adjusted to suit a certain company. If the government wants to eliminate auditor independence issues they should follow the US governments lead and make the CLERP 9 more of a strict rules based reform. Overtime Australia should adopt the US??™s more rigid approach. In conclusion, governance and accounting practices have come into sharp focus since the collapse of Ansett Airlines and Harris Scarfe retailer. The inability of the boards and management of many companies to foresee problems in their businesses and reporting of inflated earnings has seriously undermined investor confidence and has given rise to questions of the competence of independent auditors. Those two major corporate collapses can be attributed to a number of underlying issues, in particular disclosure and the role of auditors and auditor independence. These collapses have focused increased attention on creating financial education programs to properly educate consumers in financial markets so they do not lose their money through deceitful companies. The CLERP 9 was introduced two years after the collapse of Ansett and Harris Scarfe and proposed corporate governance guidelines to strengthen the financial reporting framework.
References:
1. Business Dictionary.com, ???corporate governance??™, 2009, http://www.businessdictionary.com/definition/corporate-governance.html accessed Dec 28
2. Murry Steele. The rise of shareholder intervention, Management Focus issue 12, 1999, Cranfield School of Management, http://www.som.cranfield.ac.uk/som/dinamic-content/news/documents/p20_21.doc accessed Dec 28
3. Organisation for economic cooperation and development, ???Corporate Governance??™, 2009, http://www.oecd.org/topic/0,3373,en_2649_37439_1_1_1_1_37439,00.html accessed Dec 27
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6. James. C. Lockhart, An Examination of Shareholder??“Stakeholder Governance Tension: A Case Study of the Collapses of Ansett Holdings and Air New Zealand, 2005, Emerald Group Publishing Limited, http://www.emeraldinsight.com/Insight/viewContentItem.docontentType=Book&hdAction=lnkpdf&contentId=1756995, accessed Dec 29
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10. Luke Dale, Australian companies and Sarbanes-Oxley: governance regulation in a parallel universe, 2005, All Business, http://www.allbusiness.com/business-planning/business-structures-incorporation/468952-1.html, accessed Dec 28
11. Shaun F O??™Malley, Report and Recommendations, Panel on Audit Effectiveness, 2000, http://cclsr.law.unimelb.edu.au/research-papers/audit-ind-report/part4.pdf, accessed Jan 2
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13. European Commission, The financial crisis and financial education, 2009, http://ec.europa.eu/internal_market/finservices-retail/docs/capability/financial_crisis_report_en.pdf accessed Jan 2

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