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Week 11_Corporate Collapses

Week 11_Corporate Collapses - Issues in Corporate Financial...

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5/25/2009 1 1 Issues in Corporate Financial Reporting and Analysis (ACCT3563/3573) Week 11 Accounting issues arising from recent corporate failures Presented by Richard Morris 2 Acknowledgements: Today’s lecture includes a small number of slides prepared by Gary Pflugrath and Gerry Gallery. Graphs are from Dechow & Schrand (2004)
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5/25/2009 2 3 Learning Objectives – To consider: The meaning of “corporate collapse” Why corporate collapses occur The involvement of accounting Some recent corporate failures Aspects of creative accounting, especially earnings management 4 Reading (all in Supplementary Materials on WebCT) Clarke and Dean, “ Collapse Incorporated: Tales, Safeguards & Responsibilities of Corporate Australia ”, CCH Australia, 2001, Chapter 3, “ Corporate Collapses Analysed” Dellaportas et al “ Ethics Governance & Accountability: A Professional Perspective ”, Wiley, 2005, Chapter 7, “ Creative Accounting Healy and Palepu, “ The Fall of Enron ”, Journal of Economic Perspectives, Vol. 17, No. 2, Spring 2003, pp. 3-26 (also available from UNSW library via Sirius e-journals) L. Brooks Business & professional Ethics for Directors, Executives and Accountants, (2004) chapter 2.
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5/25/2009 3 5 Extra reading – if desired en.wikipedia.org entries for Enron (US failure) One.Tel and HIH Insurance (Australian failures) en.wikipedia.org – there are several entries on the global financial crisis John Smith, IASB, speech at the European Commission Conference “Financial Reporting in a Changing World” (May 2009) (http://www.iasb.org/News/Announcements +and+Speeches/.htm) 6 In week 12 we will watch: “Enron: The Smartest Guys in the Room” – a film about fall of Enron, released in 2005. It is also available for rent or purchase in some Video stores
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5/25/2009 4 7 Why look at corporate collapses? They provide striking illustrations of: What can go wrong in business Accounting failures Ethical failures They triggered important regulatory reforms, e.g. Sarbannes-Oxley Act (US) They have led to changes in some accounting standards (eg on fair value) 8 What are corporate collapses? Commonly refers to a firm becoming insolvent ” …which usually means that: It breaches a loan covenant Its liabilities exceed the current value of its assets; or It has insufficient cash to cover short-term debt obligations (a liquidity crisis)
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5/25/2009 5 9 Implications of corporate collapses Implications vary across different industries: Negative implications: Losses to shareholders, creditors, employees Loss of consumer choice (e.g., Ansett Airlines) Contagion effects current global financial crisis was “triggered” by failure of Lehman Brothers in September 2008 Cost of inquiries and increased regulation (e.g., HIH) Reputation costs to regulators (e.g. ASIC, APRA) 10 Implications of corporate collapses – costs of Australian collapses ($ millions) Adsteam 2,100 Bond Corp 5,330 Qintex 1,260 Hooker Corp 1,960 SBV 2,700 SBSA 3,150 Pyramid BSoc 980 HIH 5,300 One.Tel 650 Harris Scarfe 160
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5/25/2009 6 11 Implications of corporate collapses However, there are some positive implications: More efficient allocation
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