Week 11_Corporate Collapses

Week 11_Corporate Collapses - 5/25/2009 Issues in Corporate...

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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)
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This note was uploaded on 05/02/2010 for the course ACCT 3756 taught by Professor Leung during the Three '09 term at University of Sydney.

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Week 11_Corporate Collapses - 5/25/2009 Issues in Corporate...

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