Accounting for Reputation: of Leighton Holdings Limited - Case Study Example

Running Head: Corporate Reputation Name Course Lecturer Date Table of Contents 1.0 Accounting for reputation 1 2.0 Leighton Holdings Limited 5 2.1 Disclosure of Leighton Holding Limited Ethics and Ethical Behaviour 5 2.2 The Structures Leighton Holding Limited Uses To Encourage Ethical Behaviour in the Company 6 2.3 Attitude to ethical behaviour in the company 7 3.0 Allegations against Leighton Holdings Limited in the Media 8 3.1 Impression of the ethical behaviour of Leighton limited 9 4.0 Conclusions about the Reliability of the Disclosures about Ethics in Leighton Holdings 2011 Annual Reports 11 5.0 Measures to Prevent Unethical Behaviours by Leighton Holdings Limited 12 6.0 References 14 1.0 Accounting for reputation Corporate reputation refers to how positively or negatively an organisation or a company is perceived by its stakeholders such as the customers, the media, employees, non-governmental organisations, suppliers and financial analysts. Also, company reputation can be termed as the “sum of all the perceptions and expectations that the relevant stakeholders have about the company in relation to their (stakeholders) own specific own agenda” (Barnett et al., 2006). The reputation of as company matters, it explains why customers and other stakeholders choose the company products and services in preference to others. Actually, the reputation makes the difference between success and failure of a company. The company reputation is diligently built up over many years; however, it can be destroyed within a very short time. For this reason, it is very important for a company to guard its reputation at all costs. The financial statements of a company do not reflect the accurate or do not reflect accurately the value of a company's reputation and other intangible assets such as innovation, talent, customer relationship and patents. The intangible assets such as reputation are central and core to the success, profitability and competitiveness of a company. Good reputation of a company sis enhanced and grows because of the market differentiation and competitive advantage that the company applies. These includes relationship with right and strategic business partners, company's ability to attract, develop and retain best talents, spread of positive words by the media and word of mouth, ability and potential to raise the required capital and ability of a company to maintain its share price high (Nguyen & Leblanc, 2001). Reputation is more emotive than financial. There are many factors that influence the value of a reputation; it also depreciates meaning that it is subject to loss of value. A good reputation is a valued asset to a company. Fifteen years ago, companies used to contain 80% of their value in the balance sheet. Currently, this has changed in and companies only contain 30% of their value in the statement of financial position or the balance sheet. The difference that have occurred over the years in reporting the value of a company in the balance sheet lies in the value, it has no immediate financial expression like intellectual capital. Interestingly, reputation influences customers in a far greater way than it could ever be measured or valued on a balance sheet. Due to its inherent volatility, reputation changes value faster and more than any other assets of a company (Fombrun et al., 2000). Managing reputation needs both understanding of its drivers as well as methods of measuring changes in it. The attempts of measuring the financial value of reputation are spurious. For this, the best way to report and account for reputation is through non-financial reporting or the narrative reporting. Once a company chooses and adopts this method, it needs to set the objectives for future value and benefits. This is not forgetting the current value of reputation. This would aid the management and the investors as well as other stakeholders. Notably, the balance sheet does not reflect the total resources of a company that are available to it. As such, narrative reporting would help a company to overcome this challenge. In reporting, it is important to indicate and clearly show an understanding of where the value lies within the company. This would inspire confidence and thus encourage investment (Chartered Institute of Managemnet Accountants, 2007). The reputation of a company is also measured or referred to as goodwill. Reputation or goodwill is the long term assets of an organisation that is categorised as an intangible asset. Reputation is an internally generated goodwill. Under the Australia Accounting Standards Board (AASB), internally generated goodwill is not permitted to be recognised as an asset by an organisation. The reason behind this reasoning is because there are difficulties or impossibilities of identifying the transactions or events that contributed to the reputation of the organisation. In addition, the AASB states that even if these were identifiable, the extent to which they guarantee future benefits as well as the value of such benefits to the organisation would not be capable of being measured reliably. For this reason, the internally generated goodwill, or reputation, is not accounted or recognised in the books of an organisation because of the above mentioned reasons (Gotsi & Wilson, 2001). Importantly, if the reputation is not recognised as an asset, as indicated in AASB, it is completely unrecognized or else it is recognised as an expense to the organisation. This is further reinforced by the Australia Accounting Standards 18 (AAS 18). Essentially, there are two types of goodwill, internally generated goodwill and externally or purchased goodwill. The internally generated goodwill is accounted for as discussed above. An organisation gets external or the purchased goodwill when it acquires another business at a premium value. The goodwill is the difference between the cost of purchase and the market fair value of the tangible assets, identifiable intangible assets and the liabilities of the acquired business. Notably, goodwill is impaired as well meaning that it losses value overtime depending on the conduct of the company. As such, purchased goodwill is subjected to impairment. Purchased goodwill is recognised in the books of the acquire company as an intangible asset (Gray & Balmer, 1998). The Financial Reporting Standards 10 (FRS 10) provides that the reporting entity to charge purchased goodwill as well as other intangible assets to their income account in the period in which they are depleted. On a further note, the purchased goodwill represents the future benefits acquired, this needs to be recognised as an asset. If the goodwill or the reputation does not have future benefits, it is recognised as an expense at the time of acquisition. Reputation is one of the most important unidentifiable assets of a company. It is made up of the effective advertising, effective market penetration, good labour relations and superior personnel. These make up the reputation of a company. Although it is not tangible and also not recognised in the accounts of a company, it is very important. It is actually the face of a company. These factors that make the reputation represent future benefits that the company draws. Together they make reputation because they are not recognised individually and they are also unidentifiable assets. Some standards do not differentiate between internally and purchased goodwill (Roberts & Dowling, 2002). 2.0 Leighton Holdings Limited 2.1 Disclosure of Leighton Holding Limited Ethics and Ethical Behaviour In the 2011 financial reports, Leighton holdings limited did not report any case about breach of ethics and ethical behaviour. The directors, officers and employees of the company worked as required. Either, no conflict of interest, especially from the director and senior personnel, was reported. The annual reports indicate that the company seeks to ensure it operates within the norms and bounds of the respective societies, the activities of the company are legitimate. As such, the actions of the company are proper, desirable and appropriate within the socially constructed system of values, norms and beliefs (Leighton Holdings Limited, 2011). The stakeholders of the company indicate that the company is also ethical and positive in its normative as well as managerial aspects of the company. All the stakeholders of the company are satisfied with the activities of the company. The company has provided an account and reckoning of its actions and activities and hence has provided information. This indicates that the company is accountable for its activities. 2.2 The Structures Leighton Holding Limited Uses To Encourage Ethical Behaviour in the Company After comprehensive consultative process, Leighton holding limited adopted a revised code of ethics in year 2010. These revised ethics and standards sets out the standards and principles with which all employees and group officers are expected to comply in performance of their work. Under the codes, the company provides a healthy and safe working place and in return requires its officers and employees to work with honesty, fairness and integrity. The company has ethics and compliance committee, this committee is responsible for reviewing incidences resulting to non-compliance to the ethical codes as set by the company. It makes recommendations to the board on the appropriate actions. It is also responsible for promoting ethical and responsible decision making throughout the company. The employees of the company, existing and new, are expected to adhere to the code of ethics and behaviour (Leighton Holdings Limited, 2011). Under the code of ethics, the employees are expected to look after each other and respect those around them as well as the community and environment they work in. they are also obliged to speak to their employers whenever something seems to be really wrong. Moreover, employees and senior officers of the company are expected to assume personal responsibility as well as accountability for their work. As such, they are expected to be extra careful in their work. The company built the ethics on its principles, values and reputation as set out in the company's core values of integrity, discipline, honesty, success and safety and health. The ethics keeps the employees grounded and hence make the company to be commercially competitive. They also enhance the company reputation and therefore `the value of the company increases (Leighton Holdings Limited, 2011). Essentially, the company is socially and ethically responsible for the environment, the health and safety of its employees and the benefits that accrue to the workforce. The company ranks among the best in compensation and remuneration of employees. 2.3 Attitude to ethical behaviour in the company The attitude of the employees and company officers to ethical behaviour in the company is very impressive. The company has taken responsibility of acting ethically and maintaining ethical behaviours at all times. Employees are aware of what is expected of them and they adhere to the ethical standards accountably. As responsible and accountable, the employees do not look for lapses in the ethical standards in order to break them, but they ensure that they themselves are the ethical behaviours. This is very impressive and it explains why the company reputation continues to increase in value. This enhances the company's reputation to the outside world and to its stakeholders. Conversely, the impression of the attitude to ethical behaviour in the company is not only impressive but it is also remarkable (Leighton Holdings Limited, 2011). 3.0 Allegations against Leighton Holdings Limited in the Media Leighton holdings limited is alleged to perpetrate corruption. These were the claims made by the Sydney morning herald newspaper on October 3rd 2013. The newspaper claims that corruption and cover ups were rife and known by the top executives of the company. Allegedly, this is from the company's internal files. The newspaper continues to assert that the then chief executive officer of the company Wal King and his short term successor David Stewart allegedly paid multimillion dollar kickbacks in Indonesia, Iraq, Malaysia and other countries (McKenzie & Baker, 2013). This is in addition to serious corporate misconduct. Moreover, the newspaper adds that there was a culture of rewarding incompetence and corruption and abysmal corporate governance. This is according to the confidential company document obtained by Fairfax media investigation. It continues to allege that David Savage and MR. King knew of the company’s $42 million kickbacks to a firm in Monaco nominated by officials from Iraq who gave Leighton Company a $750 million oil pipeline contract, this according to a memo within the confidential company file (McKenzie & Baker, 2013). Interestingly, these allegations were also published by the financial review newspaper on October 3rd 2013. The newspaper claimed that Wal king “approved Iraq bribe”. The company is said to have been advised by a private consulting firm called Concorde Corporation that it was exposed in Asia to allegations of kickbacks, conflict of interest and unethical staff appointments. Concorde Corporation further warned Leighton Company that the allegations made “indicated a serious breakdown of governance, probity and ethics within the company's Asian operations.” All these claims by both newspapers are said to have taken place in year 2010. Another legal advice provided to the company in late 2010 warned that the company executives might be linked to corruption as well as serious company mismanagement and that Leighton was facing an “extreme” risk of damaging its reputation (McKenzie & Baker, 2013). 3.1 Impression of the ethical behaviour of Leighton limited The media search has resulted in a different impression of the ethical behaviour of Leighton holdings limited. The corruption allegations made against the company were true; the company was involved in corruption deals and surprisingly by the company's top executives and management. The same persons that are expected to provide direction and implement ethical behaviours within the company are the victims of unethical behaviour. This is not a good example to the rest of the company employees. The top executives are also alleged to involve in mismanagement and governance issues, only adding to unethical behaviours. The company was expected to promote ethical behaviours and deal strongly with such unethical behaviours such as corruption, conflict of interest, governance and mismanagement. However, the company did not take any measures to ensure that such vices do not happen again. In fact, was it not for the six months investigation by Fairfax Media, all these unethical behaviours would not have been brought to light? The company executives and management would have concealed them thereby adding to unethical behaviours (Rogers, 2013). In general, the media coverage of the company is negative. The media has highlighted negative ethical concerns perpetrated by the company officials. My impression of the ethical behaviour of the company has changed because of these unethical behaviours. The fact that the company had been warned by two different and independent companies of such unethical behaviour is enough proof that the company perpetrated corruption, conflict of interest, unethical staff appointment, and mismanagement and governance issues. The warning by the Concorde Company and the other legal company are proof of the allegations. In essence, the result of the negative media coverage of the company affected the company profoundly leading to slump in its performance and loss of investors’ confidence. 4.0 Conclusions about the Reliability of the Disclosures about Ethics in Leighton Holdings 2011 Annual Reports The reliability of the company disclosures about ethics in its 2011 annual financial reports is untrustworthy and undependable; they are not reliable at all. The company did not disclose the unethical allegations and claims in the 2011 annual financial reports. This indicates that the company took part in concealing such vices even being fully aware of prove of the corruption and conflict of interest and the consequences for such unethical behaviours. In the statements, the company states categorically that all the company executives and directors are required to disclose any potential and or actual conflict of interest. However, the company does not disclose the conflict of interest in its Iraq and Monaco operations. The company directors and CEO approved millions of kickbacks as indicated above. There is nowhere that the company discloses to the users of the financial reports that such unethical behaviours took place. To make matters worse the company does not indicate the actions it would take to ensure that the perpetrators of the vices are dealt with accordingly. As such, there is not reliability of the annual reports. The company did not disclose any of the allegations nor the actions it would institute to the persons responsible. For example, the manager Gavin Hodge allegedly stole $500,000 of steal from the company in order to build a barge in an Indian company in a black market racket as reported by the Sydney morning herald newspaper. The executives of the company, rather than sack the manager, gave him a bonus and thanked him for his services to the company yet the executives knew of his alleged corruption and misconduct. The company did not include such disclosures in the 2011 annual report yet they had occurred the previous year 2010. Conclusively, the reports are not reliable in any way. 5.0 Measures to Prevent Unethical Behaviours by Leighton Holdings Limited In the concise annual report for Leighton limited 2012, the company has not disclosed any unethical behaviour that took place within the year 2012 or the years before. Although the company recognises that unethical behaviours might have taken place in the past, it does not disclose any of them. On a positive note, the company has instituted measures to ensure that unethical behaviours do not happen again. It recognises that the breach and non-compliance with the ethical code of conduct would place the company at risk of destroying its strong reputation. As such, it has put in place a raft of measures to ensure that such unethical behaviours do not take place. One of its aims is to prevent breach of the code of ethics. The company recognises this as the most effective measure of ethics and compliance. The company focuses on preventing them before they occur. The company, as it asserts, would achieve this by strengthening its culture of ethical leadership and equipping its officers and employees with information, tools and training (Leighton Holdings Limited, 2012). The purpose of this is to help them understand the potential risks and the acceptable behaviour. It recognises this measure as the cornerstone of its prevention efforts. Another significant measure instituted by the company is monitoring and detection process for identifying breaches of the code. This would be able to determine the cause of the breach as well as to implement appropriate and timely correction action. This would also include a culture of encouraging reporting of suspected breaches of the code. Notably, the company would also respond within the shortest time possible and investigate such vices promptly and if they are sustainable, timely and necessary actions would be taken in order to address and to prevent occurrence of the same again (Leighton Holdings Limited, 2012). The changes would result in ethical behaviour by Leighton’s employees in the future. This is because the measures are very operative and workable as well as realistic. In addition, the company has lost a lot of resources due to such behaviours and such experiences would enhance its desire to prevent unethical behaviour and encourage a culture of ethical behaviour. 6.0 References Accountants, C. I. (2007). Corporate reputation:perspectives of measuring and managing a principal risk. London: CIMA. Baker, N. M. (2013). Building giant Leighton rife with corruption: claims. sydney : The sydney morning herald. Baker, N. M. (2013, october 3). Building giant Leighton rife with corruption: claims. Retrieved August 8, 2014, from the sydney morning herald: http://www.smh.com.au/business/building-giant-leighton-rife-with-corruption-claims-20131002-2ut2e.html BAKER, N. M. (2013, October 3). Wal King ‘approved Iraq bribe’. Retrieved August 8, 2014, from Financial Review: http://www.afr.com/p/national/wal_king_approved_iraq_bribe_7A7XodY9Jtfu9Hki4guAIO Barnett, M. L., Jermier, J. M., & Lafferty, B. A. (2006), corporate reputation: The definitional landscape: Corporate Reputation Review, 9(1), 26-38. Fombrun, C. J., Gardberg, N. A., & Sever, J. M. (2000), the reputation quotient: A multi-stakeholder measure of corporate reputation. Journal of Brand Management, 7(4), 241-255. Gotsi, M., & Wilson, A. M. (2001), corporate reputation: seeking a definition.Corporate Communications: An International Journal, 6(1), 24-30. Gray, E. R., & Balmer, J. M. (1998), Managing corporate image and corporate reputation: Long Range Planning, 31(5), 695-702. Limited, L. H. (2011). 2011 Annual Financial Reports. Sydney : Leighton Holdings Limited. Limited, L. H. (2012). 2012 Annual Financial Reports. Sydney : Leighton Holdings Limited. Nguyen, N., & Leblanc, G. (2001), corporate image and corporate reputation in customers’ retention decisions in services: Journal of retailing and Consumer Services, 8(4), 227-236. Roberts, P. W., & Dowling, G. R. (2002), Corporate reputation and sustained superior financial performance: Strategic management journal, 23(12), 1077-1093. Rogers, P. (2013). ETHICAL OBLIGATIONS AND THE MANAGER: CASE STUDIES. Retrieved August 8, 2014, from thomsonreuters.com.au: http://www.thomsonreuters.com.au/product/AU/files/720502412/chapter_13.2_case_studies.pdf Read More