Why Reputation as an Asset Is Not Reflected in Corporate Financial Statements - Assignment Example

Accounting Theory College Name of the Student: Name of the Instructor: Name of the course: Code of the course: Submission date Author note: Table of Contents Author note: 1 Table of Contents 2 1.0 With reference to the Conceptual Framework, explain why reputation as an asset is not reflected in corporate financial statements. 3 2.0 Leighton Holdings Limited 6 2.1 Identify the disclosures Leighton makes about ethics and ethical behaviour in its annual report 6 2.2 Describe the structures Leighton Ltd uses to encourage ethical behaviour in the company 8 2.3 Based on the disclosures you have identified for Leighton Ltd, what impression do you get about the attitude to ethical behaviour in the company? 10 3.0 Search of Media Sources 11 3.1 Outline the allegation against Leighton Ltd made in the media. Ensure you reference your sources. Determine if the allegation is based on fact 11 3.2 Has your media search resulted in a different impression of the ethical behaviour of Leighton Ltd? Justify your answer 12 4. What conclusions can you draw about the reliability of the disclosures about ethics in the Leighton Ltd 2011 annual report? 13 5. What has Leighton Ltd done to prevent this type of unethical activity in the future? 14 6.0 References 16 1.0 With reference to the Conceptual Framework, explain why reputation as an asset is not reflected in corporate financial statements. A listed company normally has a high reputation and if it is positive, which generally it tends to be, it is valued for more reasons than one. It helps the entity on a number of fronts. One, the reputation attracts more talented people easily and two, customer's see the entity as the one that they can trust for the goods it delivers or services it sells. Not only that, the entity finds it easier to raise funds from bankers and investors (Qoronfleh and Vergin, 1998). Reputation is valuable in the sense that it adds intangible benefits to the entity and it has widely been debated whether or not it adds any financial value to the entity. It has also been debated whether or not reputation can be considered as a part of corporate entity's financial value or health. Both academics and public relations practitioners have been equivocal on the stand that good reputation offers an intangible value to an entity (Harrison, 1995, Stone, 1995 and Grunig & Hunt, 1994). However there are not many theories or models that accrue any financial value to reputation. Given this backdrop, it is important to see from Fombrun's (1996) perspective as to what reputation means for an entity. He remarked as this: "A corporate reputation is a perceptual representation of a company’s past actions and future prospects that describes the firm’s overall appeal to all its key constituents when compared with other leading rivals". The question, thus, arises that if reputation is just a perception, a mental concept, in an entity where, otherwise, success is measured by mathematical figures and financial measures, why is reputation being held in such high esteem. And if it holds such an esteem, why, then, does it not figure as a value in the corporate financial statements (Desmond, 2000). It is held that reputation of an entity affects its capability to sell services and products, hire talented people, attract investors, and exert considerable influence on government circles; but this statement has not been able to attach a specific value to reputation in financial statements. Fombrun (1996) has stated that reputation is just a means to convey greater latitude by virtue of which entities act by their consequences. In other words intangible perceptions are turned into tangible benefits by good reputation, which, in turn, offer value to an entity. The value is powerful if the reputation is positive but highly detrimental if it is negative; yet it does not carry any value in the corporate financial statements at all. Desmond (2000) has discussed this but he stops short of saying that a value should be fixed for reputation to be incorporated in the corporate financial statements. Desmond's remark is a bit hazy in the sense that he, though, adds that in future entities annual reports must report reputation in terms of stakeholder relationships and deliberate upon measures wherein stakeholder performance and purpose can be mentioned. This can be a taken as a clear hint on how reputation could get a measurement. Several Accounting Standards Board documents, particularly the “Financial Reporting Standard Ten: Goodwill and Intangible Assets”, which came out in 1997, are now of the opinion that intangible assets as reputation must be valued and accounted for. These documents further guide as to when and where should these values be accounted for in the corporate financial statements (Accounting Standards Board. 1997). One reason why reputation does not carry a value in the corporate financial statements is because there is lack of a formula by means of which reputation on an entity can be valued. Several studies have been done to establish a formula and see whether it can be made a part of the statements. Proposals have been put forward in favour of a conceptual formula for reputation or at least a methodology through which it can be measured. One formula was proposed by Fombrun and Gardberg for U.S. digital companies that was found to work upon testing. It is said that this formula is being seen as useful for financial quantification for reputation. But it does not end there. In order for financial statements to carry the quantified value of reputation the formula that is tested can be used in financial reporting of companies only after a body like Accounting Standards Board intervenes and ratifies its use. The industry would need to push such ratification and it might be a matter of time before it finds its place in the corporate financial statements. Though, it cannot be denied that there are and will possibly be some bottlenecks. One of them is that this will be a perceptual-based element and acceptance by the accounting industry might be fraught with certain reservations as it generally takes into consideration tangible elements or assets. Thus this subject of reputation and the process of its valuation is ensconced with broad range of perspectives, that are both academic and financial in nature. By the time such things are not resolved, corporate financial statements will have to do with the "valued component" of reputation even as reputation will continue to contribute greatly to an entity's financial health. 2.0 Leighton Holdings Limited 2.1 Identify the disclosures Leighton makes about ethics and ethical behaviour in its annual report In its annual report, the Leighton Board lays specific emphasis to promote ethical and responsible behaviour. It aligns the company's reputation and integrity if all its employees across all of its offices adhere to the highest standards of morality, good conduct and responsible decision-making. The Group promotes this thought throughout its offices and makes all attempts to disseminate across its staff a set of shared values in order to safeguard its sustainability. While doing so, stakeholders and their interests, and also that of its clients is at top of the company's mind. In order to strengthen this thought the Company undertook a comprehensive consultative process in 2010 October which led to the adoption of a revised Code of Ethics. This revised code was a set of guidelines for circulation among all its employees, including officers and staff at the lower most level, expected to comply with the sets of rules established. The Group has built these codes of ethics on its basic principles and values, which include integrity, discipline, success and safety. The code of ethics, it is interesting to note, does not only apply to employees and officers, but also to each company within the Group. Some topmost features of this code include being commercially competitive, provide a healthy and safe workplace, act with farness, honesty and integrity; create a culture that is performance, fun and challenge-driven, have respect for the environment, respect the communities and their needs in which the company operates, and support and encourage technological leadership and innovation. While those are the Group's obligations; the revised Code of Ethics establishes separate one for the employees. These include working in the interest of the Company, work smart and hard; have respect for each other, the environment and the communities in which the employees are located; act with fairness, integrity and honesty; apprise employer of any wrongdoing in or around the company; express their ideas and thoughts if they can help make improvements; and assume personal accountability and responsibility in work-related matters. These are some of the disclosures the Leighton annual report makes and the work done towards this direction can be attributed to the presence of Ethics and Compliance Committee that the Leighton Board has. It is responsible for several functions the principal ones include reviewing and making recommendations regarding ethical practices and standards with the Group to the Board; monitoring compliance and reviewing laws and regulations with specific focus on the environment, occupational health and safety, consumer laws and competition; and reviewing and monitoring Group practices and standards pertaining to tender approval probity. The Committee is also responsible for making time-to-time recommendations to the Board regarding Company's Safety Framework, a need that may arise after it reviews fatalities. These recommendations can pertain to anything from practices, safety standards and matters related to legal compliance. This is done under the Corporate Governance System as the Committee continually monitors Ethical Dimension Reporting of the Company and Group Operating Companies. The Code of Ethics s uniform and is held in letter and spirit across each company operating within the Group. At the same time each operating company within the Group has it s own ethics committee. The best part is that each new employee or stakeholder has instant access to the Code of Ethics documents as either of the two joins the same. Each major operating company is supposed to submit a quarterly report on ethical practices to the Committee, highlighting achievements in each quarter. There is a system to report breaches in the Code of Ethics and provisions for taking action against the erring employees, managers or operating companies. 2.2 Describe the structures Leighton Ltd uses to encourage ethical behaviour in the company Leighton has put in place several Board Committees, which include Remuneration and Nominations Committee, an Audit Committee and an Ethics and Compliance Committee. The Board has done this so that all these committees, including Ethics Committee are able to discharge their duties in a proper manner. Accordingly the Board's policy is that the Ethics Committee, just like other committees, is chaired by a non-executive director who is independent, has at least three members, and is able to obtain advice, professional or otherwise, at the Company's cost. When appointed the director of the Ethics Committee receives an induction pack that includes a copy of the Company's constitution and Code of Ethics, his interests disclosure agreement, a deed of insurance, access and indemnity and an appointment letter. It is at this point the director receives a briefing on the Company's culture and value system. After that, on a regular basis, the director receives continuing education on the domain in which he is supposed to perform. The Company lays special emphasis on safe workplace and practices area. This is a step with wider but positive implications as upon induction the director realises that if all participants across the value chain act in a manner that is conforming to the guidelines laid in the Code of Ethics a number of safety measures put in place can bear fruit and injuries and fatalities can be avoided. This is a step towards systematically reducing untoward incidents from happening at Leighton sites and offices. One important structure in this is implementation of Company's Safety Framework which is a compilation of minimum standards required to ensure safety across different Leighton businesses and offices. It focuses specially on what the Company calls 'Class 1' risks, which refer to the risks that result in permanent disability and fatalities. Further, in 2011 the Company established a new governance structure that proposed the induction of a Group manager in the system who would ensure all safety and ethical codes are implemented on ground. 2.3 Based on the disclosures you have identified for Leighton Ltd, what impression do you get about the attitude to ethical behaviour in the company? In what appears Leighton is strongly committed to undertaking its work with integrity and conducts its business in a ethical manner. It does what is right. Some general principles that are applicable to its employees give a notion that its work is fair-minded. After all, what else can be expected from a Company when it says it wants its employees to be fair, integral and honest? These are very basic tenets which are expected by the Company's values and Leighton Group Code of Ethics. The Code of Ethics from Leighton assumes greater meaning in the wake of the fact that it proposer higher ethical behaviours and standards than even the local laws, norms, customs and rules. It is probably because these Codes of Ethics have emerged from the twin influences of local laws and voluntary commitments and Leighton's own Group values. Leighton's business conduct is based on three fundamental concepts of prevention, monitoring and detection and response – all these lend the Company a greater reliability quotient on the ethical front. This is because when it counts prevention as a fundamental concept, it indicates that it wants to prevent something untoward long before it may happen. Such a thing s normally achieved by virtue of a strong leadership culture in an organisation, in which all employees at all levels are so well-equipped with information that little scope is left for errors. The Company regularly monitors breaches processes and detects breaches in a timely manner thus adding to the ethical quotient. Last, but not least the response to anything reported on the ethical and behavioural front is swift and sensible (Leighton Holdings, 2012). 3.0 Search of Media Sources 3.1 Outline the allegation against Leighton Ltd made in the media. Ensure you reference your sources. Determine if the allegation is based on fact From attempting to uphold its ethical standards, it is not that Leighton did not have had its share of allegations in the media. In 2013, it faced class action over bribery allegations; something that it vowed it would defend itself against vigorously. The allegations pertaining to indulging in bribery practices in Iraq, the war-torn territory. The write was filed against the company in Supreme Court of Victoria. Mark Elliot, the Melbourne solicitor, alleged in the writ that Leighton breached under Corporations Act its continuous disclosure obligations, failing to reveal allegations of corruption and bribery against some senior officers. This had happened, alleged the writ, when this $750 million pipeline was underway in Iraq. This was a case of 'misbehaviour', which the Company had failed to disclose to the investigators. The 'misbehaviour' also involved one of its former employees, pertaining to which there was this talk of in the corporate circles pertaining to an Indonesian project involving construction of a barge. Given the amount of emphasis Leighton says it lays on ethics pertaining to its stakeholders, Elliot’s writ came as the very blow to this stand as he was himself a stakeholder of the Company. He said he filed the writ primarily because he was concerned that Leighton was withholding information from him and possibly other stakeholders too on the allegations of bribery in Iraq. Leighton has since denied charges contending that it reported the issue voluntarily in 2011 to Australian Federal Police, in which it has remarked that it was a possible breach of Code of Ethics. The company was although unnerved by such reports and termed negative media attention on it as "sweeping criticism" (Ryan, 2013). 3.2 Has your media search resulted in a different impression of the ethical behaviour of Leighton Ltd? Justify your answer Yes, the media search has resulted, to some extent, a different impression of the ethical behaviour of Leighton Ltd. Even as there are not scores and scores of allegations against the company, one thing that is disturbing is one report in The Australian in which Leighton has conceded that its centre in Iraq has had no anti-corruption or specific corporate policy. This is contradictory to what Leighton annual reports claims, in which it has been said that the Group applies its Code of Ethics uniformly across all its companies and offices worldwide. What is more intriguing is that Leighton offshore business and ethics conduct policy is not more than four paragraphs in length having a passing reference to employee conduct on acting honestly, complying with law and avoid being in such circumstances that result in localities that are divided. This puts Leighton in sheer contrast to other overseas operators like Rio Tinto and BHP Billiton, which have as many detailed ethics policies in their overseas locations as they have in their parent countries of operations (The Australian, 2012). Another thing that crops up in sheer contrast of what Leighton otherwise claims is that it now says that its Code of Ethics across different businesses is under review since the Iraqi outfall. The question is how does, then, Leighton claim in its annual report that its ethical polices and codes are so well established that a separate director is appointed to look after the same? 4. What conclusions can you draw about the reliability of the disclosures about ethics in the Leighton Ltd 2011 annual report? Just because these allegations cropped up from its Iraqi operations, the disclosures made by Leighton in its annual report about ethics cannot be dismissed in just one go. For a Group of this magnitude and companies as big as it has, a should not be weighed over the overall credibility of the organisation ray allegation somewhere cannot and should not be weighed on the overall credibility of an organisation that has taken conservative and disciplined approach on use of financial resources. It will only be too novice of someone to deny that the Group has made strides upon strides and build a successful empire with a strong financial base over good number of years. Leighton is a contracting organisation and financial strength is fundamental to it. Backed by core element of a well-worked strategy that help it pave way for funding capital intensive activities including mining, it will only be immature to bring its ethical disclosures under a cloud of sudden suspicion (Leighton.com.au, nd). One thing, however, is bothersome at the hind side. The 2011 annual report looks trim as all annual reports are, but is not forthright in disclosing such things that have otherwise found way into the media or corporate world as instances of unethical behaviour. For example, it does not have any mention of Gavin Hodge, who is alleged to have stolen $500,000 from the Company for the barge work in an Indian company. This was reported by The Sunday Morning Herald, but not mentioned in the annual report. What cast doubt over the Company's functioning was when media reported that the same person, who was alleged to have stolen this money and used in a company which was blackmarketed, was given a bonus rather than initiate an action against him. 5. What has Leighton Ltd done to prevent this type of unethical activity in the future? Year 2103 was one in which Leighton came in the line of fire of Fairfax media. The allegations of corrupt practices were mainly targeting Group's international business. Leighton did not take these allegations as only an attack on its alleged corrupt practices that some of its officials had indulged in, but it took the same as ones that eroded the reputation of its culture which it had nurtured for several years. It also said that the Leighton Board was deeply concerned about impropriety, or its suggestion thereof. It goes without doubt that the seriousness that Leighton seems to be showing now to the allegations were, in fact, as much serious to it when such cases of impropriety had risen before it soon after the Company detected the same. The Company has time and again repeated that long before media started reporting the allegations, the Company had itself reported the same to the Australian Federal Police more than two years ago. Probably that was and still can be taken as Leighton's well-intended move to safeguard its reputation in future and make sure that its offices worldwide adhere to highest standards of ethical behaviour throughout. Even after the media blew these allegations up, Leighton continued to cooperate, an act that was indicative of its long-term commitment to continue with an ethical behaviour in future as well (Thomson Reuters, 2014). Despite all these measures being put in place and the overwhelming concern being shown towards ethical behaviour side of the company, what comes as a surprise is the absence of any mention of unethical behaviour in Company's 2012 annual report. Elsewhere it does not shy away from recognising the unethical behaviour issues that have dogged the company in the previous year. It recognises non-compliance and breach that has taken place in the same year. The silver lining is that in order to avoid breaches from taking place, the Company recognises the need to prevent the same in the first place. 6.0 References Accounting Standards Board. (1997). Goodwill and Intangible Assets. Financial Reporting Standard #10. December 1997. Desmond, P. (2000). Reputation Builds Success, Tomorrow’s Annual Report: Corporate Communications: An International Journal Vol. 5, No. 3. Fombrun, C. (1996). Reputation; Realizing Value from the Corporate Image. United States: Harvard Business School Press. Harrison, S. (1995). Public Relations. An Introduction. United Kingdom: International Thompson Business Press. Hunt, T., Grunig, J. (1994). Public Relations Techniques. United States: Harcourt Brace. Leighton Holdings. (2012). Leighton Group Code of Business Conduct. Retrieved from http://www.thiess.com.au/files/files/LeightonGroupCodeofBusinessConduct.pdf. Leighton.com.au. (nd). Financial strength. Retrieved from http://www.leighton.com.au/who-we-are/financial-strength. Qoronfleh, M. & Vergin, R. (1998) Corporate Reputation and the stock Market. Business Horizons. Ryan, P. (2013). Leighton faces class action over bribery allegations. Retrieved from http://www.abc.net.au/news/2013-10-07/leighton-faces-class-action-over-disclosure/5002426. Stone, N. (1995). The Management and Practice of Public Relations. United States: MacMillan Press Ltd. The Australian. (2012). Construction giant Leighton Holdings admits it had no anti-bribery policy. Retrieved from http://www.theaustralian.com.au/business/companies/construction-giant-leighton-holdings-admits-it-had-no-anti-bribery-policy/story-fn91v9q3-1226310716357?nk=0b6a3e5a4e0cc95ed4eba2e10fc90c50. Thomson Reuters. (2014). Transcript - Leighton Holdings Ltd Annual General Meeting. Retrieved from https://www.leighton.com.au/__data/assets/pdf_file/0008/29267/AGM_transcript2014.pdf. Read More