Analysis of Financial Statement and Reputation - Leighton Company - Case Study Example

nаlysis Finаnсiаl Stаtеmеnt and Rерutаtiоn Name: Institution: Professor: Аnаlysis of Finаnсiаl Stаtеmеnt and Rерutаtiоn 1. Accounting for reputation: Reputation of any company is never reported in the financial statement reports. According to the CIMA, (2007), the reputation of an organization cannot be reported in the financial because it does not qualify as a fixed asset or liability by itself, hence valuation in isolation impossible. According to walker (2010), the most ideal and precise definition of corporate reputation is the one originally put forward by Fombrun, (1996) which states that reputation is the collective representation of an organization’s previous actions and result which labels its capacity to deliver valued results to stakeholders. Reputation is therefore based on perception, the collective judgment, positivity or negativity and relative (Walker, 2010) Reputation cannot be accounted in the balance sheet as an asset because balance sheet does not report perceptions, ideas or people who cannot be owned or rented. However, the company’s reputation is an asset or liability to the extent it influences the cash flow of a company (CIMA, 2007, P.11). Likewise, the reputation of a company can only be valued by analyzing its relative effect on the return of investment. Though the value of reputation is not as concrete as property or money, it is possible to value it through forecasting on the degree to which it can affect the share price. Reputation is vital in any business organization because of its superior and exceptional capability to influence the buying decisions made by customers. The limitations affiliated with valuation and reporting of reputation in the financial statements emanates from the fact that reputation is purely founded on personalities and perceptions which means it cannot be sold or bought but has to be earned with time. Nevertheless, reputation has to be reported, and the best way to go about it is through a narrative on the non-financial sector of a company’s Financial Report. 2. (1). Disclosures on Ethical and Ethical behavior by Leighton Ltd in their 2011 report: The disclosures of ethic and ethical behavior In the Leighton Ltd 2011 report can be found in the Corporate Governance Report from page 30-43. The report indicates that, Leighton Group has fulfilled all the rules and commendations of the ASX Corporate Governance Council for the year ending June 2011 with the exception of one. The only principle not yet fulfilled is ASX council recommendation 2.1 that requires majority independent directors. The report also explains why this recommendation has not been followed. The principles of corporate governance that the LEIGHTON company implemented to ensure ethical behavior include the following; Provision of a strong base for effective management and oversight: The company has provided information regarding how they achieve oversight through the inclusion of independent and non-executive board meeting. The company has provided information on how they add value and ensure the right and smart decision. According to the Leighton annual report, new Directors receive induction training and their performance continually reviewed. The disclosures on ethic and ethical behavior are found on the third principle on corporate governance recommendations. Implications from the report indicate that the company. The company has disclosed the ethics code of conduct for all the employees and the compliance supervised by the Ethics and Compliance Committee: The company has disclosed its compliance with the ASX Listing Rules by training employees continuously on the policies to prevent insider trading. Integrity in financial reporting: The company has both internal and external auditors who ensure that the ASX guidelines have been fully complied to when reporting financial statements for taxation purposes and to the shareholders. The composition of the internal auditors has also complied to the ASX recommendations. The company uses KPMG as their choice of external auditing firms. In addition to the compliance to the financial integrity reporting the company, makes timely and balanced market disclosure which is also in compliance to the ASX guidelines on Market Disclosure Policy and procedure. The company demonstrates respect to its shareholders by ensuring that quarterly financial reports are issued, and annual general meetings organized annually. The interest of the shareholder is protected by the company’s commitment to recognizing and expertly manage risk under the management of the newly established position of the Chief Risk Officer. The fair and responsible remuneration is another ethical component disclosed. The compliance to this principle ensures that their employee remain motivated to become more creative and diligent in the interest of the company and its shareholders. 2. (2). Leighton’s Ethic structure: The responsibility of ensuring compliance of ethical conduct is mandated to committees. Ethics structure of Leighton is not limited to the Ethical and Compliance committee but begins from the Directors down to the other oversight committees. The highest level of the ethical compliance is mandated to the directors that are also the highest decision-making level where strategies and policies are drawn. The board of director’s overall monitoring role is delegated to Standard Board Committees. There are three Standard Board Committee’s namely; Audit, Remuneration and nominations and finally the Ethic and Compliance committee. The duties of these three committees include; oversight, monitoring compliance and reviewing policies. The Audit committee ensures that accounting and financial reporting is of the highest standards in terms of integrity, compliance to the all the guidelines including the statutory ones. The remuneration and nomination committees have been delegated with the duty of making sure that nominations are of the highest integrity and remuneration fair and responsible. The Ethics and Compliance committee responsibility is to provide the holistic oversight of the conduct in operations of the company ensuring overall integrity, compliance and ethical behavior. The senior managers are part of these committees task is to ensure accountability and report to the board of directors. The three senior executive offices include the (CEO), (CFO) and the Chief Risk Officer and Group General Council (CRO). The CEO is responsible for ensuring compliance Capital expenditure and business transactions according to the Group’s Business plan. As for the CFO, the office is responsible in ensuring statutory compliance in auditing and reporting among other duties. Finally, the CRO is responsible in ensuring that the Group’s risk is well managed. 2. (3.) Attitude to ethical behavior: The Leighton company has a very positive attitude towards upholding the ethical behavior in the organization. According to the disclosures in the corporate governance report, the company has followed all the ASX guidelines and recommendations on cooperate governance with the exception of Recommendation 2.1 which requires majority independent directors in the Board. However, the company has disclosed the fact that they have not complied with this recommendation and subsequently provided the reason. The company's structure involves the Ethics and compliance committee that develops and reviews policies and guideline on ethical behavior by all employees in the company. The company has a well-structured ethics and corporate governance framework that ensure no unethical behavior or conflict of interest prevails. 3. (1). The allegation against Leighton Ltd made in the media: According The Australian Financial Review (2013), The Leighton Holding company was accused of corruption through bribes and conspiracies. According to the newspaper, both Wal King, who was the CEO present at the time and David Stewart his short-term successor got involved in the biggest scandal that embarrassed Australia on the international business front. A Fairfax media investigation from leaked confidential documents disclosed a habit of paying bribes to win construction contracts, One of the scandals revealed indicated that the Leighton paid a bribe to UNOIL company for a contract that whose price had been double inflated. In another allegation the company was accused of paying a bribe of USD 23 Million for a contract in Iraq worth USD 500 million (Australian Financial Review, 2013). Basis of the allegations: The allegations resulted from a note personally signed by Stewart that was stumbled upon accidentally by lawyers and handed to the policies. According to The Australian Financial Review (2013), the memo provided an insight of an appalling conspiracy to commit severe corruption by issuing kick back for extortionate contracts. Among the allegations the company faced involved the condoning corruption by failing to punish corrupt senior officials. For instance, Gavin Hodge a manager is alleged to have stolen USD 500,000 worth of steel an constructed a barge Adani an Indian company in what was a black market trade (McKenzie & Baker, 2013). A leaked confidential legal advice warned the company that senior executives may be involved in corruption that pose a big threat to the company’s reputation (Australian Financial Review, 2013). 3. (2). Impression of the ethical behavior based on media allegations. The impression of this newspaper indicates the company does not uphold the principles of ethical behavior as stipulated in their annual report. The media allegations bring a whole different perception of the moral responsibility of the company different from the one acquired from the annual report’s disclosure (McKenzie & Baker, 2013). The frequency of the charges is too high for someone to ignore. Judging from the media reports' and facts, the evidence leads to an inclination that the ethical structures in Leighton are not as useful as they purport them to be in their disclosure. For instance, the structures do not provide a mechanism to report any unethical behavior especially among the senior managers as was the case of Stewart. Even though Stewart was aware of the bribes and kickbacks by his predecessor King Wal, he did not report this but recorded in his memo. 4. Reliability of Leighton’s ethics disclosures: Judging from the serious corruption allegations the company has been facing, one can only consider the disclosure as unreliable. It is evident that the ethical status of the company is not in its annual report’s disclosure but rather in the confidential documents relating to informal business transactions. It is, therefore, clear that the company lacks a framework of reporting unethical behavior that runs throughout the whole corporate governance structure allowing senior executives to engage in corruption undetected. References Barnett, M. L., & Pollock, T. G. (2012). The Oxford handbook of corporate reputation. Oxford: Oxford University Press. Jarboe, K. (2007). Valuing reputation as an asset. Retrieved from http://www.athenaalliance.org/weblog/archives/2007/07/valuing_reputat.html McKenzie, N., & Baker, R. (2013, October 4). Going rogue. Retrieved August 13, 2014, from http://www.theage.com.au/national/going-rogue-20131004-2uzy5.html The Australian Financial Review. (2013, October 3). Wal King ‘approved Iraq bribe’. Financial Review. Retrieved from http://www.afr.com/p/national/wal_king_approved_iraq_bribe_7A7XodY9Jtfu9Hki4guAO The Chartered Institute of Management Accountants. (2007). Corporate reputation. Perspectives of measuring and managing a principal risk, 11-12. Retrieved from http://www.cimaglobal.com/Documents/Thought_leadership_docs/cid_exrep corporate_reputation_june07.pdf Read More