Corporate Failures in Australia - Case Study Example

Running Header: Corporate Failures in Australia Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Table of Contents 1 2 Table of Contents 2 Abstract 3 1.0 Introduction 4 1.1 Purpose and Scope 4 1.2 Method 4 1.3Limitations 5 1.4 Assumptions 5 2.0 Background of the study 6 2.1 Corporate Failure 6 2.2 Storm Financial 6 2.3 Opes Prime Group Limited 6 3.0 Discussion 6 3.1 Warning Signs that were missed 6 3.2 Governance practices that were breached 8 3.3 The Role the accounting profession played in the financial reporting of these companies 9 3.5 Conclusions 10 References 12 Abstract The collapse of a company has a negative impact to its investors, customers and employees. Therefore, most people are interested in knowing the signs, governance breaches and the role that the accounting profession plays before the failure of a company. This report tries to explore the indicators that the directors of Storm Financials and Opes prime group missed before the collapse of the two companies. The report also tries to identify governance processes that were breached by the two companies prior to their collapse as well as the role played by the accountants in financial reporting of the two companies. The report found out that the collapse of the two companies was mainly influenced by the breach of governance practices. 1.0 Introduction 1.1 Purpose and Scope Corporations play an important role in a country’s economic growth and stability. However, poor corporate governance can lead to corporate failure and this can reduce the economic performance of a country, create unemployment and cause the shareholders to incur losses in relation their investments. According to Kuruppu, Laswad and Oyelere (2012, p. 33) the failure of companies to indicate going concern uncertainties makes the public to lose confidence with the audit function and this causes the investors and the auditors to incur insignificant costs and losses. Therefore, identifying the indicators of corporate failures is of paramount importance to both the shareholders and the public. The purpose of this report is to identify and discuss the warning signs that were missed before the collapse of Stone Financial and Opes Prime Group Limited. In addition, the report will identify the governance practices that were breached by the two companies as well as the role that the accounting profession played in the financial reporting of these companies. 1.2 Method The report collected its information from secondary sources which included books, journals, magazines and websites. The information was systematically analyzed in order to identify the warning signs that were missed, the governance practices that were breached and the role that the accounting profession played in the collapse of Stone Financial and Opes Prime Group Limited. 1.3Limitations The secondary sources may not completely reflect the issues that were pertinent before the collapse of Stone Financial and Opes Prime Group Limited. Therefore, there may be some difference between the actual occurrences and what is documented through the external sources. Due to time limitation and lack of opportunity it was impossible to personally collect primary information about the two companies. Thus, what is discussed in this report may not completely describe the two companies. 1.4 Assumptions The report assumed that the information collected from the secondary sources relating to Stone Financial and Opes Prime Group Limited is accurate and true. 2.0 Background of the study 2.1 Corporate Failure According to Sharan (2008, p.437) corporate failure occurs when a firm is unable to meet and fulfill its obligations to its suppliers and its creditors. Corporate failure can also occur when a firm has inadequate funds to finance its operations. 2.2 Storm Financial Storm Financial was a company that was engaged in providing financial advice and its operations were based in Queensland. The company was liquidated in 2009 and this made its clients to suffer major losses (Kolb 2010, p. 539) 2.3 Opes Prime Group Limited Opes Prime Group was a stock broking as well as an asset and securities management company. The company was located in Melbourne and it was liquidated in 2008. Kolb (2010, p. 539) notes that the collapse of the company caused major losses to the banks that used to finance the company. 3.0 Discussion 3.1 Warning Signs that were missed According to the Parliamentary Joint Committee on Corporations and Financial services (2009, p. 14) the company failed to recognize the decline in the value its customers investment portfolios as a result of the collapse in the world’s financial markets. Ciro (2011, p. 41) notes that the collapse of global financial market reduced the supply of credit hence this made the customers to reduce their investments in the company. The reduction in credit supply caused the value of assets to decline hence reduction in returns. The decline in the value of assets made the clients to receive low returns returns due to the fact that the loans remained static hence this made the company to be accountable for its customer’s loss of value. The withdrawal of credit by the commonwealth bank was another warning sign that the management of the company missed to identify. The Commonwealth Bank was the major creditor of the bank and when it withdrew its finances the company was left with inadequate funds to finance its operations. Gillespie and Zweig (2010, p. 17) emphasizes that lack of funding causes companies fail. This was the case with Enron, an American corporation, which failed after creditors withdrew their funds from the company. Anadarajan, Anandajaran and Srinivasan (2006, p. 126) states that withdrawal of creditors financing is an indication of financial distress. Moreover, the company founders declared $2 million dividends to be paid to themselves. The founders perceived that the corporation was going to collapse hence they declared high dividends in order to protect their interests. The directors failed to realize that that the founders’ actions of declaring large amount of dividend meant that the company was at the verge of collapsing. Furthermore, prior to the collapse of the company, many of its clients’ failed to receive their investment returns. Failure of the company to pay its investors their returns was a good indication that the company was at a risk of collapsing. However, the management of the company failed to realize this warning sign. The management of Opes Prime failed to recognize the effects of the revised loans policy by the Australian and New Zealand Banking Group on its operations (ANZ). The ANZ revised its loan to value ratio and this made it difficult for Opes Prime to comply with this requirement (parliamentary Joint committee on Corporations and financial Services 2009, p. 54). According to Sinha( 2009, p. 521) inability of corporations to comply with credit requirements means that they are under financial distress . Furthermore, ANZ sold the securities that it held against the loans it had issued to company. The management of the company failed to identify that the bank was protecting its own position as it perceived that the company may collapse. Moreover, when ANZ sold its securities it damaged the reputation of the company to the public (Steele 2008, 1149). The directors failed to realize that the damaged reputation was a warning regarding its going concern appropriateness. 3.2 Governance practices that were breached The Parliamentary Joint Committee on Corporations and Financial services (2009, p. 27) notes that the company breached governance practices by offering its customers similar financial advice regardless of whom the advice was given to. The company failed to advice its customers appropriately and in regard to their needs. This was in order to engage them in a unsuitable investment strategies. Turner (2009, p. 10) notes that the basic principles found in corporate governance include transparency and fairness. The directors of the company were not fair in giving their customers the same set of advice. Moreover, the company provided its customers with misleading financial advice. This was done in an effort of confusing their customers on the risks that were associated with the company investments. Furthermore, the directors incorporated wrong figures on loan applications and this led to inappropriate lending behavior. Stone customers discovered that they had loans that they did not apply for. Solomon (2011, p. 25) notes that corporate governance requires companies to do what is right and to incorporate codes of good conduct. Opes Ltd management manipulated its customer’s accounts in order to appear well positioned to meet the requirements of ANZ. The company illegally manipulated its major customer’s records in order to appear as capable of meeting the ANZ provision. This was unethical behavior that breached the requirements of good corporate governance (Solomon 2011, p.27). Moreover, the company misled its clients by promising them extraordinary returns. This motivated the company’s customers to invest in the company without adequate information regarding their investments (Parliamentary Joint Committee on Corporations and Financial services 2009, p. 27). According to Turner (2009, p.10) corporate governance requires a company to be transparent and to disclose all the necessary information to its customers. Opes Prime failed to offer its customers with full information regarding their investments hence this meant that that the company was not transparent and thus breached the practices of good governance. According to Armstrong and Francis (2008, p. 12) the management of Opes Prime breached their governance practices by failing to comply with legal provisions that prohibited them from accepting riskier shares and loans. In addition, the directors borrowed funds which were secured by the shares of their clients. The directors used these funds for their own purpose and thus they were not accountable to their investors. 3.3 The Role the accounting profession played in the financial reporting of these companies According to KordaMentha (2010, p. 1) auditors in Storm financial and Opes Prime were negligent in performing their function and this was a contributing factor to the collapse of both companies. The auditors failed to exercise quality audit procedures on these corporations causing them to collapse. Rittenberg, Schwieger and Johnstone (2008, p. 36) note that poor and low quality audit procedures fail to uncover fraud in an organization. Chan, Lee and Seow (2008, p. 339) emphasize that poor audit procedures make it difficult for the auditors to identify material facts that may indicate the uncertainty regarding the going concern of a firm. The auditors of Storm financial and Opes Prime gave misleading and erroneous financial statements which made it difficult for the investors to perceive that the going concern of the two firms was uncertain. 3.4 Recommendations To gain a deeper understanding of the conditions that led to the collapse of the two companies there is need for future researchers to comprehensively analyze their financial statements in order to identify whether there were any discrepancies in their incomes prior to their collapse. Moreover, there is need for future researchers to obtain information from the firms that acted as the auditors of the two companies so as to obtain a deeper insight of the conditions that surrounded the collapse of the two companies. Finally, the state should come up with rules to ensure that proper corporate governance is exercised hence minimize the incidences of corporate failures. 3.5 Conclusions The collapse of Storm financials and Opes Prime Group can be attributed to poor management and low quality auditing procedures. Both companies failed to recognize that withdrawal of funds and financial support by their financials was an indication that the companies were under the verge of collapsing. Moreover, both companies’ directors breached their governance practices by misleading the investors and this meant that they failed to apply codes of good conduct. On the other hand, the auditors of the two companies failed to employ quality auditing techniques and this made it impossible for them to detect the going concern uncertainties that surrounded the two companies. 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