International Accounting - Banks in Australia and the USA - Essay Example

This essay will focus on two similar companies; one is the Commonwealth Bank located in Australia, the second company is the First Republic Bank in the United States. They are similar in size, and number of locations, but very dissimilar in their respective approaches to the annual report, and it suspected the rest of their financial transactions and business as well. Introducing and discussing the annual reports for two different companies can best be done by the companies themselves through those annual reports. "First Republic wealth management services including private banking, investment management, securities trading, trust services and business and real estate lending, delivered through a team of financial professionals who are committed to extraordinary, personalized service. First Republic serves clients through offices in eight geographic regions." (First 2005 inside cover). From this description the reader can see that the First Republic Bank wishes to set itself apart from its competition by offering services that high net worth individuals and entities might find desirable. The bank plans on offering these services with 'extraordinary and personalized service'. Will this sense of caring show through in their reporting process, or will the statement end up being just another bunch of words mouthed by little people in dark suits with hands in their customer's pockets attempting to take every last dime they can find Comparing the description found in First Republic's annual report to the one in Commonwealth Bank's is an interesting comparison, mainly because the comparison cannot be made. Instead of containing basic information about what the company does, who it caters to and what it is doing to capture more business from those customers, it jumps right into a Chairman's message that tells how much money was made by the bank, how well they did in 2005, and how much more money they plan on making in 2006 (and for years to come). There was not one word concerning the customer. The first thing a reader notices in comparing the 2005 Annual Reports from the Commonwealth Bank (Australia) and the First Republic Bank (United States) is that one is a stodgy, black and white, basic, conservative report, while the other is a vibrant, four- color, easily read and understood creation that enhances the reader's enjoyment of what is essentially a financial report concerning a year already in the past. That the four-color report comes from the company in the United States is not necessarily surprising, but what is surprising is that a progressive country such as Australia would not foster a comparable report by one of its similar banking institutions. Of course, it could be the fact espoused by UK firms a few years ago concerning financial reports in general and the reports constraint on their ability to act. "The case financial institutions argued that the limited quality of public information, especially in financial reports, was a major constraint on their ability to act." (Holland 1999 pg. 161). There are a variety of rules that constrain financial reporting in general, and some of those rules are aimed in particular at the financial services industry. Both the First Republic and the Commonwealth annual report adhered to the majority of those general rules. Some of the rules included in both reports as espoused by the Securities Handbook and are as follows: 1). Section 210.2-01 is designed to ensure that auditors are qualified and independent of their audit clients both in fact and in appearance. 2). In determining whether an accountant is independent, the Commission will consider all relevant circumstances, including all relationships between the accountant and the audit client, and not just those relating to reports filed with the Commission. 3). Any partner, principal, shareholder, or professional employee of the accounting firm, any of his or her immediate family members, any close family member of a covered person in the firm, or any group of the above persons has filed a Schedule 13D or 13G with the Commission indicating beneficial ownership of more than five percent of an audit client's equity securities. 4). "Foreign activities" include loans and other revenues producing assets and transactions in which the debtor or customer, whether an affiliated or unaffiliated person, is domiciled outside the United States. 5). Other liabilities. Disclose separately on the balance sheet or in a note any of the following liabilities or any other items which are individually in excess of 30 percent of stockholders' equity (except that amounts in excess of 5 percent of stockholders' equity should be disclosed with respect to item (4). The remaining items may be shown as one amount. (Securities 2004). Both reports seemed to have qualified and independent auditors who verified the reports, and there were no disclosures that showed where either auditing firm had any other interests in the two banking institutions. Neither report showed that any close family members were involved with the banks, and both firms reported their 'foreign activities' in a clear manner. Other liabilities were also listed in both reports. "The inherent conflicts of interest in the auditor-client relationship and the un-observability of financial statement quality are likely culprits in the recent corporate scandals such as Enron and WorldCom." (Ronen 2006 pg130). Those scandals have, of course, been broadcast throughout the world and the ramifications have been felt throughout the financial industry. Auditors are being more scrupulous in their studies of the company supplied numbers and are verifying those same numbers in a more responsible manner. The information these auditors must verify are often found in the digital form rather than the written form as found in the past, which makes the numbers even more difficult to verify and the responsibility for doing so even more heavy. Much of this digital reliance is due to the lifestyles of the 'common' shareholder which is even more hectic than in the past, and the shareholders are much more technology oriented. "The various stakeholders of a firm have become increasingly reliant upon digital information. This includes financial reports, which are generated from numerous electronic transactions and are recorded in various ledgers. The auditors are expected to audit these financial reports and provide assurances that the information found within these reports has not been compromised, whether intentionally or unintentionally." (Flowerday 2005 pg. 12). Most important in these two reports are that it seems as if the auditors who verified the information seem to be on the 'up and up'. That verifiability is very important in today's financial world. The form of the reports are so strikingly different in presentation that comparing the two from the cover page and throughout the entire report shows two radically different approaches that two supposedly similar financial institutions take in presenting the same set of facts to the public and the experts in the financial sectors who will be dissecting theses reports. The scope and content of the report(s) from the financial viewpoint is very similar with a few obvious differences. These differences include; in the First Republic annual report there are approximately 35 pages filled with four-color photos and bios that concentrate on happy, satisfied customers and the services they use at the bank. This is a compelling way to sell your services. The content of the Commonwealth report does not contain any such photos or any attempts whatsoever to sell its services, except perhaps to emphasize the amount of profit, revenue growth and assets they now have under the company's control. After perusing both the annual reports for First Republic and Commonwealth it would seem that First Republic has taken the initiative in the electronic arena and used it to promote its company while still providing informative material. This same sense of creativity, or lack of creativity is to be found within the two documents provided by the companies. Similar to their respective websites we again find the Commonwealth report is (overall) a boring, droning report, while the First Republic report is more tastefully done. The First Republic annual report contains vibrant pictures and presents the usually boring financial information in a way that makes reading the report, not necessarily enjoyable, but at least it is not as overwhelmingly dull as the Commonwealth document. Both reports have a nice looking cover, and in fact the cover may be the only area where (if we were marking) we would have to give higher marks to the Commonwealth annual report, rather than to the First Republic annual report. After the cover, it all goes downhill for Commonwealth. From the size of the report to the layout, to the lack of pictures, Commonwealth's annual report is light years away from looking as good as First Republic's as well as conveying a message that its shareholders wish to hear. The Commonwealth report is over 190 pages long as compared to the First Republic Report that is a concise 130 pages. That discrepancy would not be an overriding factor in studying the report except that there is also a huge difference in how those pages are handled. Almost half of the pages in the First Republic annual report have color photos, with small blurbs on the people featured in the photos. Plenty of white space is used on these pages to enhance the featured photographs. Not only is white space used well on these pages, but it is also used well on the pages of 'financial information' that includes the remaining half of the pages contained in the report. Comparing the First Republic layout to the Commonwealth layout leads to an obvious and glaring difference between the two. The Commonwealth report contains two pages of color contained therein, and the remaining pages are filled to overflowing with redundant black print of facts, figures and meanderings concerning those facts and figures. Each of the two company's reports contained much of the same information presented in a somewhat different style. First Republic is more of a straight forward statement of facts with a consolidated balance sheet that showed exactly where the bank stood in regards to 2005 compared to 2004. The Commonwealth showed the same thing but took 6 pages to do it, using plenty of charts and graphs that seemed to be a lot more focused on profitability and earnings than on portraying how the bank was financially. Each of the categories for the different divisions were deemed worthy of five to ten pages of charts (all following the same basic design) and text (notes) that did not necessarily describe the services of the particular division, but rather how much money the division contributed to the bottom line, and more importantly, how much was expected to be contributed by that particular division in 2006. Normally a reader can expect to glean more information from the text of an annual report when comparing it to the graphs, charts and financial information contained therein, but the Commonwealth's report made this difficult as well. "While automatic analysis of financial figures is common, it has been difficult to extract meaning from the textual parts of financial reports automatically. The textual part of an annual report contains richer information that the financial ratios." (Kloptchenko 2004 pg 30). The richer information contained in the textual parts of both of these company's annual reports was a lot easier to find and read in First Republic's than it was in the Commonwealths. This could be because there was so much more of it contained in the Commonwealth's report than was contained in First Republic's. Perusing First Republic's report we find that First Republic notes that it accounts for its acquisitions by using the purchase method. "The bank consolidates the results of each subsidiary from the date of purchase or formation." (First 2005 pg 70). In the notes provided by the Commonwealth it says that they also consolidate their results and in fact the report states; "All balances and transactions between group entities have been eliminated on consolidation." (Commonwealth 2005 pg 75). Other notes show that financial institutions thousands of miles apart, affected by different cultures and facilitated in two different countries contain much the same accounting methods for various items. A good example of this is the way that they each treat the loans that they make to individuals and corporations. Commonwealth states that their loans, advances and other receivables include; "overdrafts, home, credit card and other personal lending, term loans, leasing, bill financing, redeemable preference shares and leverage leases." (Commonwealth 2005 pg 76). First Republic also makes these types of loans as well as others. Each bank treats the income from the loans as reportable 'when earned' for Commonwealth and in the month it was earned for First Republic. Bad loans or debts for each institution are reported in different ways. "Bad loans are written off in the period in which they are recognized. Bad debts previously specifically provided for are written off against the related specific provisions, while bad debts not provided for are written off through the general provision." (Commonwealth 2005 pg 76). First Republic on the other hand accounts for its bad loans through an allowance system. "The bank provides for loan losses by charging earnings in such amounts as are required to establish an allowance for loan losses that the Bank can reasonably anticipate based on the specific conditions at the time." (First 2005 pg 71). This variance portrays the way different countries require their financial institutions to account for the percentage of loans that will be bad or uncollectible. Both companies provide more than enough information for an astute reader to discern the financial aspects of each firm. The reader would definitely have to be more astute in regards to Commonwealth's due to its design and the overwhelming amount of information contained therein as compared to First Republic's report. This is not necessarily a bad thing, but would ask of the reader to be more persistent in the study of the numbers. This difference could be due to the regulations and guidelines that Australia companies are influenced by as compared to similar companies established in the United States. In some regards, the more information, the better. What this information signifies to some is that Australian companies are more conservative and conscientious than their American counterparts. Though it takes more persistence and perseverance to muddle through the Australian report when compared to the American report, the effort may well be rewarded with a more beneficial investment. Works Cited Commonwealth Bank, (2005) Annual Report. pp. 1-190. First Republic Bank, (2005) Annual Report. pp. 1-132. Flowerday, Stephen, Von Solms, Rossouw. (2005). "Continuous Auditing: Verifying Information Integrity and Providing Assurances for Financial Reports." Computer Fraud and Security, Vol. 2005, Issue 7, pp. 12-16 Holland, John. (1999) "Financial Reporting, Private Disclosure and the Corporate Governance Role of Financial Institutions." Journal of Management Governance, Vol. 3, Issue 2, pp. 161-87 http://www.commbank.com.au/default.asp, accessed May 12, 2006 http://www.firstrepublic.com/, accessed May 12, 2006 Kloptchenko, Anotnina., Eklund, Tomas., Karlsson, Jonas., Back, Barbro., Vanharanta, Hannu., Visa, Ari., (2004) "Combining Data and Text Mining Techniques for Analysing Financial Reports." Intelligent Systems in Accounting, Finance and Management, Vol. 12, Issue 1, pp. 29-41. Ronen, Joshua. (2006) "A Proposed Corporate Governance Reform: Financial Statements Insurance" Journal of Engineering and Technology Management, Vol. 23, Issue 1-2, pp. 130-146 Securities Lawyers Handbook. (2004), http://www.law.uc.edu/CCL/regS-X/index.html, accessed May 15, 2006 Read More