Critically evaluate the role of accounting in the collapse or failure of Allco. Introduction The last decade of the 20th century and the beginning of 21st century has seen a number of corporate accounting scandals in Europe and the U.S., including Enron, HealthSouth, Parmalat, Tyco, WorldCom and Xerox…
Causes of the Collapse of Allco Corporate collapse of Allco occurred like many other collapses but reasons of other collapses had been different than with Allco, which collapsed due to duality of the positions of the chairman and the CEO, the two topmost positions in the company, i.e., one of the chairman and the other of the chief executive were managed by the same person, by late David Coe. Media identified Coe as the executive chairman although later Bob Mansfield was the chairman and David Clarke, the chief executive (Walters, 2013). Financial environment worldwide was particularly not conducive otherwise but Allco suffered from the deficiency in corporate mechanism as board of corporate governance behaved like a private company. Criticality of Board Independence Board independence is very critical factor in the scheme of corporate things. The Australian Securities Exchange (ASX) has very clearly advised not to lead the two roles of chairman and chief executive officer by the ditto person. There has never been any ambiguity over this recommendation. Freedom of the board has been from the very beginning the leading principle of good corporate governance, as defined in the preamble of ASX. This issue is linked to the sound health of the capital markets, which has been central to the Australian economy. Take for example the case of Enron where the positions of the CEO and the chairman were managed by Kenneth Lay. Enron collapsed because of cheating and corruption of 18 years in securities (Walters, 2013). The same cannot be said about Allco that it cheated and practised corrupt practices but members of the board were found to be in compromising positions when it came to the issue of loan to one of its associate companies, the Allco Principles Trust (APT). Corporate Mechanism at Allco Former chief executive of Allco, David Clarke revealed the complicated corporate mechanism of the Company, which at one time had a market value of $5 billion and in 2008 it came rolling down to owing above $1 billion, affecting 50 related companies, facing settlement. The fall back in structured finance reduced the share price to almost half in late 2007. An associate company APT was given a loan of $50 million to ensure that margin calls do not bring down Allco share price. The leading shareholders of APT were holding senior executive level positions in Allco with Allco shares as capital (Lannin, 2010). Connection between Stock Prices and Earnings The relation between stock prices and earnings inspire managers to practice earning management. Generally, it is observed that public firms show increased discretionary accruals. Managers are additionally inspired to fulfil the stock market expectations of shareholders. They are motivated to leverage income before listing in stock market, for securing investors’ interests and outcomes of earning management can reflect on the capital market (Soffer et al., 2000). Functions of Allco Board A company’s board caters to the stakes of its shareholders, as executives are too busy in day-to-day management of the company. It is the responsibility of the chairperson to ensure that shareholders’ funds are invested to earn nice dividends. In the present condition, shareholders felt very unrelated and ignorant where their funds were invested and what role their super funds were playing in corporate governance (Walters, 2013). ...
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