An Analysis of Corporate Collapses

Only available on StudyMode
  • Download(s) : 44
  • Published : April 1, 2013
Open Document
Text Preview
“An Analysis of Corporate Collapses”

MPA751 Financial Reporting and Analysis
Unit Chair:Dr. Wen Qu.

Student Name:Andrew William Giblin
Student Number:211221042
Due Date:Monday 20th August 2012

I certify that the attached work is entirely my own, except where material quoted or paraphrased is acknowledged in the text. I also declare that it has not been submitted for assessment in any other unit or course.

Table of Contents

Executive Summary3
Introduction……………………………………………………………………………………………4
Agency Theory and Relevant Hypotheses5
ABC Learning Centres Limited - Australia7
Olympus Corporation - Japan ……………………………………………………………………..10 WorldCom Incorporated - United States of America…………………………………………… 13
Conclusion16
Reference List…………………………………………………………………………………….…17

Executive Summary

“An analysis of corporate collapses” is a report that discusses the concept of Agency Theory and the impact this has on organisations that appoint agents to act on behalf of the owners or shareholders of the company. Three corporate collapses were identified as part of the report and each collapse was analysed with regard to both agency theory and the Australian Securities Exchange (ASX) “Corporate Governance Principles and Recommendations with 2010 Amendments. For each case several principles and their recommendations that are deemed relevant are discussed and analysed. The three companies are: * ABC Learning Centres Limited Australia

* Olympus Corporation Japan
* WorldCom Incorporated United States of America

Introduction

This report consists of an explanation of agency theory and three hypotheses that are derived from the theory which are: * Bonus plan Hypothesis (Management compensation)
* Debt Covenant Hypothesis
* Political Cost Hypothesis

The report discusses the self-interests of agents and the impact this has for the company. I was particularly interested in bonus plan hypothesis and how this can impact or pressure the agent to manipulate accounting practices to ensure they obtain the outcomes require of them. The report analysis’s the three companies financial collapses and discusses the accounting reporting issues in regards to the both agency theory and the ASX principles.

Agency Theory and Relevant Hypotheses.

Corporations are made up of many groups such as owners, managers, employees, stakeholders, and creditors. These groups are gathered in the corporation through a nexus of both explicit and implicit contracts. It is not always possible to have the owner as manager of the company, so the owner(s) nominate a person or group as their agent to act on their behalf. The agent is then responsible to conduct the business in the best interests of the organisation and its stakeholders. As agents own self-interests will never completely align with the interests of the organisation, Agency Theory explores the separation of ownership and control of the organisation and the problems this might bring about (Bryant & Davis 2011). Agency Theory’s main behavioural assumptions are that:

1. Agents and principals are rational
2. Agents and principals are self-interested
3. Agents are more risk adverse than principals (Baeten & Balkin 2011). Agents adopt accounting policies that allow them to gain, in the view that the firm also gains. Different types of hypothesis can exist that show what motives make a manager choose one accounting method over another. (Namazi & Ghorbani 2010). Three of these hypotheses are discussed below.

Bonus Plan Hypothesis (Management Compensation)
States that a manager with bonus plans (linked to their remuneration) is more likely to use accounting methods that increase current period reported income, hence shift reported earnings from future periods to the current period.

Debt Covenant Hypothesis
Predicts that the higher the firm’s debt/equity ratio, the more likely managers will use an accounting method...
tracking img