Corporate Failure Research Articles

A Different Personal Perspective through the Behavioral Accounting Literature

INTRODUCTION was delighted to receive the Notable Lifetime Contribution in Behavioral Accounting Literature Award. The previous winners were: Bob Ashton, Jake Birnberg, Mark Dirsmith, Anthony Hopwood, Bob Libby, Ken Merchant, Ted Mock, Bill Waller, and Michael Shields. All ave had some influence on my research, particularly the early research of Bob Ashton and Bob ibby. Last year, Mike Shields 2009 provided a personal perspective of his trip through the ehavioral accounting literature. The perspective in Shields 2009 is through a management ccounting lens while my perspective considers the audit judgment and decision-making JDM iterature from the 1970s to present. It is not intended to be a comprehensive literature review but utlines some of the changes in the audit JDM research that directly impacted my own work. It lso illustrates the perspective of a non-American researcher including the opportunities and hallenges faced. The initial study to systematically examine auditor judgments was Ashton 1974 , which onsidered consensus, stability, and cue usage of individual auditor judgments. At the same time here was judgment research using the Brunswik lens model by Libby 1975 looking at individual redictions of corporate failures and research on human information processing in accounting nformation systems Driver and Mock 1975 . In the auditing arena there were lots of extensions of Ashton 1974 particularly in Journal f Accounting Research . These extensions tested for various moderating variables and the genralizability of the earlier results. With hindsight, the literature could have moved faster if the

The financial crisis and corporate governance reform

The post crisis reform of corporate governance poses significant policy challenges to director remuneration, risk management, internal practices, boards' ability to understand and control risk-taking, and shareholder concern over the long-term value of their investments. Financial institutions' corporate governance practices warrant special attention, due to the systemic implications of corporate failures, the wider range of risks under management, the special role of stakeholders (i.e., depositors) and the government intervention. To develop policy, the directions provided by the OECD Principles of Corporate Governance is a good reference, to be supplemented by knowledge of the function of corporate governance institutions and mechanisms.

Deconstructing the notion of blame in corporate failure

Corporate failure is the subject of considerable academic debate since the 1960s. Failure in the retail sector receives less attention however. This paper addresses the notion of blame in corporate failure. Reference to A Goldberg and Sons, a failed retailer, exemplifies the discussion. Prior to bankruptcy in 1990, this firm was a successful Scottish department store and clothing retailer. The study takes a historical approach, using in-depth interviews, archival material, and other secondary data sources. Findings reveal that, despite warning signs from various key performance indicators and external reviews, the company's board failed to act appropriately. A series of bad strategic decisions contributed to the company's failure. In line with theories of blame attribution, through their (in)actions, the board's negligence played a major role in the firm's demise.

Executive compensation, corporate social responsibility, and corporate financial performance: a multi-equation framework

Much has been discussed in various disciplines about the determinants of executive compensation. The importance of these scholarly inquiries has been underscored by the recent condemnation of high executive remuneration levels in the face of corporate failures and financial declines. Most researchers confine their analyses to single equation models that test various determinants and different measures of compensation. In this paper, we expand this approach to a multi-equation model that examines the determinants of executive compensation within a broader framework. Our specification explicitly allows for the endogeneity of executive compensation, firm financial performance, and corporate social responsibility (CSR). Chief among our findings is that this endogeneity assumption is supported, which means that financial performance and social performance are determined simultaneously. We further show that CSR is among the determinants of CEO pay, which indicates that pay-for-performance does not sufficiently explain compensation. Copyright © 2010 John Wiley & Sons, Ltd and ERP Environment.

Managing and Coping with Organizational Failure: Introduction to the Special Issue

Introduction This special issue focuses on understanding the causes and management of organizational failure. Over the years far more organizations have failed than have succeeded. Yet, within business and management research, the study of organizational failure has always been considered as secondary to organizational success. Failure is commonly seen as being of less significance or, at best, as being complementary to research on organizational success. “Failure is the most fundamental feature of both biological systems and human social and economic organisations,” as Ormerod (2005 p14 ) notes. “Of all the species that have ever existed, 99.99 per cent have failed in the most dramatic way. They are extinct. In America, more than 10 per cent of all companies fail every year, with more than 10,000 closing every week. Yet the existence of failure is one of the great unmentionables” (Ormerod, 2005: page 14). However, recently scholars from different disciplines including business history (Fridenson, 2005), economics (Ormerod, 2005), business management (Finkelstein, 2003; Wilkinson & Mellahi, 2005), strategic management (Mellahi & Sminia, 2009), and political science and law (Balleisen, 2001) have been calling for more research on business and organizational failure. This surge in interest in organizational failure is due in part to the wash up of the global financial crisis. High profile corporate failures caused by accounting frauds and deceits (e.g., Enron, Parmalat and WirldCom), fatal accidents (e.g., BP’s Texas City refinery fire), environmental disasters (e.g., BP’s oil leak in the Gulf of Mexico) and high levels corporate meltdowns as a result of the current global economic crisis (e.g., Northern Rock, AIG, and Freddie Mac) (Gillespie & Dietz, 2009: 127) have thrown failure into sharp relief.

Audit committee and internal audit and the quality of earnings: empirical evidence from Spanish companies

Corporate scandals and failures such as Enron, WorldCom, etc. were highly catastrophic and had a terrible effect on stakeholders. The pressure of globalisation and the intense competition have lead to organisations encouraging good corporate governance. Organisations have to promote transparency and accountability of financial information. As Gramling et al. (J Account Lit 23:194–244, 2004) argued there are four important mechanisms of corporate governance include boards of directors, audit committees (among others) and internal and external audit functions. However, this paper will focus on the relationship between two corporate governance mechanisms (audit committee and internal audit function). Thus, our purpose is to analyse the relation between characteristics of the audit committee and internal audit function and earnings management measured as abnormal accruals to test the quality of financial statements. We hypothesise that the association between the effectiveness of the audit committee and the presence of an internal audit function and its relationship with this committee would indicate less opportunity for management to manipulate earnings. Using a sample of 108 non-financial Spanish companies that traded on the Madrid Stock Exchange between 2003 and 2006 (432 observations), we have found that the size and number of meetings of the audit committee had a significant negative association with earnings manipulations. Also, our results suggest that a negative relation between having an internal audit function and earnings management.

Measuring and Envisioning Risks: Boundary-Work in Risk Management

For two decades, risk management has been gaining ground in banking, despite a series of corporate failures, large-scale losses, regional crises, and a worldwide financial crisis that have been cast as risk-management failures. Power (2004a) explained this with his model of the cyclical “metrological drama” of counting, control, and calculation punctuated by cycles of innovation, crisis and reform and, in light of the recent financial crisis, he and others concluded that the continuing expansion of risk measurement is dysfunctional (Taleb, 2007; Power, 2009). Neither the model nor its ultimate dysfunctionality, however, have been empirically scrutinized.This paper asks whether the expansion of measurement-based risk management in banking is as inevitable and as dangerous as Power and others speculate. Based on two detailed case studies and 53 additional interviews with risk-management staff at five other major banks over 2001-2010, this paper shows that while the risk functions of some organizations have a culture of quantitative enthusiasm and are dedicated to risk measurement, others, with a culture of quantitative scepticism, take a different path, focusing instead on risk envisionment, aiming to provide top management with alternative future scenarios and with expert opinions on emerging risk issues. In order to explain the dynamics of these alternative plots, I show that risk experts engage in various kinds of boundary-work (Gieryn, 1983, 1999), sometimes to expand and sometimes to limit areas of activity, legitimacy, authority, and responsibility.

Nurturing Corporate Culture With the Wisdom of the Gita - A Gateway for Good Governance

In the recent decades, especially in the post globalised era, the issues relating to Corporate Governance have assumed a great significance and concern. The crisis of credibility and confidence during the early years of the new millennium has been created by the frauds, scandals and failures of several large corporations in the various countries of the world. The major corporations which have created a havoc in corporate world include Enron, Adelphia, Arthur Anderson, Parmalat, Tyco, Global Crossing, WorldCom unconditionally and the recent Satyam scam in India. This has caused people around the world to seriously question the corporate culture, ethics and values of business organizations and its executives, auditor and leaders also. These series of corporate scams and scandals are taking place in the presence of strict laws, rules and regulations such as Sarbanes-Oxley Act 2002 in America, the combined code (1998), which was derived from the Cadbury committee report (1992), Hamphel committee report (1995) and Greenbury committee report (1995) in U.K. Even in India, the corporate world could not remain indifferent to the developments that have taken place in America and U.K. and in other countries of the world. Consequently, various committees such as Rahul Bajaj committee (1997), Kumar Mangalam Girla Committee (1999),Naresh Chandra committee 2002, Narayan Murthy committee (2003) and Dr. J.J. Irani committee report (2005) on Corporate Governance made many recommendations for good governance. In-spite of all these rules regulations, codes and recommendation, the infamous Satyam scam was unearthed in India in January 2009.

An exploratory and comparative assessment of the governance arrangements of universities in Ghana

PurposeInstitutional governance has recently attracted significant attention, fuelled by increasing numbers of global high‐profile corporate failures and scandals. In many countries issues have been raised about university governance. In Ghana, university governance has become crucial following the upsurge of private universities in recent years arising out of: increased demand for tertiary education resulting from high population growth; and expanded enrolment at basic and secondary levels, which have far exceeded the capacity of existing institutions. This study aims to explore and assess the governance arrangements of private and public universities in Ghana.Design/methodology/approachA multi‐stage sampling technique was used to select three private and two public universities. An exploratory and comparative approach was used to examine the governance arrangements of private and public universities in Ghana.FindingsBoth private and public universities in Ghana follow the “traditional”, “business”, and “trusteeship” models of university governance, although in different proportions. Additionally, both types of institutions follow the bicameral system of decision making.Research limitations/implicationsOnly five of 19 universities in Ghana were sampled. Future research might expand the sample size to test and validate the initial perspectives from this study and also investigate differences between governance arrangements of faith based and non‐faith based private universities.Originality/valueThe paper reports the findings of the first nation‐wide investigation into governance arrangements of Ghanaian universities. It will interest policy makers, university authorities, and other stakeholders in the higher educational sector.

Impact of an Ethics Presentation Used in the USA and Adapted for Italy

The purpose of this study is twofold: (1) to determine if an ethics presentation at an Italian university can change students' perceptions of ethics; and (2) to compare the results of this study with previously published results from US students. The ethics presentation, previously developed by Smith, Smith and Mulig (2005) Journal of Business Ethics, 61(2), pp. 153–164, for accounting and business classes, made available on the Internet, was adapted and used in classes in Italy. As in the USA, Italy has faced significant financial scandals and corporate failures in recent years. Both Italian and US penal laws have been changed to prevent future financial frauds, but there are limits to what laws can accomplish. The ethics presentation described in this Teaching Note was an effort to encourage students to consider the importance of ethics. The impact of the presentation on Italian students' perspectives is described. In addition, a comparison is made of the impact of the presentation in Italy and in the USA, which shows that students in both countries regard ethics as a very important topic.

Does the Sarbanes-Oxley Act Promote Ethics in Corporate Governance?

The purpose of this paper is to examine how the Act impacts ethics in corporate governance. It examines ethical issues in corporate failures and reviews aspects of the Act that promote ethics in corporate governance. It also identifies limitations of the Act in promoting ethics in corporate governance, and presents a summary and conclusion.

Recurring Crises in Anglo-American Corporate Governance

The prolonged systemic crisis in international financial markets commencing in 2007 was also a crisis in corporate governance and regulation. The apparent ascendancy of Anglo-American markets and governance institutions was profoundly questioned by the scale and contagion of the global financial crisis. Instead of risk being hedged, it had become inter-connected and international, and unknown. The market capitalisation of the stock markets of the world had peaked at $62 trillion at the end of 2007, but were by October 2008 in free fall, having lost $33 trillion dollars, over half of their value in12 months of unrelenting financial and corporate failures. A debate has continued for some time about the costs and benefits of the financialisation of advanced industrial economies. The long progression of financial crises around the world served as a reminder that the system is neither self-regulating or robust. The explanation of why investment banks and other financial institutions took such spectacular risks with extremely leveraged positions on many securities and derivatives, and the risk management, governance and ethical environment that allowed such conduct to take place is demands detailed analysis.

Resta Rejoinder to: Taubman's “Letter to the Editor”

I agree with Dr. Taubman that we need a better system for encouraging patients to bank their DNA. However, I am not convinced that DNA should be banked by commercial labs that also run genetic tests. While it would be very convenient for patients and clinicians, I am concerned that labs and other entities would be too tempted to mine such a vast wealth of DNA samples for their own ends. More rigorous legal controls and severe penalties need to be in place—beyond mere signing of an informed consent document—to ensure that samples are not used for noble or not so noble unintended purposes. There must be an absolute hands-off policy and severe penalties for infractions. In addition, guidelines need to be in place for dealing with continuity of storage and family access during the inevitable business cycles of corporate failures, mergers, buyouts, etc. Perhaps too some lessons can be learned from the experience with using stored newborn blood spots for purposes other than screening for inborn errors of metabolism.

Writing about impunity and environment: the ‘silver jubilee’ of the Bhopal catastrophe

Addressing the ‘silver jubilee’ of the Bhopal catastrophe, this article interrogates a set of serial corporate and juridical failures to bring redress for the profound suffering and violation experienced by those ravaged by the Bhopal event. Presenting the catastrophe as a series of interlinked catastrophes, including the failure to deliver retributive justice for the Bhopal-violated, the author suggests the inadequacy of some existing narrative strategies concerning Bhopal to respond to the ‘geographies of injustice’ intimated by the lived actuality of human, social and environmental suffering produced by mass disasters. Identifying a politics of naming fully complicit in the discursive diminution of the incomprehensible levels of human and nonhuman sentient suffering caused by the failures of the Union Carbide Corporation (UCC), the author engages ‘the practice of suffering thought’, locating his discussion in critical notions of biopower and recent Marxian insights. Lamenting the radical failure of response to the fundamental violation enacted (and now globally symbolized) by Bhopal and the corporate impunity of the UCC, the author celebrates the rise of new social movement solidarity in the face of Bhopal – global subaltern movement affinities now inaugurating a ‘new jurisprudence of human solidarity’ and alternate possible futures lying beyond the contemporary global corporate colonization of human rights discourse.

Presidency Overview [Presidents Column

As I said in an earlier column, the one constant in our lives is change. And our Society continues to demonstrate a high degree of adaptation and flexibility to remain relevant with a competitive advantage. The past year has been an exciting and wonderful experience for me and it has been an honor to serve as your Society president. It has been a year of extraordinary challenges not the least of which has been a dramatically disrupted world economy with a breakdown of the financial markets. This has resulted in a significant increase in unemployment together with numerous corporate failures and bankruptcies. We are fortunate that our industry is highly innovative and involved with products that are substantially in high demand.

Board Composition, Audit Committee Structure, ‘Grey Directors’ and the Incidences of Corporate Failure in the UK

This study examines the effect of board composition on the likelihood of corporate failure in the UK. We consider both independent and non-independent (grey) non-executive directors (NEDs) to enhance our understanding of the impact of NEDs’ personal or economic ties with the firm and its management on firm performance.We find that firms with a larger proportion of grey directors on their boards are less likely to fail. Furthermore, the probability of corporate failure is lower both when firms have a higher proportion of grey directors relative to executive directors and when they have a higher proportion of grey directors relative to independent directors. Conversely, there is a positive relationship between the likelihood of corporate failure and the proportion of independent directors on corporate boards. The findings discussed in this study support the collaborative board model and the view that corporate governance reform efforts may have over emphasised the monitoring function of independent directors and underestimated the benefits of NEDs’ affiliations with the firm and its management.

Executive stock options and firm valuation: a literature review and research framework

The wave of globalisation and its impact on business excellence is real. The importance of motivational compensation packages at achieving improved corporate performance/business excellence cannot be overemphasised. Executive stock options have been widely used to remunerate top executives of companies in this regard. The purposes of this study are to summarise and review the compensation literature on executive stock options plan relating it to firm valuation, with special emphasis on accounting numbers; synthesise and develop a framework that explains existing relationships in the extant literature connecting executive stock options and firm value and suggesting future research directions in this area of research. This study examined these in the context of compensation theories, corporate governance, earnings management as well as potential for corporate volatility and corporate failure.

Managing Ethical Risks and Crises: Beyond Legal Compliance

Recent interest in culture stems from its power to explain corporate and organizational failures. Such failures are both internal and external: accounting fraud, management misconduct, harassment and bullying in the workplace, racism, sexism, environmental issues, and health and safety concerns. Current theory holds that these failures are to be explained partly by the particular, poor organizational culture and unhealthy climate, poor leadership, and by the misdeeds of a few bad apples. When economic conditions are negative, organizations look to legislation, regulations, and codes, to reform their culture, and manage the risks of organizational failure. Both the compliance strategy, demanding obedience to laws, regulations and codes, and the integrity or values strategy, focusing on ethics training, education, tone at the top, and the hiring of employees with integrity and values, are the mainstay of recent legislation and regulations in North America and the European Union. We criticize the reliance on legislation, regulations and codes, the focus of a compliance solution which we find inadequate, ineffective, and unenforceable. We suggest reliance on a front-end, proactive and preventive program of best, precautionary practices, will better meet the challenge, in prosperity or poverty, of setting corporate culture on the right track.

Corporate governance failure and contingent political resources in transition economies: A longitudinal case study

This paper explores the dynamic relationship between politicians and entrepreneurs in the governance of business organizations in transition China. A longitudinal case study of Kelon (1984–2001), a product of politician-entrepreneur alliance in China’s household appliance sector, reveals how certain political resources that once assisted the entrepreneurs in creating competitive advantages in transition economies may turn into political liabilities during the course of institutional transition. Drawing upon the resource-based view (RBV) of the firm, the rent appropriation literature, and the agency theory, this paper sheds light on the contingent impacts of political resources on corporate governance and firm performance in transition economies.

Methodological comparison between DEA (data envelopment analysis) and DEA–DA (discriminant analysis) from the perspective of bankruptcy assessment

Abstract This study compares DEA (data envelopment analysis) with DEA–DA (discriminant analysis) in terms of bankruptcy assessment. Recently, many DEA researchers propose a use of DEA as a quick-and-easy tool to assess corporate bankruptcy. Meanwhile, other DEA researchers discuss a use of DEA–DA for bankruptcy-based financial analysis. The two groups are very different from the conventional use of DEA because we have long applied DEA to the measurement of operational performance, or productivity analysis. The two research groups open up a new application area (bankruptcy-based financial assessment) for DEA. This study discusses methodological strengths and weaknesses of DEA and DEA–DA from the perspective of corporate failure. The proposed comparative analysis has the three main criteria: (a) how to handle negative data in financial variables, (b) how to handle data imbalance between default and non-default firms, and (c) how to identify a failure process over time. This study finds that DEA is a managerial tool for the initial assessment of corporate failure and DEA is useful for busy corporate leaders and financial managers. In contrast, DEA–DA is useful for researchers and individuals who are interested in the detailed assessment of bankruptcy and its failure process in a time horizon.