Group Assignment (Essay)

Accounting Information For Managers

Group Essay

People who make business decisions have power, but they also have responsibilities and are accountable for their actions. (Birt et. al, 2008, p. 66) Discuss the above statement with relevance to accounting. Provide two recent examples to support your argument.

In a corporate environment, there are individuals who may posses a senior degree of power over several functions in a business, these may include individuals such as the chief executives, managers or members of the board. As a result of their power, they are able to make decisions and control certain aspects of the entity to their discretion. These individuals however, despite having this power, also have responsibilities and are accountable for their actions.

Their actions and choices as a result of their power, will consequently influence various stakeholders of the business, these stakeholders may include employees, customers, suppliers, creditors and the community. Considerable debate has transpired over whether those who make business decisions, predominately chief executives and the board of directors, are accountable for their actions in terms of corporate governance. According to George A. Steiner the concept of corporate governance refers to The legal checks and balances that define the rights and limits the powers of shareholders, board of directors and managers. (Steiner G & Steiner F, 2006, p.597) To further discuss this thesis, we will analyze two business case studies, OneTel Ltd. and ABC Developmental Learning Centers Ltd, both consequently collapsed due to a combination of poorly implemented, and substandard business decisions.

A general definition of power according to Steiner is the force or strength to act or to compel another entity to act. (Steiner G & Steiner F, 2006 p.55) However the strength and ability of power obtained by those who make business decisions may misuse this power to influence the companys profitability and earnings for their personal benefit and enrichment. (Hendrikse J & Hendrikse L, 2004, p.6) It is necessary that delegation of power is limited to numerous individuals being CEOs and Board of Directors. However the distinct issues of corporate governance is how entities grant managers discretionary power over the conduct of the business without the possibility of conflicting interests and without oppressing the ability to hold those with power responsible. (Steiner G & Steiner F, 2006, p.597) The childcare company, ABC Developmental Learning Centres Ltd is a example of how power was used through a decision to oppress the internal financial reports of the worlds largest daycare facility and thus in November 2008 placing the entity into the hands of creditors (administration receivership). In an ongoing Federal Court case, that was held during mid 2008, internal accountants were ordered by management to prepare a future income statement for the period between June and December 2008 so that loan negotiations between itself and numerous banks could continue. In the original statement ABC Developmental Learning Centres was not expected to receive any compensation fees from centre operators or developers. However after being reviewed by the chief executive and founder Eddy Groves the amended income statement illustrated that a figure of $44.79 million was expected in that period to be received. Former ABC Learnings acting chief financial officer (CFO), John Gadsby told the court I dont know if it was David (Blanche) made the changes or if it was Eddy who made the changes. (Murdoch S, 2010, p.2) later the court heard evidence by Company secretary Matthew Horton who said part of his job was to look after governance at ABC Learning but when he arrived to say there was no appropriate way to put it. He continued telling the Federal Court that there were no committees that you would

expect to see in a listed company and that chief executive Eddy Groves approved or disapproved all transactions regardless of size (Bita, 2010, p.24). Although the court hearing continues based on the evidence provided by Mr Horton and Mr Gadsby it would be appropriate to assume that to an extent that former chief executive and founded Eddy Grooves had a considerable power reign over ABC Developmental Learning Centres decision making which ultimately resulted in the collapse of the childcare company.

On the contrary of having power is having responsibilities, specifically for those who make business decisions and for those who have been delegated corporate social responsibility. According to Birt the concept of corporate social responsibility refers to the responsibility an entity has to all stakeholders, including society in general and the physical environment in which it operates. (Birt J & Chalmers & Beal K & Brooks D, 2008, p.70) In Howard R Bowens book Social Responsibly of The Businessman outlines the contemporary understanding of corporate social responsibility, Bowen highlights three main points, these being:

1. managers have a extensive responsibility to society, business enhances civic life through skills and services. 2. corporations must use their power responsibly and effectively in society or threat loosing their business legitimacy. 3. the businesses self interest must improve society through its business practices. (Steiner G & Steiner F, 2006, p. 121)

The varying responsibilities of a person who makes business decisions can be defined from a legal, social, ethical and moral viewpoint, these fundamental points can be considered for both the internal and external business environments.

The legal responsibilities for a business decision maker to consider is that which is outlined in the Corporations Act (2001) and also detailed in the Generally Accepted Accounting Practices (GAAP). The Corporations Act 2001 is the fundamental legislation regulating corporations in Australia, on matters concerning formation and operation of companies, duties of officers, takeovers and fundraising. More specifically, Section 601FD of the Corporations Act 2001 outlines the duties of officers who are also the business decision makers in many firms. In summary, 601 FD of the Corporations Act 2001 states that business decision makers should act honestly, always act in the best interests of the shareholders and exercise caution as would any other person in that position would. The authority which administers the Corporations Act 2001 is the Australian Securities and Investment Commission (ASIC). ASIC was established under the Australian Securities and Investments Commission Act and its primary role as corporate regulator is to ensure that company directors and officers carry out their duties honestly, diligently and in the best interests of their company. Consequently the existence of the Corporations Act 2001, business managers making decisions in relation to accounting information and reporting must adhere to this legislation. These outline two sources of legal laws which outline the legal obligations that a business must consider and must comply with. Failure to comply with both GAAP and the Corporations Act will result in legal action taken against the operating entity, that could result in stringent penalties such as fines, lifting of government aid and to a extreme extent the termination of a business activity in the market place.

OneTel Ltd, once a public listed company, is one example of a company that engaged in unethical procedures, which in return, experienced closure due to its poor business practice. Unethical conduct by Onetel tarnished the business public image and in addition saw mounting concerns exposed. This prompting concern saw investigation by financial forensic offices who reported to the government and other regulatory bodies such as the ASX, and as a result of this investigation it was discovered that OneTel Ltd was publishing profits that they simply did not officially own (as most of the money they stated they received did not reflect the subtraction of commission earned after each service sold therefore making profits look large which perceived investors who made investments due to the mounting profits annually). This saw the companys shares on the ASX fall to junk status, and therefore ceased to operate due to these huge losses. Jobs, individual investments, large corporate investments and customers were forfeited out due to the unethical and moral practices of OneTel and consequently these interest groups lost their jobs and investments simply due to its act on responsible. (CPA OneTel Overview (2002) )

Accountability is defined as being liable, to be called on account or answerable. According to Dan Bawly, the concept is defined as acceptance of responsibility, as these two definitions vary slightly they make up the foundation of what Accountability means. In a modern corporate environment the board of directors are responsible for the management of the entity and therefore the management, that is, the people who run the day to day business operation are responsible for the workers and so forth. Accountability is a cycle and branches into many aspects of business. Accountability can be classified in three distinct areas, this in particular places emphasis on those who make business decisions and their depending reliance resulting in a satisfactory outcome. Management must ensure that the results of their decision is profitable, not necessarily from a monetary perspective but one that ensures the full potential of the business entity, including all its

workers and resources are utilized and met by their decisions. This statement can be supported in relation to the idea of the shareholder, where they depend on the the business to make wise decisions that are profitable therefore receiving high returns in their investment, this is juxtapose in relation to the case study of OneTel.

Therefore in conclusion it is important to ensure that managers or those in a business who hold decision making power posses and understand the acceptance of responsibility and accountability. It is this, that builds upon the theme of corporate governance, and therefore reinforces that each decision that is made by the manager needs to grasp the understanding that responsibility and power comes with their role, it is only then through this understanding that strong return for the future is more probable for both the internal and external aspects of the business and not a repeat of what was seen to happen in the examples of OneTel Ltd and ABC Learning Centers Ltd.

Reference List
Bita Natasha, Goldman warned of ABC cash shortage, The Australian, Friday April 16 2010, Business Page 24. Birt J, Chalmners K Beal D, Books A, Byrne S, Oliver J, 2008, Accounting, Business Reporting For Decision Making (Second Edition), John Wiley And Sons Australia Ltd, Milton QLD. Page 70 Hendrikse J & Hendriskse L 2004, Business Governance Handbook Principles and Practice, Formset Printers, Cape Town. Page 6. Koch David (2003), Tell.All Videos Series, CPA Australia. Murdoch Scott, Millions Added To ABC Learning Accounts, Court Told, The Australian, Tuesday April 13 2010, The Nation Page 2. Steiner G & Steiner F, 2006, Business, Government, And Society - A Managerial Perspective, Text And Cases 11e, McGraw Hill/Irwin, New York. Page 597.