Avoid Corporate Governance Quick Fix -Scholar
17 July 2003 at 1:07 pm
International accounting scholar, Professor Jere Francis has warned Australia to move cautiously in mandating new corporate governance requirements suggesting that the failures evident in Enron, WorldCom and HIH will always occur, regardless of the corporate governance model.
For Not for Profits it’s worth taking a look at where the corporate world has gone wrong and how the experts view it!
In presenting the 64th CPA Australia / Melbourne University research lecture to over 250 CPAs and academics, Professor Francis says that recent corporate governance models rely on independent boards, executive contracts linked to company performance, and sceptical outside auditors.
Professor Francis argues that as the dust settles on Enron, WorldCom, HIH and other corporate failures, it appears this model has failed – boards were stacked with cronies, compensation levels were obscenely large, and outside auditors were either asleep at the switch or knowingly looked the other way.
But he says the human greed and bad business decisions that led to the Enrons, WorldComs and HIHs cannot be regulated out of existence.
Instead Professor Francis highlights the need for reform of the legal environment and investor protection in order to improve financial markets.
He says so many countries are jumping on the International Accounting Standards bandwagon hoping that stronger accounting will lead to more financial development.
He says this is just plain wrong the basic mechanisms for good governance are already in place, and derives from a common law tradition and the evolution of strong investor protection.
Classic red flags of management fraud
Professor Francis closed his presentation with his five classic red flags of management fraud.
1. Unduly aggressive earnings targets
2. Management compensation based on aggressive earnings targets
3. The inability to generate operating cash flows while at the same time reporting large earnings / earnings growth
4. Financial statements based on significant estimates that involves subjective judgment
5. Significant related-party transactions
He says these red flags are not the only signs but are extremely relevant to company boards and investors.
Professor Francis is KPMG Distinguished Research Professor at the University of Missouri, a pre-eminent scholar in accounting, and publishes extensively in top-tier international journals.