tbclogo.gif (4885 bytes)

Keywords :

page_title.gif (1527 bytes)
press releases | david edwards | tax | technology | management | small business | recruitment | cpa store
corner_ad1.gif (4898 bytes)
cpa_bannerad.gif (4628 bytes)
management.gif (1099 bytes)

Corporate ethics - more honest or more careful?

Ethical behaviour is a crucial matter for everyone in business, but is particularly important for those at the senior manager and board director levels. Much has changed since the ‘cowboy era’ of the 1980s - especially the attitude of those at the top. But is the change a genuine desire to act more honestly, or are those who are dishonest merely better at hiding their activities? In this issue, Australian CPA looks at the key issues in the governance area, showing how companies can establish structures for ethical behaviour. First, Joe Longo of the ASIC provides the view from the regulator.

Corporate governance has been a central business issue of the 1990s. To a large extent, the excesses of the 1980s ensured that it would be the focus of public and shareholder attention.

In the past decade there has been increasing pressure from the investment community, in particular, on directors to give greater attention to issues including stewardship, accountability, risk management, codes of conduct and ethical behaviour.

At the same time, regulators - including the Australian Securities and Investments Commission - have been actively driving the demand for disclosure with an increased emphasis on board composition, its membership and independence. This has been partially achieved through the appointment of independent non-executive directors and separation of the chairman and chief executive roles. The requirement for greater disclosure is in part a response to the increased focus on director’s duties and responsibilities. It puts the spotlight on stewardship, accountability and control.

Earlier this year, ASIC turned particular attention to the monitoring disclosure by directors of listed companies of interests in the listed company’s shares. It became an issue after a survey of 38 randomly selected Melbourne-based listed companies showed that during the past 12 months, 35 per cent of directors failed to disclose their interests within the 14-day reporting period. Of that group, almost two-thirds of directors had lodged their notifications more than a week late.

More significantly, in reviewing companies from the random sample where there had been no notifications or no recent notifications of directors’ interests, ASIC had found seven directors in breach of the requirement. These directors had direct or indirect shareholding interests in their companies and are in breach of their disclosure obligations for periods ranging from 21 months to three years.

For those that do breach the Corporations Law, evidence suggests that ASIC is effectively dealing with recalcitrant directors and others, particularly when it comes to enforcement. In the year to June 30, 1999 ASIC commenced 233 investigations compared with 214 in the previous corresponding period. There was a considerable increase in the number of criminal enforcement actions completed - almost double the previous period. The number of civil enforcement actions almost doubled to 64 from 34 in the previous period.

This has taken place while the number of registered companies continues to rise to about 1.15 million currently, from 1.09 million in 1997/98.

Educating the community

As well as playing an important enforcement role, ASIC has taken on a wider education role, largely as a result of new responsibilities to consumers of all financial products and services, except lending.

The new responsibilities, which took effect from July 1 1998, doubled the number of people ASIC protects from the 40-50 per cent of adults who hold investments to the entire adult population. To deal effectively with this much wider consumer base and with additional legal complexities including in the superannuation and insurance industries, new strategies were introduced to:

  • target inspections and take action that will increase the quality of service and advice for consumers and remove incompetent or dishonest people;
  • guide and consult with industry so consumers can use new products and services without loss of protection;
  • strengthen relationships with financial institutions and industry associations to raise standards of disclosure and advice that investors and consumers receive; and
  • communicate so that businesses comply with the law and consumers use their rights to avoid fraud. Enforcement evidence also suggests that no matter what rules are put in place, there will always be companies who mismanage and control their businesses to the detriment of shareholders. ASIC takes the view that the more shareholders know about what is expected of company directors and officers, the better.


One of the most important investigations of the past year was into the affairs of Burns Philp Ltd, a former blue-chip company with thousands of small shareholders. The company’s massive write downs in its herbs and spice businesses resulted in the collapse of its share price and raised questions about whether directors had adequately supervised management and had revealed the problems soon enough.

We documented in a report the problems the company had had, and the problems experienced in accurately valuing its brand names. To draw out lessons for the future, we also reported on the special investigation into Spedley Securities Ltd, which collapsed in 1989, with massive debts.

In one of the largest corporate investigations, major frauds were revealed and, through the DPP, successfully prosecuted. With the legal proceedings concluded, the report highlighted lack of internal controls, the dominance of a single director, Brian Yuill, and the absence of an ‘arm’s length’ commercial approach to loans.

In the latest financial year, ASIC took action against dishonest directors, bankrupts managing companies, insolvent trading, ‘phoenix company’ activity, and failure to cooperate with external administrators. Ten of the 22 people jailed in 1998/99 were company directors who cheated investors or creditors of small to medium-sized companies or who were involved in managing companies while disqualified. We summarily prosecuted 354 directors or company officers who had failed to give external administrators statements about the company’s affairs or books and records. During the year, this process was streamlined, causing a marked jump from the 90 prosecutions a year earlier.

Where company directors have two or more companies which are wound up in the previous seven years and return less than fifty cents in the dollar to creditors, ASIC may ask them to show cause why they should not be prohibited from managing companies. In 1998/99, 74 people were prohibited from acting as directors.

Acquired for the first time last year was the power to accept enforceable undertakings. These offer a quicker and cheaper method than court action for remedying possible breaches of the law. Undertakings were accepted from 25 companies and individuals in 1998-99 as a result of our accounting surveillance to individuals involved in advising consumers. The surveillance measures were an important way for ASIC to identify problems and areas the accounting profession and business community had in relation to their disclosure obligations.

Financial surveillance

Particularly for the accounting profession, ASIC’s scrutiny of financial reports is highly significant. The latest surveillance project was carried out on the financial reports of 111 listed companies with balance dates from 1 July 1998 to 31 December 1998. It identified major problem areas in the amortisation of intangible assets, abnormal items and directors’ and officers’ emoluments.

Small business has been a particular focus, with the attendance to more than 1,290 regulatory matters affecting small companies during the year. These included action to eliminate bankrupts from company management, responses to requests from directors and shareholders and applications in relation to assets of defunct companies which vest in ASIC.

In each state and territory, ASIC’s small business team has developed relationships with company liquidators to identify serious offenders and to provide assistance. Teams have also set up links with professional groups, industry associations who represent small business, especially in industries prone to higher than average levels of insolvency, such as the building and computer sales industries.

The forces shaping corporate governance, like enforcement and shareholder pressure, appear to be changing the attitudes of directors. This is reflected in greater participation by directors in investigations and surveillance programs held to determine the level of understanding about specific sections of the Corporations Law.

In the year ahead, ASIC will continue to develop various strategies to encourage compliance with a special emphasis on electronic enforcement. The recent formation of the Electronic Enforcement Unit inside ASIC has focussed our attention not only on the need for regulation of electronic commerce, but also the need to work with industry to structure policies and consumer education strategies to keep up with technology.

Joe Longo is National Director, Enforcement, with the Australian Securities and Investments Commission.

Article from Australian CPA October 1999

cpa_logo.gif (3542 bytes) Copyright © 1997-1999 Australian Society of CPAs
Please read the disclaimer
Contact the ASCPA