Essay On Small Business And Corporate Governance In National Australia Bank And Commonwealth Bank.

Experience of Small Business with National Australia Bank

1.Read the extract from Stewart Oldfield’s article ‘A step too far crucifies small business’ reproduced in Financial Accounting in the News 3.6 and answer the following questions:

Financial Accounting in the News: A step too far crucifies small business

Stewart Oldfield

The Australian Financial Review, 4 June 2004, p. 81

Alan and Wilma McMinn thought they had it made when they bought a Gold Coast child-care centre from ABC Learning’s Eddie Groves in 1995.

They had a supportive commercial manager from National Australia Bank who endorsed a jointly penned business plan with a $800 000 loan to exploit one of the fastest growing population corridors in the country. They had switched from ANZ Banking Group because of their faith in the manager, who, they say, showed a keen understanding of the child-care business.

The 1996 financial year produced a net profit of $250 000, prompting plans to expand, they say. They planned to build an adjoining child-care facility and have it ready for the start of the 1997 school year.

But changes were afoot at their bank under the then general manager of Australian financial services, Frank Cicutto. Job cuts and branch closures were in full swing as each of the major banks sought to cut costs.

The McMinns say their trusted bank manager was replaced and a string of less-capable bank staff were appointed to manage their account.

Nevertheless, the McMinns say that in September 1996 they were told by a new manager that the bank remained committed to their expansion.

They say the new manager told them that head office was in a mess due to ongoing restructuring and staff changes, but the loan would be approved so they should proceed while the necessary paperwork was completed. The McMinns started building, but then in December they say they were ordered to stop work without explanation.

Four agonising months passed before approval to resume building was finally granted. The McMinns believe the delay caused by the internal restructuring crucified their plans because they missed the start of the new school year. This started them on a debt cycle that eventually led to the appointment of receivers.

They say they had 16 different commercial managers at the bank between October 1995 and July 2000 and have been left bitter about their treatment by the bank.

Their dispute with the bank is now before the courts and the bank is saying little on the matter. ‘We have a general policy of not commenting on matters of this kind,’ a NAB spokesman said.

But it seems the internal restructuring in the country’s most profitable small-business lending franchises continues to rub customers up the wrong way.

In its latest financial results, NAB reveals that it is losing market share at the sole-proprietor end of the business lending. ‘Every bank has got a different version of what SME relates to, but what we are clearly doing is losing market share at the sole proprietor end,’ the head of NAB’s Financial Services Australia unit, Ian MacDonald, says.

CBA's Legal Claim for Selling Toxic Investments

But it is not the $360 000 million foreign currency option scandal that is being blamed for the departure of the lucrative sole proprietors.

Instead, it is a new round of restructuring triggered by a centralisation program kicked off two years ago under Cicutto’s Positioning for Growth strategy.

The initiative resulted in about 110 business bankers [being] pulled out of the field and into capital-city offices.

The idea was that NAB could centrally manage its small-business customers, sacrificing face-to-face contact in the process.

The bank now admits it went too far with the efficiency drive.

The bank has moved to have a small-business banker in each of its 110 business-banking centres around the country, MacDonald says. Further it will position a business banker in a retail branch if there is a need.

It is an embarrassing and costly turnaround that has gone largely unnoticed by investors as they focus on the impact of the currency option scandal.

The drive for efficiency has seen the market leaders in small business banking, NAB and CBA, become too willing to call receivers in on a client when there is a whiff of trouble, Evan Jones, of the economics faculty at the University of Sydney, says.

Staff turnover has contributed to the demise of an unknown number of NAB borrowers, he says, sympathising with suggestions that NAB will transfer a bank manager who gets too close to clients.

‘There is no moral or legal pressure on these banks to act in any normal principles of ethical standards or corporate governance. The imbalance of resources which they can bring and their long-standing relationship with the receivers means they can count on getting away with whatever they want to do. I would like to think that there is a link between NAB’s behaviour and loss of market share,’ he says.

The banks have promoted studies that find small business is getting a better deal from the banks, perhaps in fear that the federal government might introduce legislation to improve service to the country’s 1.2 million small-business operators, as has the government in the UK.

Required:

a.Applying Stakeholder Theory, would the bank care about the concerns of the small business sector and regional business communities?

b.Applying the political cost hypothesis of Positive Accounting Theory, explain the claim in the article that ‘The banks have promoted studies that find small-business is getting a better deal from the banks, perhaps in fear that the federal  government might introduce legislation to improve service to the country’s 1.2 million small-business operators, as has the government in the UK’.

c.If rising bank closures and management turnover are not what the community expects, how would Legitimacy Theory predict how the bank might react?

2.Read the following adaptation of an article entitled ‘CBA in payout on “toxic” products’ by Leo Shanahan that appeared in The Australian on 4 April 2015.

In 2012 a claim was lodged in the Federal Court against the Commonwealth Bank by Gloucester Council and an investment company, Clurname, alleging that CBA had breached its duty of care and engaged in misleading and deceptive conduct in selling them ‘toxic’ investments, ignoring their request for conservative investments. Eventually around 35 investors, who had been sold $140 million worth of AAA-rated collateralised debt obligations (CDOs), participated in the class action. 

CBA settled with the investors for $50 million, including legal fees, and agreed to pay $1.5 million to International Litigation Partners, funder of the class action. 

The bank refused to comment on the settlement, saying the court still had to approve it, although CBA had previously said the investor’s claim had no merit. In the course of the case it had been revealed that CBA had settled with at least 14 other CDO investors. 

CBA had earlier been faced with the fallout from the frauds perpetrated by some of its financial planners, which led to public apologies and expensive settlements. 

REQUIRED

On the basis of the brief information provided, consider how, if you were the chief accountant at the Commonwealth Bank, the case would be disclosed within the annual report of CBA. What factors would you consider in determining the form the disclosures should take, and in which years the disclosures would be made?

Experience of Small Business with National Australia Bank

The case study is on three major concepts and the theories, one of which is the Stakeholder’s Theory as per which all the financial and non-financial information needs to be shared with the user for decision-making and continuity of the business. The second is the legitimacy theory as per which the businesses should operate keeping in mind the norms and practices being followed in the society and should try to meet the needs of society (Belton, 2017). The final theory being discussed is the positive Accounting Theory, which has a number of hypothesis to deal with like debt equity hypothesis, the bonus plan hypothesis and the political cost hypothesis. It has a number of concepts as well like that of agency cost and relationship and agency issues. All of these has been explained using case study.

Part 1: If Bank cared about small businesses and regional business communities

Introduction: Stakeholder’s theory

As per this theory, the stakeholders of the business expects that the businesses are going to create value for them and this is the only way in which the businesses can survive and grow. Both the financial and non-financial information needs of the users are to be met. The stakeholders can be internal or external. Internal stakeholders include employees, debtors, creditors, existing customers, management and shareholders of company, on the other hand, external stakeholders include government, tax authorities, bank, financial institutions and the prospective investors (Bizfluent, 2017). Since all the above-mentioned stakeholders contribute in some way or the other in the growth of business, they expect value creation for them as well by the company. Thus, it is each other’s actions can affect a two-way impact and both the parties heavily and therefore harmonization in the goals is required.

Application: Stakeholder’s Theory

In the given case, the childcare centre plan of Alan and Wilma McMinn’s had to be closed because of inefficiencies of the National Australian Bank and the inadequate support rendered by them. They failed to meet the expectation and completely ignored the needs of the small businesses sector due to internal issues like restructuring, constant change in the internal staffing who were responsible for these small business accounts (Fay & Negangard, 2017). The company also reported these in the financial statements and it had a huge loss in the market share due to this. Furthermore, the called 110 of its field officials and banking partners to central offices in city as part of the small scale lending centralization. This further cut off the face and face communication and the personal contact with the customers. The bank also faltered in contributing to growth of regional community as they failed to meet the loan application of Alan and Wilma McMinn who were already earning as much as $ 250000 from the existing business locations (Farmer, 2018).

Part 2: Application: Political cost hypothesis in Positive Accounting Theory

Positive Accounting theory and its meaning

Positive Accounting Theory (PAT) is one where the methods of accounting are being changed based on the given circumstances such that the information needs of the stakeholders are also being met and the relevant accounting standards are being followed. The decision to apply one or the other accounting approach depends on the economic consequences of the method being followed. Out of the three hypothesis of this theory, the political cost theory states that the earnings needs to be deferred if the organization is involved in bearing of political costs (Vieira, et al., 2017).

CBA's Legal Claim for Selling Toxic Investments

Application: Political cost hypothesis in Positive Accounting Theory

There was one of the statements in the article, which said, “The banks have promoted studies that find small-business is getting a better deal from the banks, perhaps in fear that the federal government might introduce legislation to improve service to the country’s 1.2 million small-business operators, as has the government in the UK”. The statement depicts that NAB already perceived and was aware of the fact that it has been ignoring the needs of the small businesses and as a result, the government may put up a legislation to be followed by bankers to help the small businesses sector (Kuhn & Morris, 2016). This was in fact a proactive and positive approach in a bid to avoid the political costs in the future and get involved directly in serving the sector straightaway. The company did a defensive action to promote and advocate that the small businesses are getting better deals from the banks or else it would have landed in huge political costs. This is one of the examples of Positive Accounting Theory where in  order to avoid the unnecessary political costs and reducing profitability, it decided to changes the perception and way of accounting where the company would no more be perceived as profit making in the eyes of government and politicians. It further wanted to depict the company as one, which considers public interest at large as priority rather than profits. With this, political costs and regulations could be avoided (Marques, 2018).

Part 3: Application: Legitimacy Theory

Legitimacy Theory and its meaning

As per the Legitimacy theory, the company needs to disclose in the annual financial statements, the social, environmental and community obligations, which has been met by the company to enable users, understand that the company is meeting the social and economic obligations. It is one of the requirements of corporate governance and in the given case; the company NAB should have reported the same in financial statements (Md Khokan Bepari, 2014). It could have saved NAB from the allegations imposed by Alan and Wilma McMinn that the company did not offered loan on time due to which the business and society as a whole suffered.

Misleading information in Disclosures

As per AASB 130, it is required for all the listed companies in Australia to disclose all the material information in the financial statements, which could be critical for decision-making. Furthermore, the bifurcation of the expenses heads is also required in the annual accounts for better understanding of the users (Grenier, 2017). As per the given case study, CBA did not disclose all the material information in the books and thus deceived the investors. Some of that critical information is mentioned below:

1. The litigation expenses being paid to “International Litigation Partners” amounting to $1.5 Mn was not disclosed separately in financial statements – notes and disclosures section.
2. The complete picture of provision and contingent liabilities that the company might incur in the coming future was not shown(Knechel & Salterio, 2016).
3. The financial and non-financial risks due to above class action and its impact on the goodwill and reputation of the company and other risks associated with the bank were not disclosed.

There are several things, which need to be taken care off while making financial statements like:

1. If the economic and other investing decision of the investors would be impacted by disclosure(Sithole, et al., 2017).
2. If a particular item qualifies as material and what is the background that should be shown in the financial statements.
3. Whether the company adhered to the regulatory requirements and Standards on Accounting.
4. If the information disclosed is true and is not deceiving for investors(Kangarluie & Aalizadeh, 2017).

Period of disclosure

In the given case, since the investors have already suffered because of wrong reporting in the financial statements therefore the company should be reinstating the annual financial statements for the given period and should be reissuing the same. This is because the given incident resulted in the financial obligations for the bank.

References

Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
[Accessed 07 december 2017].

Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations. Journal of Media Ethics, pp. 1-12.

Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal of Accounting Education, Volume 38, pp. 37-49.

Grenier, J., 2017. Encouraging Professional Skepticism in the Industry Specialization Era. Journal of Business Ethics, 142(2), pp. 241-256.

Kangarluie, S. & Aalizadeh, A., 2017. 'The expectation gap in auditing. Accounting, 3(1), pp. 19-22.

Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.

Kuhn, J. & Morris, B., 2016. IT internal control weaknesses and the market value of firms. Journal of Enterprise Information Management, 30(6).

Marques, R. P. F., 2018. Continuous Assurance and the Use of Technology for Business Compliance. Encyclopedia of Information Science and Technology, pp. 820-830.

Md Khokan Bepari, S. F. R. A. T. M., 2014. Firms' compliance with the disclosure requirements of IFRS for goodwill impairment testing: Effect of the global financial crisis and other firm characteristics. Journal of Accounting & Organizational Change, 10(1), pp. 116-149.

Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.

Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems. SAGE Journals, 30(1).