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Corporate Governance

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REPORT RE: RECENT ACCOUNTING AND CORPORATE GOVERNANCE SCANDALS Contents INTRODUCTION:3 CORPORATE GOVERNANCE5 CORPORATE GOVERNANCE IN IRELAND5 RESPONSE FROM REGULATORS TO THE MOST RECENT SCANDALS IN BANKING SECTOR7 US CORPORATE GOVERNANCE at a time of Tyco scandal8 RESPONSE FROM THE REGULATORS -SARBANES-OXLEY ACT 20029 AUDIT10 EXTERNAL AUDIT10 INTERNAL AUDIT11 INTRODUCTION TO ANGLO IRISH BANK12 The Scandals12 Loans to Sean Fitzpatrick13 Irish Life and Permanent Depositing Funds14 Corporate Governance Situation of Anglo16 Ernst & Young – External Auditor17

Impact on Shareholders & The Public18 Company Law, Financial Regulator, Accounting Standards IFRS and GAAP19 TYCO INTERNATIONAL20 DETAILS OF TYCO’S SCANDAL21 ACCOUNTING ISSUES IDENTIFIED22 THE CORPORATE GOVERNANCE WEAKNESSES AT TYCO22 PERFORMANCE OF EXTERNAL AUDITORS23 CONCLUSION27 The Main Reasons for The Scandals27 Steps taken afterwards-will they prevent similar events happening in the future? 33 END REFLECTION36 Bibliography:37 Appendices:41 INTRODUCTION: Accounting and corporate governance scandals have been a growing problem in the recent years.

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Many believe that the blame for those scandals should be borne on two groups of people.

Those responsible for managing a company and those whose duty is to provide assurance on the accounts prepared by the directors (auditors), both of whom failed to perform their jobs adequately. Our report aims to seek how true this general opinion is. We shall examine examples of such scandals, explaining the matter of those scandals, similarities/differences between them as well as reasons for and consequences arising from them.

So what are the accounting/corporate scandals? Wikipedia (2010) outlines accounting/corporate scandals as “political and business scandals which arise with the disclosure of misdeeds by trusted executives of large public corporations. Such misdeeds typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of corporate assets or underreporting the existence of liabilities, sometimes with the cooperation of officials in other corporations or affiliates. BPP in its ACCA F8 Study text (2012) states the meaning of fraudulent financial reporting, which in fact leads to corporate scandals as activity that “involves intentional misstatements, including omissions of amounts or disclosures in financial statements, to deceive financial statement users. This may include: * Manipulation, falsification or alteration of accounting records/supporting documents * Misrepresentation (or omission) of events or transactions in the financial statements * Intentional misapplication of accounting principles

Such fraud may be carried out by overriding controls that would otherwise appear to be operating effectively… Management fraud is harder to detect because management is in a position to manipulate accounting records or override control procedures. ” Below we take a closer look at high profile examples of corporate scandals that played some role in forming corporate governance landscape. We will analyse the scandals of Tyco (US) and Anglo Irish Bank (IE)- companies from opposite sides of Atlantic, operating in jurisdictions using different models of regulation (principles vs. ules-based). We cannot talk about the corporate scandals without first explaining the concept of corporate governance, as poor corporate governance often gives grounds to those scandals. The first part of our report focuses therefore on illustrating what corporate governance is all about, what system of corporate governance was in each country at the time of the scandals and what changes were introduced as a response to those scandals. The important role of an audit in relation to corporate governance will also be highlighted.

Second part of our report will give detailed description of the scandals, outline the corporate governance weaknesses found and discuss the consequences of the scandals on the shareholders, potential investors and the public in general. The conclusion section of this report will talk about the main reasons behind Tyco’s and AIB scandals, differences/similarities between them. It will also include our opinion on whether the steps taken afterwards will deter similar events happening in the future. CORPORATE GOVERNANCE Corporate governance is the system by which companies are directed and controlled. Good corporate governance is important because the owners of a company and the people who manage the company are not always the same. As it is the directors that manage the company, the burden of good corporate governance falls on them. ” (ACCA Paper F8,p. 35) There are various codes of corporate governance across the globe with those most influential including OECD Principles of Corporate Governance, UK Combined Code and US Corporate Governance.

For the purpose of this report we are most concerned with the two latter ones as they directly influence the jurisdictions we are analysing. CORPORATE GOVERNANCE IN IRELAND Influences on Irish Corporate Governance SOX EU Recommendations Common Law Companies Act Irish GAAPs UK Combined Code Corporate Governance in Ireland IFRs OECD EU Directives ISAs Direct influences Indirect influences Corporate Governance System in Ireland at the time of Anglo’s Scandal From all factors influencing corporate governance in Ireland, the UK Combined Code is the most significant. As in other countries, the development of corporate governance in the UK was initially driven by corporate collapses and financial scandals. The UK’s Combined Code (1998) embodied the findings of trilogy of codes: the Cadbury Report (1992), the Greenbury Report (1995) and the Hampel Report (1998). ” The Combined Code was reviewed in 2005 and 2007 resulting in small number of changes. (Mallin 2010) The UK Code sets out standards of good practice regarding board leadership and effectiveness, accountability (including audit), remuneration and relations with shareholders. ACCA F8 2014) The Code contains broad principles and more specific provisions. Listed companies have to report how they have applied the principles, and either confirm that they have applied the provisions or if they have not, to provide an explanation (comply or explain concept). “Corporate governance codes address a wide range of structural and behaviour elements including board accountability, shareholder rights (e. g. the one-share-one-vote-one-dividend principle), financial disclosure and internal controls, executive remuneration and board structure and functioning. (Maier 2005, p. 5) * Every company should be headed by board of directors, which is collectively responsible for the long-term success of the firm. * There should be a clear division of responsibility at the head of a company between the chairman and the chief executive. * The Code requires ‘an appropriate combination’ of executive and non-executive directors on the board and recommends that at least half the board should comprise non-executive directors (to ensure objective judgement). * The chairman and non-executive directors meet the same independence criteria i. . neither of them should be a former chief executive of the same company. * The board should be a subject to evaluation reviews. * It is recommended that sub-committees of the board are set-up to deal with sensitive areas (audit committee, nomination committee, and remuneration committee). * Need for business to maintain good systems of internal control to manage the risks the company faces (internal audit). (ACCA F8 2012) It will be interesting to discover if Anglo Irish Bank complied with the principles of the Combined Code at the time leading up to the scandal.

RESPONSE FROM REGULATORS TO THE MOST RECENT SCANDALS IN BANKING SECTOR “Financial crisis in 2008 and 2009 prompted the Financial Reporting Council to undertake an extensive review in 2009 and a revised code, the UK Corporate Governance Code, was published in May 2010 (subsequently updated in September 2012). This code incorporates recommendations made by Sir David Walker in a report on his review of the governance of banks and other financial institutions. ” (ACCA F8 2012, p. 6) Since 2010 Irish listed companies must adhere to the updated UK Corporate Governance Code and also comply with the additional requirements in the ISE’s Irish Corporate Governance Annex. For financial services companies, the compliance requirement is even more onerous with the publication of the Central Bank’s Corporate Governance Code for Credit Institutions and Insurance Undertakings. Grant Thornton (2011) describes the significant changes introduced in the new code. Those include the introduction of annual rotation for directors, and a requirement to take into account the diversity nd gender balance on the board as well as the creation of a new Stewardship Code to regulate the conduct of institutional investors. The Irish Annex focuses on the quality of the disclosures, emphasising the need for meaningful disclosures and explanations and calls for companies to “move away from the practice of recycling descriptions that replicate the wording of the 2010 code or Irish Annex provisions. ” It also requires some significant additional disclosures in relation to the rationale for board composition, the board appointments process, board evaluation, the work of the audit committee, and remuneration policy.

In relation to financial institutions The Central Bank’s Code added a number of new innovations particularly the introduction of specific quantitative limits, such as a maximum number of boards a director can serve on, and minimum numbers of boards meeting. The compliance with the Central Bank Code is not on a ‘comply or explain’ basis. It is mandatory for all credit institutions and insurance undertakings to act as per scope of the code. Therefore breach of any requirement in the code could result in a criminal prosecution.

US CORPORATE GOVERNANCE at a time of Tyco scandal “Like the UK and Ireland, the USA has a well-developed market with a diverse shareholder base including institutional investors, financial institutions, and individuals. It also has many of the agency problems associated with the separation of corporate ownership from corporate control. The US is somewhat unusual in not having had a definitive corporate governance code in the same way that many other countries do. Rather there have been various state and federal developments over a number of years. (ACCA F8 2012, p. 43) At the time of Tyco scandal “corporate governance in the US was comprised of multifaceted legal and institutional mechanisms designed to safeguard the interest of corporate shareholders”. The United States had several layers of corporate governance regulations. Edwards (2003) recognises three lines of defence in U. S. Corporate governance mechanism. “A first line of defence is our basic legal structure consisting largely of state-based corporate law and federal securities laws…Corporate law is a second line of defence which ttempts to better align the interests of managers and directors with those of shareholders by imposing various obligations on manages and directors and then penalising them if they fail to meet those obligations. A third governance mechanism is executive compensation increasingly tied to the company’s stock performance by granting managers either stock options or restricted stock. ” There are two fundamental models of regulation (principles and rules-based) in any field where regulation is necessary. U. S. takes the “rules-based” approach to accounting (US GAAP, GAAS) and corporate governance.

There are several advantages and disadvantages of this model. Detailed rules remove the scope for judgment and therefore the risk of manipulation. A rule can be quickly issued in an accounting abuse or loophole becomes apparent. Changing principles has deep implications as it can affect the interpretation of several matters. On the other hand it is virtually impossible to develop a set of rules comprehensive enough to cover every eventuality. It is often possible to distort reality while still complying with the letter of the rules.

It is likely that creative individuals will devise way to avoid rules by literal interpretation (aggressive accounting practices) and that is exactly what happened in case of Tyco International. RESPONSE FROM THE REGULATORS -SARBANES-OXLEY ACT 2002 There have been a number of significant corporate scandals in early 2000s that resulted in subsequent failure of companies such as Tyco International, WorldCom and Enron. These resulted in the Public Company Accounting Reform and Investor Protection Act (Sarbanes Oxley) in the US to try and prevent further corporate fraud. Foundations in accounting 2011) Changes embodied in the Sarbanes-Oxley Act included: * Requirement for CEOs and CFOs to certify that quarterly and annual reports are fully compliant with applicable securities laws and present a fair picture of the financial situation of the company. * Listed companies must have an audit committee comprised only of independent member and at least one of them must be ‘audit committee financial expert’. * Establishment of new regulatory body- the Public Company Accounting Oversight Board (PCAOB)- with which all auditors of US listed firms have to register, including non-US audit firms. SEC issued separate rules that encompass the prohibition of some non-audit services to audit clients (e. g. book-keeping, financial information system design and implementation, internal audit), mandatory rotation of audit partners and auditors’ reports on the effectiveness of internal controls. * The auditor is required to report to the audit committee various information including all critical accounting policies and practices, and alternative accounting treatments. (Mallin 2010) AUDIT Many of the requirements in relation to corporate governance necessitate communication between the directors and the shareholders. ” (ACCA Paper F8 2012, p. 8) Financial statements produced by directors is an example of such communication. But how will the shareholder know whether information included in those statements is accurate and represents a fair picture of company’s financial situation? One way of dealing with this problem is seeking assurance from a practitioner. “Assurance services include a range of assignments, from external audits to review engagements. (ACCA Paper F8 2012, p. 10) Assurance services may be provided by an independent outsider who provide an opinion on financial information (external auditors) or by people employed as part of an organisation’s system of controls (internal auditors). EXTERNAL AUDIT The annual accounts of most limited liability companies are required to be audited by law, but some small companies are exempt. The need for an external audit in the case of companies arises primarily from the existence of separation of ownership from control.

ISA 200 states that, in conducting an audit of financial statements, the overall objectives are: “To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respect, in accordance with an applicable financial reporting framework; and to report on the financial statements, and communicate as required by the ISAs, in accordance with the auditor’s findings. (ACCA Paper F8, p. 105) For the external audit function to be effective, it must be independent of management. Auditors must report to shareholders, not to company management. This can be difficult when management negotiate the audit and other fees paid to the auditors. There are a number of perceived threats to external audits, in particular those that affect auditor independence. These include: * Non-audit fees * Lengthy relationships with auditors * Large fee income (and consequent dependency) from a single client * Relationship between auditor and client Non-audit services (Brennan, 2003) The organisation and structure of the auditing profession vary from country to country. However, there is a clear movement towards harmonisation of both auditing and accounting standards throughout the world. INTERNAL AUDIT “Internal audit assists management in achieving the entity’s corporate objectives, particularly in establishing good corporate governance. ” (ACCA Paper F8, p. 83) Internal audit can form a part of organisation’s system of controls.

It is not required by the law; therefore a company has the right to decide whether or not to establish internal audit function. It is not regulated in the same way as statutory external auditing. The scope nature of internal audit’s work is more likely to be set by company policy than by any external guidelines. Internal audit is an appraisal or monitoring activity including examining, evaluating and reporting to management and directors on the adequacy and effectiveness of the accounting and internal control system. There are some limitations of the internal audit function, e. g. Internal auditors are employed by the organisation and this may influence their independence and objectivity as well as the ability to report fraud/error because of perceived threats to their continued employment within the company. * Internal auditors are not required to be professionally qualified and so there may be limitations in their knowledge and technical expertise. (Foundation in Accountancy 2011) The two scandals described in this report illustrate how important it is for companies and their shareholders that auditing and other assurance engagements are carried out effectively.

INTRODUCTION TO ANGLO IRISH BANK Anglo Irish Bank was set up in 1963, its headquarters were in Dublin. It was one of Ireland’s smallest banks until 1978 when it was acquired by the City of Dublin Bank. In 1986, Sean Fitzpatrick was appointed the Chief Executive Officer. In 1988 Anglo saw a 54% growth in profits and following this, the corporation started to expand its business to the US, Austria as well as taking over other banks such as Royal Trust Bank, Smurfit Paribas Bank and the Credit Lyonnais Bank of Austria.

In 2004 Sean Fitzpatrick took on the role of Chairman after eighteen years as CEO, David Drumm was appointed CEO. (Wikipedia, 2011) A series of scandals began to unravel from 2008 onwards. The main areas of controversy are Loans to Directors, Mainland Ventures, EMPG Loans and Loans to Sean Quinn & the Quinn Group When these scandals came out, Anglo share price dropped dramatically. The Irish Government made a decision to bail out the bank, at this stage the true state of the bank was unknown.

Anglo Irish Bank was nationalised in 2009 as the Irish government decided that recapitalisation would not be enough to save the bank. In 2011, Anglo Irish merged with the Irish Nationwide Building Society, with the new company being named the Irish Bank Resolution Corporation. Michael Noonan, the Minister for Finance stated that the name change was important in order to remove “the negative international references associated with the appalling failings of both institutions and their previous managements. ” (The Department of Finance, 2011) The Scandals

There are three main parts of this scandal we are going to discuss, firstly; the personal loans to Sean Fitzpatrick (lack of disclosure, misstatement) secondly; the moving, depositing and withdrawing of funds involving Anglo Irish Bank and Irish Life and Permanent (misstatement). Thirdly; the golden circle which involved ten wealthy business men coming together to buy shares in Anglo (apparent breach of company law in relation to dealing in own shares). Loans to Sean Fitzpatrick It all started in 2000, when Sean Fitzpatrick the chairman of Anglo Irish Bank took loans from the bank and then covered them up.

At the year end when Anglo Irish financial statements were about to be published, Sean Fitzpatrick would take out a loan from Irish nationwide Building Society to remove loans from the balance sheet in Anglo Irish, the loans were repaid just before the year end and then re-borrowed immediately after the year end . This loan situation continued for eight years where finally it had grown to a size that was unable to be covered up. This was first noticed in 2008, by financial regulators who were inspecting Nationwide Building Society loan books (not the auditors).

They came across loans to Sean Fitzpatrick amounting to €87 million; these loans were repaid and then repeated themselves. When this news was reported, Sean Fitzpatrick admitted his fraudulent activities and resigned as chairman of Anglo Irish in December 2008. Following this more members of the Board resigned, the total amount of directors loans reported was €179m. (For the year end September 2008, the reported net income before tax was €784m, Materiality €179m / €784m = 22. 8%, this is deemed to be material as greater than 5%) Resignations included: David Dumm – CEO

Lar Bradshaw – Non executive director Willie McAteer – finance director and chief risk officer Michael Walsh – Chairman of Nationwide Building Society The share price of Anglo dropped from €17 to €0. 12. Anglo subsequently ceased trading, in 2009 Irish Government Nationalised the Anglo Irish Corporation. Irish Life and Permanent Depositing Funds Irish Life and Permanent had been depositing funds of approximately €7 billion into Anglo Irish Bank, these funds were borrowed from Anglo Irish and deposited back to Anglo Irish in the last few days leading up to the banks financial year end.

This was to boost the deposit balance in the balance sheet of Anglo Irish Bank to gain support of the investors. These deposits were classified as customer deposits. Days after the financial year end, Irish Life and Permanent withdrew the funds which they had deposited. “Anglo Irish Bank was artificially building up its deposits to give a false picture of its financial health, that would be very, very serious. ” (Financial Times, 2009) “The controversial deposits were included in Anglo’s accounts as “customer deposits”, serving to boost its end-of-year eposit base by 7. 8pc to €51. 5bn when, in fact, its lodgements were down. ” (Finfacts, 2009) The reason for this was to boost the deposit balance in the balance sheet of Anglo Irish in order to gain support and confidence of the investors, deposits were classified as a corporate and commercial deposit rather than an inter-bank loan. When the auditors, Ernest and Young took a “snap shot” of the finances for the annual report in December 2008. The customer deposit base looked healthy and expanding, all talk of a run on the bank. The actual fact was that the bank had lost €4 billion in deposits during the international credit crisis during the month of September. Excluding the €7 billion from ILP, Anglo Irish’s loss of deposits could actually have been €11 billion during September 2008. Anglo Irish effectively presented its own deposit base as larger and more stable than it was and used these enhanced figures during a “road show” to the U. S. Seeking new institutional investors. ” (Blogspot. e, 2010) David Drumm, CEO of Anglo Irish stated “the continued strong performance of our customer deposit business reflects consistently competitive rates, transparent products and a strong service ethos – a combination that results in high retention levels” (The Telegraph, 2009), knowing exactly the situation that a large percentage of these deposits would be reverted in the following days.. The intention of Anglo Irish Bank was to cook the books and manipulate the investors this can now be clearly seen. The “Golden Circle”

The principal allegation against Mr. Fitzpatrick seems to be that he was in breach of Company law when he allowed the bank to provide financial assistance to Sean Quinn and loans to ten customers, known as the ‘Maple 10’, to buy Anglo shares to prevent a collapse in the share price. (Public Enquiry, 2013) Ten wealthy businessmen were gathered to obtain loans from Anglo Irish Bank who then bought shares from Sean Quinn (a major shareholder of Anglo) with these loans. This was thought to be an attempt to support and raise the banks share price.

Further investigations showed that only a small amount of the loans taken by the golden circle were repaid. Members of the Golden Circle included: 1. Patrick McKillen, developer owes IBRC an estimated €300m to the IBRC, formerly Anglo. 2. Seamus Ross, developer, loans have been transferred to NAMA. 3. John McCabe, developer owes NAMA around €200m on foot of his loans from Anglo. 4. Patrick Kearney, developer owes over €370m in bank loans, including loans from Anglo, AIB, Bank of Ireland and Ulster Bank. 5. Gerard Maguire, developer 6. Brian O’Farrell, developer and auctioneer . Gerard Gannon, developer 8. Sean Reilly, developer 9. Gerard Conlan, businessman 10. Joseph O’Reilly, develor This kind of action shows the cavalier attitude of Fitzpatrick to corporate governance. Corporate Governance Situation of Anglo Anglo Irish Banks directors used creative accounting techniques to manipulate information reported to stakeholders. The term creative accounting is given to “accounting practises that attempt to manage earnings and other aspects of corporate financial statements by staying within the letter of the rules contained” (Lee, 2007).

Ethics is the real question in these scandals; it seems in this situation the people involved in dealings were more concerned about their own personal reward than on ethics. The board acted unethical, they hid loans to directors, raised revenue through dishonest deposits and issued loans to wealthy businessmen to buy shares from the directors on the board they acted recklessly by becoming over exposed with loans to the property sector.. They intentionally mislead shareholders and the general public. The case that Anglo may have broken the law in relation to share support, still has to go to trial.

This accounting scandal is the product of multiple failings of auditing, accounting, corporate governance. Directors have the responsibility of disclosing financial statements that are true and fair and working for the best interest of the stakeholders. The financial services regulator said these loans were not illegal, but Anglo’s practises were not appropriate. Anglo has been said to be the Irish equivalent of the Enron scandal in the US. The financial regulator at the time was Patrick Neary, who has received much criticism over is handling of the affair.

He retired on 31 January 2009 after the announcement from Anglo Irish Bank. There were some reports that the financial regulator may have known of the loans for eight years prior to the revelation. The chief executive of the financial regulator said that “a lay person would expect that issues of this nature and this magnitude would have been picked up” by the external auditors, Ernst & Young. Mazars consultants reviewed the case and suggested that “regulatory expertise was lacking in some areas” (Independent, 2009)

Ernst & Young – External Auditor Ernst and Young have been the external auditors for Anglo Irish Bank since the 1990’s. Having an auditor client for so long period of time may create a familiarity threat to independence. E&Y have been severely criticised over the failure of Anglo Irish Bank. Questions arising from this affair, is how did they not notice the loans of Sean Fitzpatrick and other directors and the temporary deposits of Irish Life and Permanent TSB. Honesty and straightforward procedure is imperative when dealing with accounts.

Due diligence and standard practice would have been assumed when an organisation such as Ernst & Young were involved. They have been paid approximately €9 million for their work from Anglo Irish Bank. Such a substantive fee can also create self interest (financial) threat which in turn can affect the objectivity of an auditor. Auditors are typically hired, paid and fired by the very firms that they evaluate which may suggest that the interests of auditors may be more closely aligned with those of corporate managers rather than with those of shareholders.

On the other hand, it is important to understand that the fact that companies’ financial statements are audited does not mean that there is an obligation on the auditor to ensure that audited accounts are entirely free from misstatements. When reporting that financial statements give a true and fair view in accordance with the relevant financial reporting framework, auditors provide “reasonable assurance” that the financial statements as a whole are free from material misstatement, whether due to fraud or error.

Former Anglo, IBRC have issued legal proceedings against Ernst and Young for their pre nationalisation auditing work. Ernst and Young are defending their work, they will stand by the quality of their work and will defend any proceedings. They have since been replaced by rival Deloitte. (Irish Times 2012) We think that someone should be accountable for the problematic window dressing which occurred and spiralled out of control. However, Ernst & Young maybe able to defence their case if they can demonstrate that they complied with International Auditing Standards when carrying out the audit duties.

Ernst Young was criticised in a report last year by an investigator appointed by the Chartered Accountants Regulatory Board, the watchdog for the chartered accountants’ professional body. Former controller auditor general John Purcell said the firm had a disciplinary case to answer over its failure to detect loans owed by former Anglo chairman Sean FitzPatrick and how the loans had been moved temporarily off the bank’s books at its accounting year-ends, which had kept them hidden. The firm rejected Mr Purcell’s opinion and said it would defend itself.

The failure of auditors to raise more red flags about the banks during their reviews has been criticised by everyone from the Central Bank governor Patrick Honohan to Nama chairman Frank Daly to the author of the third banking crisis report, Peter Nyberg. Impact on Shareholders & The Public Shareholders: “Anglo Irish share price peaked at €17. 60 in May 2007 this valued Anglo at almost €13 billion” (Independant, 2008). In December 2008, after Fitzpatrick’s retirement Anglo Irish share price dropped to €0. 32, with the entire bank valued at a measly €242 million. Anglo was nationalized in January 2009 at this point the share price was €0. 2. The Cost to the Public: “Anglo received €34. 7 billion, but the interest on its €31 billion promissory note IOUs will bring the ultimate cost of that initiative to €47 billion”. (The Irish Times, 2012) ————————————————- Enda Kenny says in his speech: “It is a burden that has weighed heavily on struggling families across the country. While not all of our public finance problems relate to the banking crisis, there is no doubt the hardship suffered by the Irish people has been worsened by the cost of bailing out Anglo Irish Bank and Irish Nationwide Building Society”. Fine Geal, 2013) The failure of Anglo Irish Bank, has been a complete disaster for Ireland. Its success derived from being able to borrow billions of euro on international markets and lend that on to a number of greedy property developers and connected persons, banks embarked on a profit – driven lending spree which as left the taxpayer picking up the tab. Anglo Irish Bank was one of the main contributors to the banking crisis in Ireland and now unfortunately the failures of the bank rest upon the taxpayers in Ireland.

Company Law, Financial Regulator, Accounting Standards IFRS and GAAP Breaches of Company Law: Fraud, insider trading, market manipulation, false accounting, conspiracy, concealment of an offence and are just some of the possible offences under Company Law that may be taken against Anglo Irish Bank. Sean Fitzpatrick, Willie McAteer and Pat Whelan are all facing charges of breaching company law. IBRC have also taken legal action against Ernst and Young, the former auditors of Anglo Irish Bank. There will be further investigations into the collapse of Anglo Irish Bank.

The possibilities of further charges are quiet likely. The Irish Financial Services Regulatory Authority also failed to supervise the banking system and to enforce ethical standards in the industry. The IRFSA has a responsibility to ensure that banks lend money responsibly with a view to the longer-term consequences of their actions. Anglo did not follow the code of ethic’s set out by IFRS, GAAP, it did not follow company law, acting in the best interest of the company. Anglo should have followed the guidelines set in place by governing bodies.

Also the bodies which set the standards are also to blame for not taking corrective actions in aiding and advising alternative approaches to lending and borrowing for Anglo. TYCO INTERNATIONAL Tyco International Ltd was founded by Arthur J. Gandua in 1960. Nominally based in Bermuda, its operations headquarters are in West Windsor, N. J. Tyco manufactures a wide variety of products, from electronic components to healthcare products. The conglomerate operates in over a hundred countries around the world and employs 240,000 people. (Tyco 2013) During 2002, the Securities and Exchange Commission began an investigation of Tyco’s top xecutives. Inquiries into the accuracy of the company’s books began in January. As investigations continued it was uncovered that Dennis Kozlowski, Tyco’s former CEO; Mark Swartz, Tyco’s former CFO; and Mark Belnick, the company’s chief legal officer, had taken over $170 million in loans from Tyco without receiving appropriate approval from Tyco’s compensation committee and notifying shareholders. For the most part these loans were taken with low to no interest. Many of them were offset as bonuses without open approval. Kozlowski and Swartz also sold seven and a half million shares of Tyco stock for $430 million without telling investors.

Formal charges were made by the SEC in September 2002. (How Stuff Works 2013) The Tyco scandal is an interesting one as it “differs in a few key aspects from other high-profile trials involving once-powerful corporate executives. While all of the cases contain elements of self-dealing, Kozlowski and Schwartz were not charged with accounting fraud-unlike WorldCom’s Bebbers, Scrushy’s HealthSouth and Enron’s Lay” (CNN/Money 2005). What is also unusual about this case is the fact that both CEO and CFO testified (January 2005) “that they never stole anything from Tyco or received anything from the company to which they were not entitled.

They also pointed out that unlike the cases at WorldCom and Enron; Tyco continued to thrive after the scandal. ” (Crawford 2005) In our essay we shall examine how true this statement was and whether the executives were able to defence themselves. We will also point out what were the consequences of Tyco scandal to the company the shareholders and the society. DETAILS OF TYCO’S SCANDAL In 1999 the SEC began an investigation after an analyst reported questionable accounting practices.

This investigation took place from 1999 to 2000 and centred on accounting practices for the company’s many acquisitions, including a practice known as “spring-loading. ” In “spring-loading”, the pre-acquisition earnings of an acquired company are underreported, giving the merged company the appearance of an earnings boost afterwards. The investigation ended with the SEC deciding to take no action. (HowStuffWorks 2013) In January 2002, the accuracy of Tyco’s bookkeeping and accounting again came under question after a tip drew attention to a $20 million payment made to Tyco director Frank Walsh, Jr.

That payment was later explained as a finder’s fee for the Tyco acquisition of CIT. In June 2002, Kozlowski was being investigated for tax evasion because he failed to pay sales tax on $13 million in artwork that he had purchased in New York with company funds. At the same time, Kozlowski resigned from Tyco “for personal reasons” and was replaced by John Fort. By September of 2002, all three (Kozlowski, Swartz, and Belnick) were gone and charges were filed against them for failure to disclose information on their multimillion dollar loans to shareholders. American Business n. d. ) On 7 October 2003 a first trial took place. On 17 June 2005 Kozlowski and Swartz were convicted of all but one of the more than 30 counts against them. The grounds on which they were found guilty include grand larceny, falsifying business records, securities fraud, conspiracy, corruption, taking bonuses of more than $120m without the approval of Tyco’s directors, abusing employee loan program, and misrepresenting the company’s financial condition to investors to boost the stock price, while selling $575 million in stock.

Both are serving 8 1/3-to-25-year prison sentences. Belnick paid a $100,000 civil penalty for his role. (NBC News n. d. ) ACCOUNTING ISSUES IDENTIFIED * The use of aggressive accounting procedures and “financial engineering” that enabled Tyco to report stronger than actual financial results from some of the hundreds of corporate acquisitions, including a practice known as “spring-loading. ” The pre-acquisition earnings of acquired companies were underreported, giving the merged company the appearance of an earnings boost afterwards. Results inflated by $400m over five year period i. . 1998-2002 (McCoy 2003) * Abuse of employee loan program. Defendants took out several loans of more than $120m (for a detailed brake down of the amounts involved please refer to Appendix 3) and then forgave them by calling them “bonuses” but none of the forgiven loans were approved by the board of directors (Crawford 2005) * Kozlowski and Swartz misrepresented the company’s financial to investors to boost the stock price while they sold $575m in stock without informing the shareholders (Crawford 2005) * Extravagant corporate spending authorised by CEO D.

Kozlowski including a $2m birthday party he threw for his wife on Sardinia, $6,000 shower curtain and a $6,000 dog umbrella holder he purchased with company funds. (CNN/Money 2005) THE CORPORATE GOVERNANCE WEAKNESSES AT TYCO * Poor control environment, ethic not important at the top management level * Poor internal control PwC provided consulting services as well as auditing services to Tyco for number of years as US law did not prohibit it back then (the threat of self-interest and self-evaluation) * Positions of chairperson and CEO were held by the same person- Kozlowski (threat to independence) * The Board was divided into sub-committees including the key ones (audit, compensation/remuneration and corporate governance and numeration committee). The independence of the members, however was questionable as there were not many non-executive directors

PERFORMANCE OF EXTERNAL AUDITORS PricewaterhouseCoopers was the external auditor of Tyco for eight years including year 2002 when the inappropriate practices of the three high level executives became public. Having an audit client for a long period of time (and eight years can be considered as a long period of time) may create a familiarity threat to independence. Mallin (2010) suggests that in case of the financial scandals of early 2000s it was perceived that the close relationship between companies and their external auditors was largely to blame. As Tyco’s auditor, PwC failed to uncover the fraud and to prevent the damages to Tyco’s shareholders at a time when Tyco is alleged to have overstated its income during the Class Period by $5. 8 billion. ” (Grant 2007) After four years of hard-fought litigation and extensive mediation the settlement with PwC was reached. In June 2007 PricewaterhouseCoopers LLP agreed to pay $225 million to settle securities and accounting fraud claims relating to the Tyco. This settlement represents one of the largest recoveries from an outside auditor in the history of securities class action litigation.

R. Scalzo the auditor who signed off Tyco’s accounts in 2002 was fired and barred from practising as an accountant however no criminal charges were imposed on him. As we read in Foundation in Audit Study Text (2011) “When carrying out their duties the auditors must exercise reasonable care and skill. This is required by the accountants’ Rules of Professional Conduct; each accountancy body has their own detailed set of rules and members agree to abide by those rules. Any members found in breach of the rules can face disciplinary action from the relevant body to which they belong. Accountancy Bodies are therefore self-regulated and can impose their own sanctions to penalise members who do not comply with the rules and that is exactly what happened in case of Mr Scalzo. The Manhattan District Attorney who was the investigator said:” Although we agree with the SEC that Mr Scalzo was reckless in not knowing that the Tyco audits were not being conducted according to Generally Accepted Auditing Standards, we found that his conduct did not rise to the level of criminal behaviour. ” (Michaels 2003)

Edwards (2003) argues that public confidence is directly related to the effectiveness of corporate governance. Therefore it would be logical to think that public distrust of corporate executives increased rapidly in early 2000s. Professor Edwards suggests two main reasons for this. Firstly, excessive CEO compensation paid to many CEOs including Kozlowski. Secondly, repeated incidences of corporate “reporting failures”. The executive pay issue was identified by Greenbury (1995) whose report formed part of the UK Corporate Governance Code.

The Greenbury Committee which was set up in response to concern at directors’ remuneration package explained that:”Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for this purpose. ” (ACCA Paper F8 2012) “Central to the Greenbury Report recommendations were strengthening accountability and enhancing the performance of directors.

These two aims were to be achieved by (i) the presence of a remuneration committee comprised of independent non-executive directors; and (ii) the adoption of performance measures linking rewards to the performance of both the company and individual directors, so that the interests of directors and shareholders were more closely aligned. ”(Mallin 2010) From our research we learnt that there was a remuneration committee (called compensation committee in US) at Tyco at the time of scandal. Its role was to “review and pprove compensation and benefits policies and objectives, determines whether Tyco’s officers, directors and employees are compensated according to these objectives, and carries out the Board’s responsibilities relating to the compensation of Tyco’s executives. ” The Compensation Committee held seventeen meetings during fiscal year 2002. The Committee was comprised of experienced individuals: S. Foss, J. S. Pasman and P. W. Slusser yet it made decision to pay Kozlowski $71m while he was allegedly looting Tyco of some $600m.

The independence of Tyco’s Compensation Committee was questionable as non of the members were non-executives directors, they served the board for many years (ranging from 5 to 10 years) and S. Foss was also a former director of Tyco in years (1983-1997) Please refer to Appendix 1 to learn more about members of Compensation Committee. Scandals such as Tyco’s had negative influence on the public in general. The morale of top management had worsened.

In early 2000s Americans did not perceive a CEO role to be better than a position of a car dealer. (CNN 2002) Investors and shareholders lost their faith in Tyco. The share price dropped from $60 (01. 2002) to $18 (12. 2002). Investors lost millions of dollars (260,000 Tyco’s employees were also shareholders). “The social and economic returns to good corporate governance are high” Gompers et al (2001) and Tyco was aware of that fact. For that reason several steps were taken to improve the image of its corporate governance after the scandal.

As described by Wharton (2006) to restore investors’ faith, Tyco’s new management team reorganized the company and recovered some of the funds allegedly taken by Kozlowski. At its annual meeting, shareholders elected a new board of directors, voted to make future executive severance agreements subject to shareholder approval, and voted to require the board chair to be an independent person rather than a Tyco CEO. The Tyco scandal proved that internal control in the company was weak at the time when Kozlowski was a CEO.

The new management faced the challenge of improving the internal control so that “reasonable assurance about the achievement of the entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations and compliance with applicable laws and regulations”(Foundations in Accountancy 2011) could have been provided to existing and potential investors. Kaplan (2011) suggests that internal control is achieved by management establishing and effective internal control system comprised of control environment and control procedures.

Control environment in turn can be seen as the “overall attitude, awareness and actions of management regarding internal controls and their importance. ” Tyco learnt its lesson from the scandal and appreciated the importance of effective internal control. As a result company decided to adopt a new management style, new corporate culture, values, philosophy as well as altered personnel policies and procedures. The company hired Eric Pillmore as Vice President of Corporate Governance. Eric Pillmore was determined to revamp Tyco’s ethical culture.

Under his leadership, Tyco implemented a corporate ethics program and replaced 90 percent of the headquarters staff. The company also created the Tyco Guide to Ethical Conduct. The guide is 32 pages long and is available in a variety of languages for global employees. The purpose of the guide is to familiarize employees with company expectations and help them to make ethical decisions. Eric Pillmore worked to incorporate three elements into Tyco’s culture: 1) strong and ethical corporate leadership; 2) accountability; and 3) behaviour tracking processes.

Tyco had lacked all three under Kozlowski’s leadership. Pillmore also created an ombudsman position at Tyco who can mediate between employees and management. Tyco published a confidential hotline, called ConcernLINE, so employees could report misconduct without fear of retaliation. CONCLUSION The Main Reasons for The Scandals The Tyco and AIB failures as well as other spectacular corporate accounting and governance scandals of recent years have several important lessons for the business world. Those financial collapses highlighted loopholes in fields of accounting, law and ethics.

Based on our research and in depth analysis of the problem we believe that to some degree responsibility for recent corporate misconduct should be allocated to the failure of several components of the business and governance systems. 1. ExecutivesIn both cases corporate managers failed in their fiduciary duties to shareholders and were motivated more by self-interest and greed rather than by a desire to benefit the corporation and its owners. We perceive them as being unethical and dishonest. Tyco’s CEO (Kozlowski) and CFO (Swartz) never eemed to understand that what they did was wrong and believed that they were entitled to everything that they received. They defended their actions to the end, and even at the end of the trial when they were being sentenced they asked the judge for leniency due to the amount of money they gave to charities even though they money was stolen from the company. S. Fitzpatrick and D. Drumm never expressed remorse for their wrongdoings. They avoided consequences resulting from their actions and continue to live the high live while the Irish society has to pay off their debts. . Organisational CultureDoes earnings manipulation become an integral part of business culture? As an example we can use the culture that Kozlowski created within Tyco had quite a bit to do with contributing to its failures. When the SEC began investigating Tyco, during the first investigation it was found that Tyco used questionable accounting practices. Employees were told to push the envelope to create earnings for the company. These earnings were largely overstated, and it was a known fact to upper management, and even encouraged by them.

A 33 page report, written by David Boies, a lawyer who represented Tyco in the midst of the SEC investigation stated that Tyco “suffered from a pattern of accounting that, even when not erroneous, was undertaken with the purpose and effect of increasing reported results above what they would have been. ” In addition to these findings, it was also uncovered that the company “suffered from poor documentation; inadequate policies and procedures to prevent the misconduct of senior professionals that occurred; inadequate procedures for proper corporate authorizations; inadequate approval procedures and documentation. Boies revealed that one of the managers had a memo to another manager that stated, “I would strongly recommend never putting this into writing. ” The report of the company is geared toward the success of numbers, in any manner possible. Ethical decisions were not rewarded, only inflated numbers were. People who knew how to play the number games were the ones that were rewarded, with company cars, and then car allowances on top of that, with relocation bonuses awarded to people who never relocated. 3.

Internal Corporate Governance MechanismsWhy did internal corporate governance mechanisms such as corporate boards, audit and other committees allowed managers to deceive shareholders? The boards’ structure in general was good i. e. both companies had sub-committees for audit, remuneration and nomination functions. Each of the committees had mission statements which expressed exactly what is viewed as “best practice”. So technically committees should assist management in establishing good corporate governance. The board cannot be faulted for failing to act on information that was withheld, but it can be faulted for the limited scrutiny it gave to many transactions…” (Edwards 2003) such as acquisitions affected by “spring loading” in case of Tyco or deliberate misclassification of transactions in case of AIB (e. g. Boosting the deposit balance of AIB, money was paid by Irish Life and Permanent it came, however from AIB in a way of loans). Independence? Lack of scrutiny could have resulted from not being alert enough or not being independent.

Taking into account the organizational culture/ control environment created at Tyco and AIB we feel that traditional culture of collegiality and the “go along” atmosphere were the major problems here. It is worth to mention that the independence of chairmen in both firms was questionable. Kozlowski hold the position of former chairman and CEO in Tyco (US regulation did not require separation of jobs of CEO and chairperson). In 2004 Fitzpatrick took on the role of Chairman of AIB board after being CEO for eighteen years.

The UK Corporate Code states that the chairman meets the same independence criteria as non-executive director and therefore should not be a former chief executive of the company. 4. External AuditorsThe accounting and auditing professions have been under the public spotlight for many years now as a result of huge failures such as the case of Tyco and AIB. Professional scepticism and judgement “The end result of an audit is an opinion to assist the user of the financial statements- auditing therefore relies heavily on professional judgement, not merely facts.

The auditor’s opinion makes reference to true and fair, or fair presentation-but true and fair is again a matter of judgment- it is not precisely defined for the auditor. ” (Kaplan 2011) Auditors therefore must perform an audit with an attitude of professional scepticism (questioning mind) and exercise professional judgement at all stages of an audit to be able to make informed decisions, maintain critical assessment of audit evidence and most importantly to produce good quality opinion that shareholders can rely on.

If misleading shareholder was not the intention of PwC (Tyco’s auditors) or Ernst&Young (AIB’s) (and so far it has not been proved that it would had been) the lack of appropriate degree of professional scepticism and professional judgement could be seen as one of the reasons why those two big accountancy firms fail to uncover inappropriate practices of both Tyco and AIB for a number of years. Remuneration and appointment of auditors Earning a fee of a client can create (it should not, but in practice it does) a self-interest threat to objectivity and independence of an auditor.

This looks even more realistic if we consider the amount that auditors charge for their services (i. e. they are expensive). After all, auditors are typically hired, paid and fired by the very firms that they evaluate. The question that rises here is: Are the interests of auditors more closely aligned with those of corporate managers rather than with those of shareholders? It is very unlikely that either of the accounting firms would like to lose as valuable customers as Tyco or AIB who pay millions for the audit services.

We believe that it is fair to say that companies (directors) that hire auditing firms are paying them for favourable evaluations, not unbiased evaluations. Surely, if auditors give unfavourable opinion (negative assurance) they are unlikely to be retained again. We think that it is more probable that accounting firms would strive to secure their employment with big players such as the companies involved in the scandals, even if the price they need to pay is unethical conduct. Intimidation This occurs when the client tries to coerce the auditor into offering an opinion that they would not ordinarily have arrived at through normal audit procedures. This could be in the form of physical or verbal intimidation or it could come in the form of withholding fees or even bribery. ” (Kaplan 2011,p. 16) Although there is no evidence of intimidation in cases of Tyco and AIB, we feel that it cannot be fully excluded (e. g. Kozlowski was charged with corruption) and is a possible threat that could have had influence on objectivity and independence of the auditors. 5.

Loopholes In Corporate Governance The corporate scandals that happened in US in early 2000s as well as the most recent financial crisis in Ireland undermined confidence in business system and raised questions about the effectiveness of corporate governance. US Although the rationale behind the overall US Corporate Governance system was good i. e. incentivising managers/directors to pursue the same interests as shareholders (equity-based executive pay) and penalising them for engaging in activities counter to the interest of the company as a whole, the system failed to protect the country from massive corporate scandals.

There were many loopholes in the corporate governance structure that contributed to that failure. These include: * The system did not put enough emphasis on the independence of the board and sub-committees * It allowed auditing firms to provide services other than audit to the company that was a subject to evaluation * It allowed close relationship between companies and their external auditors * Lack of transparency of executive pay packages * The accounting standards were not strict enough to reduce ex-ante opportunities to engage in misreporting (Edwards 2003) Ireland Allowed poor quality disclosures in relation to directors independence * Many companies did not comply with the provision of UK Code relating to board balance (at least half of the board comprised of independent non-executive directors) and nothing was done in relation to it. * No limits in relation to a maximum number of boards a director can serve on, and minimum numbers of boards meeting. 6. Executive compensation increasingly tied to the company’s stock performance Rationale behind equity-based compensation is sound-to motivate managers and better align managers and shareholders’ interests and seems ike a good way of getting around the agency problem. In practice however linking remuneration of managers/directors to corporate performance encourages short-termism. So what looked as a good solution at first, became problematic as the benefits from inflating company’s results increased substantially. It looks like this type of incentive structure motivates managers to engage in the kind of financial misreporting and earnings mismanagement that characterised Tyco and AIB corporate scandals. 7. Ethics The prevalence of white-collar crime casts a long shadow over discussions in business ethics. One of the effects that has been the development of a strong emphasis upon questions of moral motivation within the field. Often in business ethics, there is no real dispute about the content of our moral obligations, the question is rather how to motivate people to respect them. ” (Heath 2008) There is a conflict between accounting rules and corporate goals. Accounting takes the “substance over form” approach, whereas the perspective of corporate finance is different.

It focuses on cash flows. Corporate managers trying to meet any number of legitimate corporate goals, such as sales targets, increase in profits or earnings per share that in turn lead to their own bonus targets may find accounting rules standing in their way. Top management in Tyco and AIB failed to grasp the critical role of accounting information in keeping shareholders trust and compromised the fundamental quality of such information i. e. reliability.

Edwards (2003) emphasises the importance of ethics in business world and argues that “solutions to the corporate scandals and financial crisis must involve not only regulatory reforms and changes in governance procedures, but also reforms and revisions to the system of training and education of managers that might have led so many managers and accountants to abuse the principles of accounting. ” We agree that Edwards is right in his point of view. The problems is, however that students like ourselves wishing to pursue a career in a field of accountancy do not have sufficient exposure to ethics in college education.

The chapters dealing with ethics are usually the shortest and are paid least attention to. We spend most of the time concentrating on applications of accounting standards, practising methods of calculating certain provisions, the main focus is really on figures. Ethics are only brushed on and students do not practise how to handle potential future professional ethical dilemmas. Yet when we look at the scandals of Tyco and Anglo ethics (i. e. lack of them) played major part in the failures. Maybe it is the time to reorganise the way ethics are perceived and taught in business schools.

We could go even further to think about the need of having some mechanism measuring one’s personality/ethical behaviour as a requirement of education for those involved in jobs that have public accountability and/or are crucial for success of corporations and the economy (e. g. accountants, auditors, directors etc). Steps taken afterwards-will they prevent similar events happening in the future? The governments and regulators responded to the scandals in both countries. They have either reviewed present regulations (e. g.

UK Corporate Code) or introduced completely new piece of legislation (e. g. Sarbanes-Oxley Act) to strengthen the system. The US Congress, for example, in response to corporate financial scandals and frauds that took place in early 2000s has radically changed the regulation of the accounting profession in the Sarbanes-Oxley Act 2002. Those changes had some impact on the quality of financial reporting and the independence of auditors. They did not, however fully eliminated the scope for “financial engineering” and the collapse of Lehman Brothers could be used as an example here. In September 2008 Lehman Brothers, a global financial services firm, filed for bankruptcy in the US triggering a severe world-wide financial crisis. Lehman had expanded aggressively into property-related investments, including so called sub-prime mortgages. In subsequent reports it was claimed the Lehman Brothers covered up the extent of their irrecoverable debts using an accounting manoeuvre known as ‘Repo 105’, which involves loaning ‘bad’ assets to other firms in exchange for short-term financing. (ACCA Paper F8 2012) In case of Tyco scandal it is worth to mention that steps taken by the company itself were very effective and have proved to deter similar events happening so far. Let’s recall –the shareholders sued the three top officials responsible for the scandal and managed to get back some of the money stolen and to put two of them in prison, both are serving 8 1/3-to-25-year sentences. The case brought to court against auditing firm PwC was also successful and the company received $225m in damages.

Another important step that Tyco undertook was restructuring its organisational culture and internal control systems. To recover from the negative impact of the scandal new board of directors was elected, separation of CEO and chairman jobs introduced and the company’s ethical code revamped. All of above actions prove that Tyco was successful in penalising those responsible for poor corporate governance as well as making internal changes that act as a safeguard from future corporate governance failures.

The high penalties that US legal system imposed on Kozlowski (CEO), Swarz (CFO) and PwC (auditor) proved that the system is very strict when it comes to breaches to corporate governance and can be seen as a warning for those who think about engaging in similar events. The US legal system seems to be more effective than Irish system in this respect. It is probably too early to judge whether the changes taken by Irish regulating bodies will deter similar events happening in the future.

Those changes are very recent and we need to observe how they will work in practice in long term to be able to comment on their impact on corporate governance. They are, however areas that were not addressed in those changes but which we feel need more attention from the government and regulators and these are: * Limitation of auditAuditors cannot examine every single transaction (as it would be too expensive and time consuming) so they use different techniques such as sampling, in most cases assisted by computer software( CAATs).

We believe that additional techniques should be introduced to improve the effectiveness of external audit. Computer software concentrate on numbers not on “substance over form” issues and that is area that auditors should concentrate on as it has the greatest scope for “creative accounting” . * Key feature of the 2010 UK Corporate Governance Code is the retention of the ‘comply or explain’ approach, despite some criticism that it was not an effective mechanism for requiring and enforcing corporate governance standards. The Financial Reporting Council (FRC) argues that the major issue about ‘comply or explain’ approach, it is not that the approach itself is fundamentally flawed, but rather that it has not been applied with anything near the rigour and level of disclosure that was envisaged by the FRC. ” (Thornton 2011,p. 7) It would be logical to think that some mechanism needs to be put in place to enforce the compliance and proper interpretation of the approach. Unfortunately that has not been done yet. * Nothing has een done to motivate people to respect business ethics. The importance of ethics was ignored again. The fact that “nothing” really happened to those responsible for AIB scandal and failure may only encourage future unethical conduct. Changes introduced by regulators following the recent banking crisis as well as any others can limit but not fully eliminate the scope for fraud and financial engineering. To be fully successful in this matter two factors must be in place; strong regulations and good ethical code of those applying the regulation END REFLECTION

In summary, the scandals of Tyco and AIB resulted from inappropriate actions of executives, bad quality of control environments they created in the companies and poor code of ethics of people responsible for implementation and control of corporate governance. Those main reasons can also be seen as similarities between the two scandals. Other common characteristic include the manipulation/inappropriate use of loans. The major difference between the two events is the effectiveness of penalising those responsible for the scandals. U. S. Corporate System seems to be more strict and effective.

For detailed comparison of the two scandals please refer to a table in Appendix 2. Above described scandals do not arise exclusively as a result of illegal actions. During our research we noticed a concerning issue i. e. the abuse of rules and principles which can be completely legal or quasi legal and therefore does not lead to any legal consequences. Such practices are popular among so called “creative accountants” and if extensively used can cause scandals and may result in downturn of a company as many recent companies failure prove.

Although legal, we believe that such practises are sophisticated, unethical and inappropriate and some mechanism should be used to stop it as this has negative effect on the accounting profession. In the light of the global financial crisis, regulators have been considering the effectiveness of the audit and the auditor’s role in helping to prevent, or at least provide warning of, corporate and financial institution collapses in the future. (ACCA Paper F8 2012) Despite their negative impact on shareholders, investors and the public we do not think that corporate scandals should be classified as exclusively negative and undesired events.

We can see a positive side to corporate scandals. These are the changes that those scandals initiate resulting in stronger legislation and regulation to guard against similar collapses in the future. “As governments and regulators respond to these challenges with the adoption or revision of new corporate governance codes we are seeing an emerging consensus of accepted best practice and this trend is likely to continue. ” (Maier 2005) Bibliography: ACCA Paper F Audit and Assurance (International). (2012) 6th Ed. , London: BPP Learning Media Ltd American Business. 2002) Tyco international scandal – history of business in the U. S. [Online]. Available at: http://american-business. org/2781-tyco-international-scandal. html [Accessed 22nd January 2013]. American Business. (2011) Tyco International scandal – History of Business in the U. S. [Online]. Available at: http://american-business. org/2781-tyco-international-scandal. html. 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Available at: http://www. euters. com/article/2007/07/06/idUSN0619694620070706 [Accessed 26th January 2013]. The Department of Finance (2011) Statement Anglo Irish Bank, [Online] Government of Ireland, Available at http://www. finance. gov. ie/viewdoc. asp? DocID=6483 [Accessed: 15 February 2013] The New York Times. (2013) Articles about Tyco international ltd. [Online]. Available at: http://topics. nytimes. com/top/news/business/companies/tyco_international/index. html [Accessed 22nd January 2013]. The Telegraph (2009) Moulds, J. , Scandal-hit Anglo Irish charged with cooking the books, [Online] Available at: http://www. elegraph. co. uk/finance/newsbysector/banksandfinance/4593647/Scandal-hit-Anglo-Irish-charged-with-cooking-the-books. html [Accessed 30th January 2013] The Washington Post. (2007) PwC settles Tyco investors’ suit over fraud. [Online]. Available at: http://www. washingtonpost. com/wp-dyn/content/article/2007/07/06/AR2007070601857. html [Accessed 26th January 2013]. University of Pennsylvania. (2006) How Tyco international remade its corporate governance. [Online]. Available at: http://executiveeducation. wharton. upenn. edu/ebuzz/0609/seniormanagement. html [Accessed 26th January 2013]. Wikipedia (2011) Anglo Irish Bank [Online]. Available at: http://en. wikipedia. org/wiki/Anglo_Irish_Bank [Accessed 24th January 2013]. | USA Today. (2005) Timeline of the Tyco international scandal. [Online]. Available at: http://usatoday30. usatoday. com/money/industries/manufacturing/2005-06-17-tyco-timeline_x. htm [Accessed 22nd January 2013]. Yahoo Voices. (2012) Tyco Scandal Business Case Analysis. [Online]. Available at: http://voices. yahoo. com/tyco-scandal-business-case-analysis-11330744. html? cat=3 [Accessed 22nd January 2013]. Appendices: 1. Members of Compensation Committee in Tyco, year 2002

Stephen Foss. Age 59. Director since 1997. Chairman and Chief Executive Officer, Foss Manufacturing Company, Inc. (manufacturer of synthetic fibers and non-woven fabrics) (1969-present); Director, Ameron International Corporation; Director, Former Tyco (1983-1997) James S. Pasman, Jr. Age 70. Director since 1992. Director, CSAM Income Fund, Inc. , CSAM High Yield Fund, Inc. and Education Management Corporation; Trustee, Deutsche Bank VIT Funds; Director of approximately 50 funds in the Warburg Pincus Funds Complex and the Credit Suisse Institutional Funds Complex. Peter W. Slusser, Age 72.

Director since 1992. President, Slusser Associates, Inc. (investment banking firm) (1988-present); Director, Ampex Corporation and Sparton Corporation. 2. SIMILARITIES/DIFFERENCES BETWEEN THE TWO SCANDALS The table below summaries scandals of Tyco and AIB, highlighting similarities and differences between them and it is based on the information from a number of resources which we came across in our research. AREA| TYCO| AIB| Industry| Manufacturer in security and health sector| Banking Sector| Year (when unfolded)| 2002| 2008| Region| USA| Ireland| Size of the scandal (i. e. oney involved)| $600m stolen from the company by the three top executives| The amounts involved in the scandals were Loans to Chairman Sean Fitzpatrick of €87m other directors loans of €63million, loans to wealthy business men to purchase Anglo shares, to raise share price of €400million| Codes of practice prior to scandal| Accounting: US GAAPsCorporate Governance: state-based corporate law and federal security laws| Accounting: UK and IE GAAPs, IFRSCorporate Governance: Company LawAuditing: The International Auditing Standards| People involved and consequences to them| Kozlowski and Swartz found guilty.

Both were sent to jail for up to 25 years. Both were fined and had to pay a total of $239m. | * Sean Fitzpatrick – retired * David Drumm – retired * Lar Bradshaw –

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