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The responsible use of power in decision making has always been the key to business success. People In key positions must have sufficient power to make significant business decisions In order to enhance businesses’ growth. Responsible decision making, facilitated by use of various accounting tools, enhances a business’ power. Conversely, questionable accounting and irresponsible business decisions can have catastrophic consequences. Contrasting international examples will be discussed here.
Richard Brannon, a well known entrepreneur, created an empire (the Virgin Group) from an idea of a better priced and better product for the market. Lehman Brothers, a firm with a historically distinguished reputation, who took irresponsible risks in pursuing increased profits and increased market penetration, eventually brought about its own demise. Within Australia, accountability is imposed on companies by the Corporations Act 2001 (Cloth) in order to promote responsible use of power and rigorous accounting practices, and to maintain market stability.
Accounting Information underpins all business decisions because It provides the Information required to make responsible decisions. While opportunities for businesses to diversify their income stream can be seen as positive, some key plans need to be mapped out such as opportunity, risk, finance and social responsibility. Managers of business use vast amounts of accounting and economic data, such as product demand and price value information before undertaking new ventures. This will give some indication of how well an investment in that venture will fare. Birth et al. 2008) states that while accounting cannot be used to predicting exact outcome of a venture they can use historical information to trend past performances of other equines entitles. In undertaking a venture the entity would prepare budgets for personnel, marketing, property and equipment acquisitions in its budget. As part of the planning process managers need to be diligent and review all options presented before them Garrison and Noreen (2003) state that managers must evaluate the financial, Implications of decisions that require tradeoffs between the costs and the benefits of different alternatives as part of a business strategy.
Accountable use of power In business making decisions, by responsibly meeting the demands of the market, can reap significant financial rewards. Richard Abrasion’s response to difficulties encountered in accessing quality financial products is one example of a person with power making a conscientiously motivated and financially rewarding decision. Chapel (2007) states “(w)here most see turmoil, some see opportunity. And [sic] few are more opportunistic then Richard Brannon”.
Brannon was tired of paying 5% Interest for his financial contract to a financial service company, so he decided to start a new financial company of his own. Vulgar Direct was founded In 1995 to compete with other financial Institutions In the united Kingdom (ELK). The business plan was simple: to create a banking/finance system that original business portfolio, offered life insurance, retirement plans and cash management accounts. The company eliminated fine print and hidden fees in these products, and quickly won over customers from the competitors.
Grant and Newport (2003) state that these products indeed had lower management costs and better performance than almost all managed funds in the I-J market. Virgin Direct eventually won over 250,000 customers and acquired $1. 5 billion under management (Grant and Newport 2003). As a consequence of its responsible use of power, and intended financial success, the Virgin Group continues to be recognized as trustworthy, when presently other banks are not Oarfish 2010).
This trust has increased the company’s power, allowing it to continue to expand its interests in the financial sector, such as its recent acquisition of Church House Trust in the I-J (Baker 2010). In contrast, the collapse of Lehman Brothers in 2008 is a sobering example of the catastrophic consequences of the irresponsible application of power without accountability. It was influenced by: over capitalization in sub-prime real estate, assignment of executives’ power, too little risk management, and questionable accounting practices (McDonald and Robinson 2009).
Key players in this debacle were: Richard Full CNR. , Chief Executive Officer (CEO) of Lehman Brothers, and Mark Walsh, head of Lehman Brothers’ Global Real Estate Group (GREG). McDonald and Robinson (2009) state that Full’s suspect and personal motivations resulted in decisions that eliminated Walsh’s accountability when purchasing some of the world’s most extravagant commercial real estate, particularly when personal rivals of Full’s were competing.
For example, when Full’s historical rivals Goldman Cash and Blackstone were competing; Walsh purchased Orchestra-Smith (a luxury apartment group) for $22 billion, some $3 billion over market value. McDonald (2009) goes further to say that there seemed to be little oversight and mitigation of risk by executive management, even to the extent of removing Madeline Anatomic, Lineman’s Chief Risk Officer (CROP) and Michael Zealand, head of its Fixed Income Division (FIDE) in 2007, because of their opposition to the company’s growing accumulation of risk and illiquid investments, as reported by Values (2010).
It soon became clear that unacceptable accounting practices were used to conceal the extent of Lehman Brothers’ debt, with the company eventually needing to file for Chapter 11 bankruptcy protection, and contributing to the collapse of global financial markets (McDonald and Robinson 2009). While both of the preceding examples are of international businesses, Australian companies are made accountable under the Australian Corporations Act 2001 (Cloth). The Australian Federal Government created this legislation to protect the Australian share markets, investors and creditors from what ultimately could lead to a collapse of a corporation.
Companies’ activities are policed by the Australian Securities and Investments Commission (ASIA), which is the regulatory body empowered by the Corporations Act 2001 (Cloth). The Act states that directors in Australia have power to, and responsibilities for dealing with the company assets, commercial, transactions, internal operations and especially risk management. It is the duty of a director to exercise care, diligence and skill as and equitable duty of care. According to section 180 of Corporations Act 2001 (Cloth), director or other officer must exercise their powers and discharge their duties with a degree of care and diligence.
Directors must also have fiduciary duty to avoid conflicts between the company’s interest and their own. Responsible accounting practices are also mandated by the Corporations Act 2001 (Cloth). Part of “due diligence” includes a requirement that the directors undertake and provide accurate financial accounting at the end of the financial year in accordance with Australian Accounting Standards Board Interim Financial Reporting Standard (Australian Accounting Standards Board 2009) and the Corporations Act 001 (Cloth). Penalties for breaching the Corporations Act 2001 (Cloth) can be varied depending on the case and severity of the breach.
In the case of ASIA vs.. Jodie Richer the former director of the now defunct One. Tell as stated by ASIA sought civil penalties under pet 9. B for each defendant to be banned from being a director and be required to pay compensation up to $92 million Heath (2009). People who make business decisions must make their decisions responsibly. Rigorous and honest accounting provides the information required to do so. The continued expansion of the Virgin Group’s interests in the financial sector is an example of the financial success that can result from trust created by responsible decisions made by Richard Brannon.
Conversely, the bankruptcy of Lehman Brothers demonstrates the adverse outcomes of questionable accounting and irresponsible decision making. Responsible business practices and rigorous accounting are mandated in Australia by the Corporations Act 2001 (Cloth), in order to maintain stability of the market and prevent outcomes such as those experienced by Lehman Brothers.