The great financial services company fraud: A structuration perspective
Umesh Sharma*
Department of Accounting,
Waikato Management School
University of Waikato
PB3105
Hamilton 3240
New Zealand
Email: ups@waikato.ac.nz
Paresha Sinha
Waikato Management School
University of Waikato
PB3105
Hamilton 3240
New Zealand
*Corresponding author
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The great financial services company fraud: A structuration perspective
Abstract
In this paper we use Anthony Gidden’s structuration theory as our theoretical framework to
analyse two cases of corporate fraud in the financial services industry in two different
business environments (Fiji and New Zealand). Our archival study presents the business
ethics issues (actions and structures) affecting the collapse of the National Bank of Fiji (NBF)
and Bridgecorp (BC) in New Zealand. The National Bank of Fiji debacle was shaped by
political interferences where extensive lending was made to politicians and political
supporters of the ruling Party. The National Bank case exhibits the political aspect of
mismanagement of state Bank where no one has been prosecuted or terminated from their
position due to ethical misconduct that resulted in the loss of deposits by customers. In
contrast, the Bridgecorp case illustrates that NZ$500 million was lost by the depositors. The
company’s prospectus was forged and eventually the directors were imprisoned for 6.5 years;
the harshest punishment for company directors in New Zealand. Firms with political
interference and weak corporate governance are likely to face financial difficulties, and the
demand for good governance is warranted in wake of poor firm performance. However, as
the collapse of the firm with political interference does not result in clear blame or
punishment, the lack of legal denouncement of unethical behaviour may explain the
consequential perpetuation of corruption and unethical behaviour in those social systems. On
the contrary, firms embedded in transparent societies can more significantly curb unethical
behaviour and potentially protect its citizens from harm from unethical actors.
Key words: Ethics, corporate governance, corporate collapse, structuration theory,
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The great financial services company fraud: A structuration perspective
1. Introduction
In this paper we use Anthony Gidden’s structuration theory as our theoretical framework to
analyse two cases of corporate fraud in the financial services industry in two different
business environments (Fiji and New Zealand). The paper presents the business ethics
background affecting the collapse of the National Bank of Fiji (NBF) and Bridgecorp (BC) in
New Zealand. The question that we ask: how do social structures including prevailing norms
and values in the company shape ethical misconduct? How does that impact on the
company’s primary and external stakeholders in societies with different corporate governance
practices? Our focus is to examine the ethical misconduct and its consequences in societies
with good and poor governance, highlight red flags and learn from such cases about ethical
misconduct. Accordingly we view ethical behaviour as a social phenomenon where agency
and structure are both implicated (Yuthas et al., 2004; Dillard et al., 2011). While exploring
the behaviour of individuals in each society, we recognise the impact of societal structures on
the perceptions and actions of individuals. These questions and the NBF and BC cases are
interesting to us as business ethicists, as we are interested in highlighting the varieties of
social structures that permit unethical behaviour.
Our focus significantly differs from research on corporate collapse that focuses on developing
and testing bankruptcy prediction models (Monem, 2011; Houghton, 1984; Jones & Hensher,
2007).
While ethics and corporate governance issue receive wide media and political
attention following major collapse in each country, comparative academic research on
collapsed firms has not been so widely conducted. This paper seeks to fill this void by
conducting research in two distinct settings, Fiji and New Zealand.
The paper is organised as follows. In the next section we set out the relevant literature on
ethics, corporate governance and corporate collapses to highlight the role of agency which is
followed by section 3 on our methods. Section 4 sets out the theoretical framework of
Giddens structuration theory. In sections 5 and 6, we set out our findings of NBF and BC.
Section 7 draws appropriate conclusion.
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2. Ethics, Corporate Governance and Fraud
In recent years, ethical issues have become a central interest of stakeholders and academics
alike, due to the realization that unethical conduct and the present incentives and loopholes in
legal and accounting systems have played a key role in the downfall of many companies such
as Enron, Pamalat and Satyam. Dillard and Yuthas (2002) point out that an ethical individual
is seen as one who acts in accordance with high ethical principles such as justice and fairness.
Arjoon (2005) reports that “many of us … are concerned about the lack of ethics in the
business world, particularly in the financial system, since there are greater incentives for
unethical conduct” (p.7). Some key ethical issues that adversely impact on the stakeholders
include the misuse of creative accounting, conflicts of interest, and misrepresentation by
corporations, all of which adversely impact on the return to investors and the wider
stakeholder group.
Shleifer and Vishny (1997, p.737) define corporate governance as “the ways in which
suppliers of finance (investors) to corporations assure themselves of getting a return on their
investment.” Corporate governance mechanisms are economic and legal institutions that can
be altered through the political processes- sometimes for the better. Werder (2011) advocates
that predominant topics of corporate governance should involve:
the determination of the overall goal of a company; the selection of structures, processes, and
persons at the top of the company for pursuing this goal; periodical evaluations of the
implemented structures, processes, and persons; as well as the securing of an adequate
transparency of the company’s activities via communication. (p. 1346)
According to Arjoon, (2005) ethical corporate governance includes the relationship of a
company to its shareholders and to society, the promotion of fairness, transparency and
reporting accountability, reference to mechanisms that are used to “govern” managers and to
ensure that actions taken are consistent with the interest of key stakeholder group (p.344). In
contrast inadequate disclosure of information to stakeholders or lack of transparency in
financial reporting produces an information asymmetry that gives an illegal or unethical
advantage to the reporting managers. Sound practices of corporate governance thus play a
key role in protecting investors. Moreover, Tian and Twite (2011) explain that better internal
corporate governance contributes directly to efficient agency and managers so as to improve
firm productivity as well as internal corporate governance can be substituted for external
market discipline. However, in absence of good corporate governance, ‘illegal’ corporate
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fraud occurs, when a firm and its managers engages in earnings management that involves
deception intended to shape stakeholders to misperceive the reporting entity’s performance .
Sims and Brinkmann (2003) discuss Enron Corporation debacle. In Enron, a handful of
highly paid executives were able to pocket millions of dollars while eroding the life-savings
of thousands of employees. As discussed by the authors Enron employed questionable
accounting methods to maintain its investment- grade status. However, in the long run,
Enron’s executives could not rob “Peter to pay Paul” (Sims & Brinkmann, 2003, p.246). The
culture at Enron weakened gradually through overstepping ethical boundaries that permitted
the significant increases in the instances of questionable behaviour to slip through the cracks.
Such deception is usually possible when audit committee members charged with oversight
financial reporting fail to protect shareholders by adequately monitoring and controlling the
accounting judgements made by the management. This situation often occurs due to high
trust and low knowledge of the members of the audit committee (Rose & Rose, 2008). At
Satyam in India, the audit committee was introduced to strengthen the corporate governance.
However, the audit committee at Satyam failed to perform its duties effectively (Kumar et al.,
2012). The external auditors in their study of Satyam Computer Services in India also failed
to detect the fraud that perpetrated over the years at Satyam. Therefore in the following
section we discuss the role of external auditors in relation to corporate fraud/collapses.
2.1 External auditors, Fraud and Corporate Collapses
According to Kumar et al., (2012) external auditors need to be considered “watchdogs” in
order to promote good governance (p.452). Audits on companies need to be conducted so that
the auditors are in position to certify that the balance sheet and profit and loss account of a
company portray true and fair view of company’s finances. In an ethical world, external
auditors can be presumed to provide a fair and independent evaluation of the client firm’s
financial integrity (Moore et al., 2006; Sikka, 2009). However, after studying two decade of
behaviours of analytical procedure of auditors, Messier et al (2012) notes
“Managers may intentionally or unintentionally bias their explanations in the company’s
favour. Auditors do not always gather sufficient evidence to corroborate management
explanations or validate the data used to corroborate these explanations” (p.174)
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Samanta and Das (2009) studied different contexts using Enron (USA), and Parmalat
(Europe) as examples and compared the roles of the auditors in each of these fraud cases.
According to the authors, the auditors’ independent role is essential to instil confidence in
market and to provide a true and fair view of the company’s financials. In Enron’s case, the
auditor Arthur Anderson’s independence was compromised owing to the large amount of
non-audit related fees that Anderson received from Enron. In the case of Italian food giant,
Parmalat, the auditors aided the managers in the creating and hiding fraud. Thus, an external
auditor’s financial dependence on the clients can induce them to compromise their
independence from company management (Moore et al, 2006). Put differently, auditor
independence is the central value or ideal that underlies the work and legitimacy of public
accountants’ role (Sikka and Willmott, 1995).
According to Reinstein and McMillan (2004), accounting fraud can be minimised by use of
“red flags”. Red flags are warning signals for fraud that indicate areas for increased auditor
attention (Reinstein & McMillan, 2004; Moyes & Hassan, 1996; Pincus, 1989).
Management’s displaying inappropriate attitudes about internal control can be an appropriate
cue for testing potential financial fraud (Reinstein & McMillan, 2004). The formation of
audit committees may also be helpful to alleviate fraud (Reinstein & McMillan, 2004). If
proper follow-up procedures for whistle-blowing are in place, companies would be likely to
act on those warnings (Reinstein & McMillan, 2004). Peer review process may also be
helpful (Moyes & Hasan, 1996). Moyes and Hasan (1996) point out that the peer review
process tends to remind auditors that the audit performance will be evaluated by another
accounting firm. Peer review can improve the quality of audit work.
While agency is recognized in the above literature, the questions remain which become the
basis for this study:
How do social structures (including prevailing norms and values in the company) shape
ethical misconduct at the individual level? How does the resultant loss of economical and
ethical status impact on the company’s primary and external stakeholders in societies with
weak and good corporate governance practices?
The next section delineates the research method for the study.
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3. Research Method
In-depth case study provides natural contextual boundaries (Yin, 2009) when “the underlying
dynamics of phenomena that play out over time” are being studied (Siggelkow, 2007, p. 22).
We selected two corporate frauds cases that occurred in two different institutional
environments (Fiji and New Zeeland) with the purpose of arriving at a deeper understanding
regarding the role of social structures in shaping unethical behaviour. An archival study of
NBF and BC collapse was undertaken to understand the ethical issues that were highlighted
in multiple sources that exposed different aspects of the fraud. Archival data sources enabled
us to capture a contextual understanding of the social phenomena under study (Modell,
2005). Reliance was placed on secondary sources of information such as newspaper articles,
magazines and websites for information on the ethical conduct of the two companies. The
annual reports of the two companies prior to their collapse were also examined. We also
relied on documents from legal proceedings on the two case studies. Our use of multiple data
sources enabled us to triangulate this data, which in turn served to strengthen the validity and
reliability of our findings within the context of this case study (Eisenhardt, 1989)
In the first part we analysed our evidence by preparing tables listing issues frequently raised
in our secondary data (Sharma et al., 2010). Several themes (such as context of crisis,
auditors, sale of assets, misleading offer documents/ creative accounting) were drawn from
the documentary evidence and a narrative that focused on the key ethical aspects pertaining to
each case was prepared In the second part of the analysis, we drew on our theoretical
framework to make sense of the case data. The analysis was guided by structuration theory
and focused on the business ethics issues, and actions and structures that explained the fraud,
and its impact. The next section presents our theoretical framework.
4. Theoretical Framework
We employ structuration theory as a sensitising framework for use in understanding the
prevailing norms and values within NBF and BC. What we propose is a possible
interpretation of the changing norms and values that took place at NBF and BC.
Anthony
Gidden’s structuration theory (1984, 1979) is chosen as an analytical framework as it
recognises the role of human agency in constructing and reconstructing the social structure
within which human action in our case the unethical action takes place. To understand the
evolution of the unethical social system, the theory proposes the study of how agency and
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structure work interactively. Giddens (1984) structuration theory argues that institutional
properties (corporate governance mechanisms) and social action (unethical action) mutually
influence each other in the evolution of social systems. Gidden’s view suggests that while
unethical action is intuitionally constrained, it also alters the structures and institutional
arrangements that may be placed to prevent it.
Analysing the structuration of any unethical social systems means studying the modes in
which such a system, grounded in the activities of situated actors who draw upon rules and
resources, is produced and reproduced in interaction. Thus, managers and corporate
governance mechanisms are not two independently given sets of the corporate fraud
phenomenon, but represent a duality of structure: Gidden’s seminal concept.
The interaction of human agents and social structure is identified as “the duality of structure”
which illustrates the dynamics for change within the context for action. Thus, Gidden’s view
pushes us to view agents and structure as interdependent. For example structure has no
existence independent of the knowledge that agents have about their day-to-day activities.
Agents cannot act independently as their actions are both enabled and constrained by the
structural forces in their environments.
The changes in both are usually reflected by the changes in the legitimation, domination and
significance structures in what appears to be the ordinary course of existence. Agency is the
ability of agents to act. Social structures are the rules and resources implicated in action by
agents. Giddens (1979) characterises structures as rules and routines. Rules are seen as
being either normative or interpretive. According to Yuthas et al., (2004) normative rules
manifest structures of legitimation, while interpretive rules represent structures of
signification. Interpreted actions make up and are interpreted within the existing structures.
The extant structures provide the means for accountability in that they embody evaluation
criteria whereby action is evaluated
Legitimating structures are made of rules that solicit
legitimate conduct within the social system such as a society, a profession or an organisation.
Legitimation system embodies social norms and values that provide the basis for ethical
action.
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Signification structures entail shared knowledge and organising rules that guide social
interactions and constitute the codified rules or laws which follow from the accepted norms
and values. The signification structures influence the manner in which agents understand
themselves and attach meaning to their external environment.
Resources symbolises the other type of structure. Domination structure determines who has
access to resources. Giddens illustrates two resource categories: allocative and authoritative.
Allocative resources have to do with material/economic resources such as goods, wealth or
natural resources, etc and emerge from domination over nature. Authoritative resources, on
the other hand, manifest nonmaterial resource such as human beings and arise from the
domination of some actors by others. The actors controlling resources resemble power over
other actors.
According to Yuthas et al., (2004) structuration theory can thus be useful in investigation of
the conflicts among and within the structural contexts that influence accounting.
Signification structure in organisations aid employees give meaning to the circumstances
within which they function and to their roles within organisation. Legitimation structures
manifest norms and values that provide the criteria for evaluating behaviour.
These
structures represent what actions and attitudes are considered legitimate or appropriate.
Domination structures govern access to resources.
The interplay of all these structural elements was studied to show how action and structures
contributed to the corporate fraud that occurred at NBF and BC. The next section delineates
the case findings from the two case studies.
5. National Bank of Fiji Crisis
This section discusses the NBF crisis. This section is organised in four subsections:
background of NBF, context of crisis, auditing failure at NBF and sale of Telecom.
5.1 Background of National Bank of Fiji (NBF)
The NBF evolved from the Government Savings Bank of Fiji which was established in 1907.
The Government Savings Bank of Fiji changed its name to the Post Office Savings Bank in
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1961 and on independence in 1970; the Savings Bank of Fiji was spun off from other post
office activities. In 1974, it became a commercial bank owned by the government and was
renamed the National Bank of Fiji (Grynberg et al., 2002). As a public sector institution, the
NBF was directly accountable to the Fiji government. Stewardship of NBF was overseen
through periodic audit of its operations and financial statements. Audit of the NBF fell under
the jurisdiction of the Office of the Auditor General in Fiji (OAG) as it was wholly owned by
the government until 1999.
In 1995, the bank nearly collapsed, with bad debts amounting to the equivalent of 8.5 percent
of gross domestic product of Fiji (Grynberg et al., 2002); debt that had to be paid off by the
people of Fiji.
Problems associated with the financial audit of the NBF by government auditors through the
office of Auditor General are a key element in the contextual mix of factors that shaped the
technical insolvency of the bank and loss of public monies.
5.2 The Context of the Bank collapse
It will be evident from the analysis that problems existed in the NBF pretty early on, however
neither the government, the NBF Board, nor the Reserve Bank interfered in the management
of the NBF. It was not until the situation was out of control in 1995 that these parties reacted.
Prior to this, the financial results of the NBF showed that it was doing reasonably well, when
in essence, it was insolvent. A number of forces characteristic of the Pacific environment
permitted the problem and allowed them to be ignored.
The statements of the chairman of the NBF board in 1995 acknowledged that the bank
operated under political interference:
Many of the problems that NBF faces today- including its management team can be
linked to political interference...The rehabilitation will not work without political
will... Let professional bankers run the NBF without political interference...that’s the
intention. It remains to be seen whether we can put that into practice.
(Review 1995a, p.25).
Some specific issues relating to NBF scandal (see Review 1995 a, b, c, d), Grynberg
et al., (2002) and Lodhia & Burritt (2004) included:
10
-
The NBF”s attempt to increase its market share since the 1987 military coups had
resulted in it accepting business that extended credit well beyond the customary
limits of a standard bank (Nath & Chand, 1998). As a result the level of nonperforming loans was F$152.7 million, almost 40 percent of loans,
-
Collectability of many loans was in doubts and write-offs for non-performing
loans were inadequate because the bank was obsessed with reporting a profit
despite the recommendations by the Reserve Bank of Fiji for remedial action to be
taken. The auditor found that provisioning was required for F$94.72m of the nonperforming loans which created a deficiency of F$79.94 million in shareholders’
funds. NBF had to borrow F$108 million to fund its bad and doubtful debts.
-
The bank was reported to be reluctant to restrict lending on non-performing or
doubtful accounts.
-
Administrative and control of credit card operations were found to be largely
ineffective.
-
Lending guideline to staff was breached with there being inadequate review and
supervision of accounts.
-
NBF failed to differentiate its role of a commercial bank from that of a
social/political agency. This is illustrated through the circumstances under which
the general manager of NBF from 1987- 1995 was installed. Fiji’s 1987 coup
leader, Rabuka, installed the manager of a local branch as general manager of
NBF with the “vision” that his duties would include advancing indigenous
supremacy (Review 1996a).
This is in contrast to the type of banking
management one would expect in a financial institution and exemplifies how the
Pacific social and political context contributes towards bad management and
corruption.
-
An exhaustive list of the major parties involved in the NBF scandal that was
published in the Review (1995c) indicate that most of the uncollectible loans that
were provided by the bank related to employees, current and former politicians as
well as their relatives and close business associates.
These provide some indication of the extent of corruption at the NBF.
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5.3 Auditing Failure at NBF
The Office of the Auditor General also failed to highlight deficiencies in these results. Thus,
manipulated results in the form of accounting failures which remained undiscovered for a
long time because of the auditing failures led the NBF management being provided with
complete independence which in turn led to chaos.
Suspicions were also cast over auditing practices conducted by the Office of Auditor General:
-
Aidney and Dickson, independent auditors hired by the government, state that
“...the law had been broken, and there were weaknesses in internal controls,
collateral deficiencies, outdated accounting records and other exceptions.
Sections of the Banking Act, the Bill of Sales Act; the NBF Act and the RBF Act
had been violated. The bank’s lending policy did not adhere to its own lending
manual. Transaction records were not posted to ledger accounts, accounts were
created in the wrong names, and proper records not kept for advances made.
There were a large number of collateral and documentation deficiencies (Review
1995c, p.53).
-
According to Lodhia & Burritt (2004), an auditor has to make an assessment of
the client’s internal control structure, that is the mechanism it has in place to
prevent irregularities, errors and frauds. The public record indicates that audits of
the NBF by the OAG did not detect these problems. If the audits had stringently
covered these aspects, the discrepancies could have been discovered much earlier.
-
Aidney and Dickson report that: “The Auditor General issued unqualified
opinions for each year up to 1993 and it is difficult to understand how he can have
issued such clean audit reports. Had the deficiencies been reported earlier, much
of the damage would have been mitigated.
(Review 1995c, p.39)
-
The OAG issued unqualified audit opinions on NBF annual reports for the five
years between 1988- 1992 (Nath & Chand, 1998) and qualified reports in 1993
and 1994. Aidney and Dickson (Review, 1995c) suggest that irregularities should
have been revealed earlier.
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The above analysis illustrates irregularities in the NBF control systems during the period of
analysis and OAG failed to bring to the attention of stakeholders’ information they would
have like to know about. According to Lodhia and Burritt (2004), accounting systems lacked
control and policies seemed to be circumvented. Provisions were limited and while it is not
realistically possible to calculate the annual doubtful debts ex post, it is notable that the
independent auditors Aidney and Dickson disagreed with the level of provision set by the
Bank. These provisions were significantly increased in subsequent years. Therefore, creative
accounting was used to disguise a rather fragile financial situation that remained unnoticed by
auditors for many years.
The Review (1996a) raised questions such as who is to blame and who is to pay? Such
questions were being avoided by bureaucrats. It was as if the people were responsible and so
they had to pay for it (p.17). Indeed along with other taxpayers, the “ordinary indigenous
Fijians” were faced with prospect of paying a bill of at least F$330m, as the cost incurred
while the bank fulfilled those objectives (Review, January, 1996a). The cost covered the
principal of F$220 million plus a total interest of F$110 million over 10 years.
5.4 Sale of Telecom to recover from the NBF collapse
Fijian government finances were in dire state due to the NBF collapse. To recover NBF debt,
the government was involved in a controversial sale of Fiji Telecom because of the NBF
crisis referred to above. Telecom was sold to the state-controlled Fiji National Provident
Fund1 at an inflated price.
1
Fiji National Provident Fund is a compulsory superannuation fund in Fiji. Both employer and the
employee each contribute 8% towards this fund. The Fiji National Provident Fund was established in
1966 to provide financial security to the workers when they retire. It is a social security savings
scheme jointly supported by employees, employers and Fiji government. It provides two other main
contingencies prior to retirement when the member is incapacitated and is not able to work and for the
financial support of survivors in the unfortunate event of death. Over the years, the fund has evolved
into a comprehensive scheme that provides a number of pre-retirement withdrawals to members for
home ownership, healthcare and education (www.fnpf.com.fj/2010).
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This controversial situation was created by the Fiji government through the sale of its telecom
holdings. Fiji Telecom had to be valued before it could be sold. The Fiji government carried
out the valuation with the help of Rothschild Consultants in order to prepare the company for
full privatisation. Their valuation was based on the assumption of Fiji Telecom’s continuing
monopoly and relied on the financial reports which involved substantial accounting
assumptions and policy choices.
The sales and purchase negotiations were based on
assumptions of net present value calculations; most cash flow predictions were subject to a
high level of uncertainty, particularly estimates of future prices and volumes and the choice
of discount rates in areas where there were no comparable private sector returns.
Accounting numbers played a role in the valuation process insofar as past revenues and
expenditures were used as a basis for predicting future cash flows. According to Grynberg et
al. (2002), Rothschild valuation of Fiji Telecom was overvalued and used by the Fiji
government to sell Fiji Telecom to the Fiji National Provident Fund at F$253 million (51%).
The Fijian government appointed board members of Fiji National Provident Fund who were
instrumental in purchasing the telecommunications sector. Grynberg et al. (2002) claimed
that Telecom Holdings was overvalued and Rothschild used figures from a time when the
economy was doing well and had not considered the Asian crisis of the late 1990s.
Grynbeg et al. (2002) argue that an inflated Fiji Telecom valuation was used by the Rabuka
government to recover from the failure of the State’s National Bank of Fiji where some
F$200 million dollars were lost without adequate credit check of customers. Grynberg et al.
(2002) note that most of the loans were given to political supporters of Rabuka’s party (the
then Prime Minister). The Fiji government guaranteed depositors’ money in this Bank: that
is, if the Bank became insolvent then the government could be called to repay depositors’
money, possibly through income collected from income taxes. The general public felt that
Fiji Telecom’s sale was mainly to rescue the National Bank of Fiji from the brink of
bankruptcy. The Fiji government dominated by ethnic Fijians and backed by the tribal
leaders ensured that the local inflated sale would help to rescue the Bank. The overseas bids
received were below F$100 million.
The sale delighted Fiji’s then finance minister who was quoted in the Islands Business
Magazine as saying:
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This sale is a gift made in Heaven. We will show surplus this year of about F$150
million which is about five percent of our Gross Domestic Product.
(1999, p.44).
The Islands Business Magazine reports that, according to the 1999 budget documents, the Fiji
government had expected under F$100 million from the sale.
The Finance Minister,
however, made it public that the Fiji National Provident Fund bid was what the Rothschild
consultants had estimated its telecom assets to be worth. It is obvious that the government
proceeded with sale to Fiji National Provident Fund in order to salvage the State Bank.
5.5 Analysis of NBF findings
We employ structuration theory as a sensitising framework for use in understanding the
prevailing norms and values within NBF. The changes are reflected in the legitimation,
domination and significance structures in what appears to be the ordinary course of existence.
We recognise how agency and structure work interactively.
Signification structure consists of shared knowledge and organising rules that guide social
interactions. This may include rules that follow from accepted norms and values. Profit
maximisation was a norm accepted by organisational participants at NBF. The aim was to
increase revenue, manage costs and improve profitability. Some massive lending was made
to political supporters without their ability for repayment of debt. Such circumstances were
created through frequent political interference of government ministers at NBF.
The
management were political appointees of the ruling Party who were generally Party
supporters but lacked commercial experience.
Some politicians and their allies were
advanced loan which were not repaid. The auditors provided unqualified reports to NBF
while the Bank was literally facing financial difficulties and the audit report failed to identify
the financial hardship faced by the Bank.
Organisation activities are motivated from the imperative of legitimacy- seeking behaviour
(Scott, 1995). Legitimacy is influenced by socially constructed norms and values embedded
within organisation and society. For NBF to survive, the NBF agents must act in ways
consistent with prevailing ideology and exhibit the societal expectations. The dominant
political and economic context faced by NBF is market capitalism.
The legitimating
characteristics within this system are maximising shareholder value. There are also social
15
expectations of NBF: to take depositors money and provide lending services in order to
remain legitimate.
The NBF had to follow Reserve Bank Act and Banking Act for its operations to be viable.
However, even when it did not its legitimacy was not destabilised. The Reserve Bank of Fiji,
however, was not so vigilant when the Bank was facing difficulties and chose to ignore that
due to political interference facing Fijian public sector at that point. There were lending
manuals which the bank did not adhere to. The NBF had deviated from its legitimacy
characteristics, which came to public notice when it faced financial challenges.
Allocation of resources falls under the domination structure of structuration theory. The Fiji
government guaranteed depositors’ money at the Bank. As seen from the study some F$152
million loan was not performing. As a result, the Fiji government sold its telecom company
at an inflated price of F$250m in order to recoup the debt of NBF. Authoritative resources
were manifested by politicians who intervened in NBF’s internal affairs.
Political
interference was common, and the Bank was rescued through political decision of sale of
profitable Telecom company to the superannuation company of Fiji National Provident Fund.
According to Singh (2002, p.1) corruption has become the base of Fiji’s society. Therefore,
not only did the NBF failure highlight poor banking management and inefficient auditing, but
it also identified the extent of corruption associated with such banking management- most
loans were provided without adequate security, the borrowers were related to current and
former politicians and government officials as well as powerful businesses closely associated
with these perpetrators.
While there are examples of governments overseas resigning from their blunders, Fiji’s
politics of tradition and ethnicity overrode the politics of principles. In particular, we saw
that as auditing authority OAG was supposed to provide a fair and independent evaluation of
the NBF financial integrity, their political and therefore presumed financial interdependence
on the government meant that ‘their independence as auditors was compromised’(Moore et
al, 2006).
In contrast, social actors who were in responsible position were in those roles because of their
positions in the political hierarchy therefore claimed constraints on their actions. Former
Chief General Manager informed Review (1996) that he was highly critical of the way
16
Reserve Bank of Fiji handled NBF during his term in office. RBF closely guided and
supervised NBF. “If they had identified the problems at that time, and told us that this is the
direction to go in, we couldn’t have said no to it” (Review, 1996, p.18). Ironically, Review
(1996) explained that the police could not track down those who cheated and bring them to
justice as the man who presided over the demise of the bank and who must accept political
responsibility for further state of affairs was in charge of the police.
In terms of the unethical practices that shaped the controversial sale of Fiji Telecom to
FNPF, the role of Yee who served a dual role: he was the chairman of Fiji Telecom board as
well as the Chief Executive Officer of FNPF can be scrutinized. Grynberg et al. (2002)
suspect that Yee had a conflict of interest for the Fiji Telecom sale transaction that took place
when he (Yee) led both organisations. Yee was an eminent advisor to the Fiji government on
government finances for a long time. Under his dual role there was general public perception
that Fiji National Provident Fund had made a misjudgement in purchasing 51 percent stake in
Telecom Fiji (Island Business, 1999, p.44). Finally the interdependence between the social
actions and the political structure are most apparent in the absence of blame or punishment
for any actor other than the common investor. In fact,
There has still been no inquiry and nobody has been punished for the NBF disaster.
No Reserve Bank governor has resigned; no auditor general dismissed and no
politician or finance secretary’s career truncated directly as a result of the crisis.
(Grynberg et al., 2002, p.xix).
6. Bridgecorp Crisis
This section examines the BC crisis. The section is organised as follows: subsection 6.1
delineates the background of BC, subsection 6.2 discusses Petrecivic (the director’s unethical
actions), 6.3 examines the implications on investors and 6.4 provides an analysis of BC
findings.
6.1 Background of BC
Bridgecorp was a prominent New Zealand (NZ) finance company established by Rod
Petricevic in 1993. Bridgecorp was one of the first big finance companies in New Zealand to
17
collapse in 2007, leaving 14,500 investors, $459,000,000 out of pocket (R v Petricevic,
2012a, p.9).
Bridgecorp Ltd, was incorporated in 30 April 2001 The history of Bridgecorp begins with
Rod Petricevic, the founder and a 53% shareholder. He was no stranger to the finance
industry and has been involved with troubled companies in the past.
Bridgecorp’s niche was as an Auckland property financier, willing to take on higher risk
second and third mortgages, even stepping in to complete projects if they fell over. In order
to raise money from the public, Bridgecorp fulfilled its legal requirements by registering a
prospectus and investment statement with the Registrar of Companies. Bridgecorp also
appointed Covenant Trustee Company Ltd as trustee (Bridgecorp Limited, 2007, p.7).
Bridgecorp experienced rapid growth and soon become New Zealand’s second largest
property finance company with nearly NZ$600 million tied up in different loans and property
ventures. Due to the strength shown on its balance sheet, Bridgecorp had been awarded
investment grade credit ratings, which gave investors’ confidence in the security of their
investments. They received a B3 from Rapid Ratings (“Missing the signals,” 2007), and a 3.5
from Property Finance Research (Bridgecorp Limited, 2007, p.6).
Among the principle reasons for Bridgecorp’s ultimate failure was its lending in relation to a
development at Momi Bay, Fiji, and the other loans related to the joint ventures with the
Urwin Fernandez Group, which ultimately became the Barcroft transaction (R v Petricevic,
2012a, p.79). The Momi Resort project involved developing a 250 bed resort and a 400 lot
residential subdivision. The 2006 coup in Fiji threatened this project. The development was
delayed due to political uncertainty surrounding the Fijian coup (Wilson et al., 2010a); this
threatened $48 million that Bridgecorp had tied up in the project (“Missing the signals,”
2007).
Through a complex arrangement, Bridgecorp’s loan was converted into an accounts
receivable. This was achieved by Bridgecorp selling the loan to Barcroft Holdings, which in
turn issued a promissory note to Bridgecorp. Barcroft then sold the loan back to Bridgecorp at
18
a 2% premium (Wilson et al., 2010b). The internal auditor found $40million worth of sales
contracts on stage one of the Momi bay developments had been assigned in favour of
Bridgecorp. Coincidently, this was the same amount as the outstanding loan balance. The
amount had been recorded as a receivable in the statements, but there was no evidence to
back up what it actually consisted of. The money never eventuated and the way it was
accounted for should have been reassessed, but it continued to be recorded as a receivable
(“Bridgecorp board”, 2011).
The auditors failed to pick this up and instead gave the
company an unqualified audit report.
The Barcroft transaction was not disclosed as a related party loan, but as Gary Urwin
(director of Bridgecorp) has a beneficial ownership and was responsible for providing all
information on the loan (Wilson et al., 2010a) Justice Venning judged that it should have
been reported as a related party (R v Petricevic, 2012a, p.87). The concern is that the
transaction highlighted deficiencies in the Bridgecorp’s board. Bridgecorp’s corporate
governance code included directors having a duty of care to avoid conflicts of interest
between the best interests of Bridgecorp and their own personal interests. Still, board chair
Bruce Davidson failed to require Gary Urwin to have no involvement in the board’s decision
making when such a significant loan to a company owned by him was being considered.
(Wilson et al., 2010a).
6.2 Petricevic’s unethical actions:
Petricevic made a number of unauthorized payments over a long period of time (R v Davison,
2010). The payments include the purchase of the Medici yacht, payments to Ms. Wright
through her company ABb, and salary and tax payments made to and on behalf of Petricevic.
(Wilson et al., 2010a)
The purchase of the Medici was just one example of Petricevic using his status in the
company to get what he wanted. After a proposal he put before the board was rejected on 21
May 2002, he announced he would purchase the vessel himself. His request for a bridging
loan was not approved, so he devised himself an alternative way of funding it. The
transaction to acquire the Medici yacht was for $1.65 million (Wilson, Rose, & Pinfold,
2010a). The yacht was purchased by Poseidon Ltd with Petricevic being the sole owner and
19
director of the company. The purchase was funded by taking a loan of $1.65 million from
Dominion Finance and a reciprocal loan to Dominion Finance, with an undertaking that the
loan to Dominion would not be withdrawn (Wilson, Rose, & Pinfold, 2010a). The purchase
of the Medici simply shows Petricevic’s deceitful nature.
Another example of Petricevic using Bridgecorp as his personal bank was the string of
payments totalling over $1 million made to the company ABb. A search of the companies
register revealed no such company existed. These payments occurred from February 2004 up
until June 2007 for services such as consultancy, database creation, call centre services,
marketing consulting and other charges. After investigation it was discovered that the work
Ms. Wright did for Bridgecorp was minimal at best. Petricevic had personally authorized 35
of the 41 invoices that were put forward for payment. It is also known that Petricevic and Ms.
Wright were in a personal relationship, this created a conflict of interest which was not
disclosed to the Bridgecorp board and no independent review of the services was undertaken
(Wilson et al., 2010a).
When Bridgecorp was placed in receivership it clearly showed that the company’s high
profile advertising campaign called “minimizing the risk,” was misleading and should have
been dubbed “invest in Bridgecorp and maximize your risk” (Gaynor, 2007, para.1).
Bridgecorp’s prospectus and its directors claimed the company had never missed an interest
of principle payment. However, between February and May 2007 Bridgecorp’s late payments
totalled over $16 million (Ministry of Economic Development, 2008).
Friar (2012b) provides a summary of the Justice Venning’s (R v Petricevic, 2012a) findings
regarding untrue statements made in offer documents in December 2006. The offer
documents contained the following misleading statements or material omissions. The offer
documents stated that a $76 million loan was made to an unrelated party, when that party was
in fact ultimately owned and controlled by Bridgecorp and one of its directors (para.14). The
offer documents stated that there had been no change in Bridgecorp's financial circumstances
since June 2006, when in fact new investments had declined significantly, impaired loans had
more than doubled and actual collections were 20% of forecast (para.15). The offer
documents stated that Bridgecorp managed liquidity by maintaining a minimum cash reserve
with a bank, when in fact no cash reserve was held (para.16). The offer documents failed to
20
state that Bridgecorp's liquidity position had deteriorated since June 2006 (para.17). The offer
documents stated that Bridgecorp never missed an interest or principal payment to investors,
when from February 2007 Bridgecorp regularly missed such payments. Although the offer
documents were correct in this particular when first distributed in December 2006, they
became untrue in February 2007, and should have been withdrawn (para.18).
At June 30, 2007, Bridgecorp had total assets of $595 million, of which $393m was classified
as its loan book (Gaynor, 2007). Interest on most of these loans was only received when the
loans were repaid. However, Bridgecorp reported the interest as revenue over the course of
the loan, which resulted in reported earnings being much higher than actual cash flow. They
continually received unqualified reports from the auditors over the years. Also, bad loans
were only identified when interest payments were missed and Bridgecorp’s borrowers only
paid the interest at the end of a loan period, so they were able to understate their nonperforming loans (Gaynor, 2007). They have again used creative accounting as a way to
portray a picture of Bridgecorp that they wanted to be seen, but does not show the true reality
of their financial state.
Implications on Investors from BC collapse
BC was placed into receivership on the 2nd July, 2007. At the date of its receivership it had
approximately $459 million of secured debenture stock outstanding to approximately 14,500
debenture holders or investors (R v Petricevic, 2012a, p.9).
Bridgecorp failed to consider the implications that their actions would have on those that
were investing with them. There are countless numbers of stories of people who suffered
from Bridgecorp’s collapse. Sadly, many of these investors were retirees who lost their entire
life savings. As a result, they will now have a dramatically lower standard of living in
retirement (Wilson, Rose, & Pinfold, 2010b). Following are some examples of how some of
the investors have suffered.
A retired professional man of 69 invested $150,000 with Bridgecorp in January 2007. After
he and his wife sold their home in June 2007, they invested the net proceeds with Bridgecorp,
approximately $1 million. They then made other investments totalling approximately another
21
$1 million. All of this money has been lost. Now instead of enjoying his retirement, he has
been forced to keep working. Losing the money was even harder on his wife who suffered a
nervous breakdown. Despite extensive treatment she has only mildly improved and is on
constant medication (R v Petricevic, 2012b, p.6).
Another story was told of an elderly couple, who worked all their lives until retirement, and
lost $250,000 when Bridgecorp collapsed (R v Petricevic, 2012b, p.7). The 79-year-old man
and his wife, invested in what they believed to be a minimal risk company when they retired.
They had originally hoped to use the money to fund their retirement and to pass on to their
children, but after the collapse they barely have enough left to buy a new car. "The impact of
the financial loss has been devastating both to them and to their family," Justice Venning said
"the lifestyle they had worked all their lives to achieve and looked forward to enjoying in
retirement have been lost. They say it is the most depressing period of their lives” (R v
Petricevic, 2012b, p.7).
There are numerous other stories, but they all tell pretty much the same story. Fairfax News
(2007), reports that the investors believe Bridgecorp’s misleading advertising made the
company look like a safe investment, and the financial advisors persuaded a number of them
to invest in Bridgecorp. Justice Venning said, “in addition to financial losses there are the
emotional and psychological costs caused to people who may have lost the benefit of much of
their retirement savings. Common sense dictates that a number of those who have suffered
loss will also have suffered from medical conditions brought on by the stress of what has
happened” (R v Petricevic, 2012b, p.12). As a result of the fraud, both Petricevic and Roest
were convicted of making false statements on different offer documents and were charged on
10 counts under Securities Act, two counts under the Companies Act, and six counts under
the Crimes Act.
6.4 Analysis of BC findings
The significance structure at BC consists of shared knowledge and organising rules that guide
social interactions. This follows from accepted norms and values. Operating on the basis of
profit maximisation was the norm taken-for-granted by BC organisational participants. The
organisational participants were to function to provide second tier property loan financing.
22
The finance was provided to property developers and other customers who could not secure
the financing from the Banks.
Organisation activities are motivated from the imperative of legitimacy-seeking behaviour
(Scott, 1995). Legitimacy is influenced by socially constructed norms and values embedded
within organisation and society. The dominant political and economic context faced by BC is
market capitalism.
The legitimating characteristic within this system is maximising
shareholder value. To get legitimacy from the public, BC obtained a B3 rating from Rapid
Ratings and 3.5 from Property Finance Research. These positive ratings enabled investors to
deposit money into BC. BC issued prospectus to investors to exhibit the legitimacy of its
operations. The auditors also issued unqualified reports for the company to gain legitimacy
from the public. However, later when the company collapsed, the legitimacy structure of the
company was questioned. It was found that the prospectus was forged and also the auditors
were liable.
Allocation of resources falls under the whims of dominant structure of structuration theory.
The resources were provided by the investors with the assumption that the company provided
legitimate services. However, a large number of Bridgecorp’s investors were persuaded into
investing their life savings by financial planners. These planners were being paid three times
the industry average in commission. This situation creates a conflict of interest as it is in the
planner’s best interest to promote Bridgecorp due to the extra commission and other
incentives they will receive, even if it is not in the investor’s best interest (Yahanpath and
Cavanagh, 2011).
Following the collapse of BC, the investors who had invested up to NZ$500m lost their
money. BC collapsed because the directors exhibited unethical behaviour in the management
of the business and resources as exhibited by the case study. Petrecevic exhibited domination
over other actors. This was so as he controlled resources resembling power over other actors:
an aspect of Giddens conception of authoritative resources. Petricevic was acting without
any concern for ethical principles. He was using company resources to fund his personal
interests and was determined to get his way whether it was ethical or not. Garcia-Sanchez et
al., (2013) state that “CEOs determine what their organizations will ultimately look like
23
according to their personal characteristics, such as orientations, values, attributes or qualities”
(p.7). Bridgecorp ultimately became an outworking of Petricevic’s lack of ethical values.
Therefore investors’ trust was violated when the company collapsed and the unethical
behaviour of the directors was discovered. However, due to the efficient and effective legal
system in the country both directors were sentenced to 6.5 years in jail (R v Petricevic,
2012b). This is significant as it is one of the harshest sentences handed out so far in one of
these types of cases. It's notable that the sentence is at the higher end of the scale and reflects
the Court's view of Mr Petricevic's conduct." (para.2). Petricevic was also banned from being
a director or a promoter of a company until 29 May 2014. Justice Venning said one of the
purposes of Petricevic’s sentencing was to denounce his offending and deter others from
committing the same and similar offences (R v Petricevic, 2012b, p.6).
.
7. Conclusion
This paper examined the NBF (Fiji) and BC (New Zealand) debacle. The questions raised in
the paper were how do social structure including prevailing norms and values in the company
shape ethical misconduct? How does that impact on the company’s primary and external
stakeholders in societies with different corporate governance practices? The NBF debacle
was shaped by political interferences where extensive lending was done to politicians and
political supporters of the ruling party.
The NBF case exhibits the political aspect of
mismanagement of state Bank where no one had been prosecuted or terminated from their
position due to ethical misconduct. Because of the involvement of politicians, this action
seemed to be acceptable in a Fijian context where corruption amongst politician was
widespread (post 1987 Rabuka regime) (Lodhia & Burritt, 2004).
In BC case study,
NZ$500m was lost by the depositors. The company’s prospectus was forged and eventually
the directors were prosecuted and sent to prison for 6.5 years. This was harshest punishment
for company directors in New Zealand. This is in stark contrast to Fiji’s NBF case where no
one has been convicted because of tribal nature of Fiji’s political and economic system.
Kinship relationship and networks predominate Fijian society whereas New Zealand society
is more individualistic and corruption is at the lower end. However, corruption in Fijian
society is relatively higher. Forces such as political pressure, interference and nepotism are
24
common in the Fiji environment (Nath & Chand, 1998). The political interference and
nepotism is not so common in the New Zealand context.
While ethics and corporate governance received wide media and political attention following
major collapses, academic research in collapsed firms have not been so widely conducted.
This paper fills some of this void in the two distinct geographical settings: Fiji and New
Zealand. We find in both settings firms with weak corporate governance eventually collapse,
and the demand for sound governance is warranted in the wake of poor firm performance
(Monem, 2011; Dillard et al., 2011). However, as the collapse of the firm with political
interference does not result in clear blame or punishment, the lack of legal denouncement of
unethical behaviour may explain the consequential perpetuation of corruption and unethical
behaviour in those social systems. On the contrary, firms embedded in transparent societies
can more significantly curb unethical behaviour and potentially protect its citizens from harm
from unethical actors.
However both cases highlight accountants need to more carefully perform their audits as the
best mean to prevent future firm failures (Sikka, 2009). When we conceive auditor
independence as a ‘moral issue’ we usually choose to focus on studying processes internal to
the individual, however as discussed in this paper, we must see the role structures, socialorganizational context plays in shaping and permitting unethical behaviour as ultimately an
individual makes judgement and decisions in the social context (Gendron, Suddaby & Lam,
2006).
One possible solution would be to ensure punishment for accounting firms, auditors and top
corporate executives who partake in fraudulent acts. In addition, ethical issues such as auditor
independence, conflict of interest can be seen as topics that can be taught in business school
curriculums and or objects that can be regulated through standards promulgated in codes of
ethics and/or government regulation, and checked upon and verified through reviews and
inspections. At the same time, we encourage regulators and the profession to make better use
of existing works to prevent fraudulent financial reporting. The auditors do not need new
guidelines. All they need is to follow the old guidelines and to read the interpretive literature.
Basically, the profession needs to adopt a “back to basics” approach to auditing. If proper
follow-up procedures for whistle blowing are in place, companies would also likely act on
25
those warnings before things become worse. Peer reviews may also improve the quality of
audit work.
The study is limited to two case studies. However, future research could examine other cases
of corporate collapses in other research settings to show new insights of the rationale for the
collapses. This may provide lessons for policy makers and practitioners as to their role in
instituting good corporate governance within business organisations, so that we protect the
investors and societal interests.
26
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