Corporate capers, group accounting reforms

ABSTRACT

Histories of business firms, mergers and takeovers, disputes, frauds and failures have proven fruitful in observing whether accounting generally produces serviceable information in applied commercial settings. We contribute to this literature by drawing on John Preston’s 2021 biography of Robert Maxwell, and earlier biographies of the media baron, juxtaposed with evidence in Frank Partnoy’s account of the 1920s larger-than-life Swedish engineer, businessman and financier Ivar Kreuger. Cameos of other business histories are interposed to suggest these cases are not outliers. Both oversaw what was referred to as an unexpected company failure. While their founder manager actions suggest that there is nothing new under the sun, there are enduring deficiencies in the group information disclosed to interested parties using malleable standards-based accounting, especially conventional consolidation accounting. These weaknesses are known to regulators and accounting standard setters but remain effectively unaddressed. The wheeling and dealing of Maxwell and Kreuger provide the commercial equivalent of a laboratory setting, with evidence suggesting circumvention of the separate legal entity notion within corporate groups, impeding effective regulatory and governance controls. Using a hypothetical, worked example, an alternative group accounting system illustrates how disclosure of additional, more serviceable group information to interested parties would likely provide a check on the actions of a dominant manager, and further, provide a greater likelihood of identification of a company failure trajectory.

KEYWORDS:

• Group accounting reform
• biography
• evidence
• Robert Maxwell
• Ivar Kreuger
• intra-group transactions

Acknowledgements

Following comments by several University of Sydney colleagues from accounting and cognate disciplines, what began as a book review of John Preston's Fall morphed into its present article form. Ray Chambers' thinking about theory development also influenced the larger focus on group accounting reform, drawing on the premise that actual accounting, finance and management practices provide the basis for developing the conceptual framework of accounting thought. I wish to thank the following for pushing me to expand this piece into what the Editor has described as a ‘political’ paper: Richard (“Dick”) Edwards, Graeme Gill, Russel Lansbury, Sue Newberry, Rodney Tiffen, Murray Wells, Peter Wolnizer, and my long-time editorial consultant Carl Harrison-Ford. Any infelicities in thinking and editing are my responsibility.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1 Chambers (1970, 41).

2 Lee, Clarke, and Dean (2008) highlights problems for auditors created by dominant senior managers using complicated group structures. See also the discussion in Note 13.

3 Speculation exists that this was financially assisted by MI6 funding. If so, it would be possibly a unique MI6 event — and it would explain the recurring espionage stories throughout Maxwell’s career — covering contestable spying allegations in respect of various countries. The allegations are discussed briefly by Preston, but are much more in focus in Davies (1995), and say, Thomas and Dillon (2003).

4 For example, Bower (1988), and Thompson and Delano (1988). Those appearing several years later included: Greenslade (1992), Davies (1992), Bower (1995), and Davies (1995).

5 See also Andrew Buncombe, “How the spectre of Robert Maxwell hung over his daughter’s trial”, Independent (online), 30 December 2021.

6 Maxwell’s favourite daughter Ghislaine was found guilty in January 2022 of sex trafficking charges related to her relationship with Jeffrey Epstein. She has appealed that decision.

7 Most reviewers were positive. One not so, Christopher Sylvester, “Deeply Flawed Life of Cap’n Bob”, The Critic, April 2021 (online), suggests Preston might have been too close to Robert Maxwell’s son, Ian, who agreed to be interviewed by Preston, along with other family members and some close business contacts. Some other reviewers, like Jonah Raskin, “Fall: The Mysterious Life and Death of Robert Maxwell, Britain’s Most Notorious Media Baron”, New Journal of Books, 9 February 2021, notes that while material from those interviews augmented material in earlier biographies, the claims are indicated only generally in each chapter, more could have been done to provide specific reference details.

8 A larger examination of these issues is provided in Clarke, Dean, and Egan (2014). It explores accounting, auditing, and other corporate group deficiencies requiring reform — namely, corporate governance problems related to directors’ duties. Those matters are only tangentially addressed in the present analysis. The group accounting system, developed to supplant conventional consolidation accounting, is discussed briefly in the text and in the related Appendix.

9 Walker (1978) illustrates this point. He notes that by the 1920s, ‘aggregated’ (consolidated) statements were not uncommon in US accounting for inter-corporate investments — e.g. the article in the Journal of Accountancy by Price, Waterhouse & Co partner, Arthur Dickinson (1906) — while in the UK, Sir Gilbert Garnsey (1923), also a partner in the firm, Price, Waterhouse & Co. delivered a 1922 lecture to British Institute members on the topic of consolidated statements two months after the publication of the first UK consolidated balance sheet, namely Nobel Industries Ltd. The lecture was published in full in The Accountant in January 1923. Walker (1978, 24) concludes that ‘in 1922 British accountants began experimenting with the use of consolidated statements’, which took a variety of forms. Edwards and Webb (1984) suggest the emergence may have been around 1910.

10 The present study could have drawn on the actions of other larger-than-life 1920s businessmen, like Samuel Insull who managed the 1920s–1930s Insull Utility Investments Corporation, a US corporate colossus that collapsed in the chaotic market circumstances of the Great Depression. As with Kreuger, significant corporate reporting misinformation went undetected until the Congressional investigations into the utility group occurred in 1933–1934. The 1935 US Public Utility Holding Company Act was an attempt to redress some of the group activities and reporting issues that had been revealed.

11 He had a partner in his early adult years, and he was later a strong financial and general supporter of Greta Garbo as she gained fame in the 1920s.

12 These speculations were explored by the Paris police for more than a year before they concluded that the fatal chest wound was ruled to be self-inflicted. His brother and business confidante, Torsten, always questioned this. He published a book, The Truth About Ivar Kreuger (1968) collating evidence that Kreuger was murdered.

13 Lee, Clarke, and Dean (2008) provides case-study evidence across time and many jurisdictions to support this proposition. While the present study analyses focus mainly on group accounting issues, other deficiencies have been noted, resulting in proposed reforms such as accounting profession initiatives in the early 1930s to formalise a standard form of audit opinion and the revised requirement of the Committee on Stock List of the NYSE that all new listings must have audited financials accompany their listing application (Audits of Corporate Accounts 1932/34, 4-14). More recently, the 1992 UK Cadbury Corporate Governance Guidelines focused on, inter alia, (i) the lack of non-executive directors on listed company boards, and where they are in place, their ineffective actions; and (ii) concern over the Chairman and CEO roles being held by the same person. Similar corporate governance developments occurred in Australia (see Jones 2011, 155–157).

14 Recall that it is management’s responsibility to oversee the preparation of the accounts and the auditor’s role is to verify them.

15 J. R. “Dick” Edwards alerted me to Samuell’s book.

16 This is noted in Hunt (1936) and in the Hearings and Report of the US Senate Committee on Banking and Currency, The Pecora Report: The 1934 Report on the Practices of Stock Exchanges from the “Pecora Commission”. The response failed to stop enactment of the major disclosure reforms in the 1933, 1934 securities legislation.

17 Edwards (2019, chapter 18) suggests that in the UK, public interest in the limitations of accounts was revived in in the 1960s and beyond, following the 1969 Pergamon-Leasco merger and the 1980s Maxwell Group earnings management manoeuvres. Notably, there are earlier important examples, especially the Royal Mail case in 1931.

18 See for example, Chambers (1973), Griffiths (1986), and Jones (2011).

19 A representation of this complex group structure is reproduced in Clarke, Dean, and Oliver (1997), and Clarke and Dean (2007). These figures are reset versions of one which first appeared in the Financial Times (6 November 1991).

20 Law Society Gazette, 7 June 1995.

21 Clarke, Dean, and Oliver (1997/2003) provides several instances of complex civil and criminal cases in Australia in the 1980s and beyond (see also note 23). Those cases also involved several million pages of technical evidence requiring the use of high-tech computer-equipped courtrooms.

22 Bower (1995, 376–377) details the pursuit of accountants, lawyers and others involved in the questionable within-group transactions. He notes several settlements were negotiated by the relevant parties, but generally, he asserts more action by regulatory authorities was needed: ‘Considering the numerous people, banks, partnerships and organizations who by their questionable conduct had not prevented the pension fund losses and the collapse of MCC, it was more than surprising that the official censure was so sparse.’

23 Complex corporate group arrangements persist in the 2020s; often coupled to other types of creative accounting, they have been integral to the modus operandi employed in numerous twentieth-century worldwide corporate scandals (not all involving fraud). They include in the USA, Stanley Goldblum (Equity Funding Corporation America) in the early 1970s, and Kenneth Lay (Enron), Bernard Ebbers (WorldCom) in the 2000s; in the UK, Clarence Hatry (Hatry-Austin Friars Group) and Gerard Bevan (City Equitable Insurance) in the 1920s, Tiny Rowland (Lohnro) in the 1970s, and Aghan Abedi (BCCI) and Asil Nadir (Polly Peck) in the 1990s; in Australia, Stanley Korman (Stanhill Corporation) in the 1960s, Laurie Connell (Rothwells), Alan Bond (Bond Corporation) and Christopher Skase (Qintex) in the 1980s, Ray Williams (HIH Insurance) in the early 2000s, and most recently, Lex Greenshill (Greenshill Capital Group). Those ‘fallen’ businessmen were often household names in good times. Most favoured secrecy over public disclosure, advocating disclosure on a ‘needs-to-know’ basis. Some of those cases were examined in Haldane (1960), Jones (2011), Clikeman (2008), Bhaskar, Flower, and Sellers (2019), Lee, Clarke, and Dean (2020), and Toms (2019).

24 Maxwell’s financial difficulties were noted in the Autumn 1991 BBC1 Panorama’s The Money Program – “The Max Factor” presented by Nisha Pillai after a nine-month investigation. It augmented concerns expressed a little earlier in 1988 biographies by Bower and Thompson and Delano. Academics, like the LSE’s Christopher Napier, had also been critical of the accounting practices adopted by Maxwell.

25 Taylor (1941) was one to make that claim.

26 These included in 1932, Earl Sparling, William Stoneman, Trevor Allen, Poul Bjerre; and in 1933, Manfred Georg.

27 Partnoy (2009, 227) in a ‘Note on Sources and Acknowledgements’ indicates the lack of identifiable sources in many earlier accounts of Kreuger’s life — he cites Galbraith (1957) who lamented in respect of books written about Kreuger: ‘the time has come when we must incite readers to violence against all authors — certainly all historians — who do not provide a decent minimum of footnotes’. Partnoy provides numerous footnotes. In passing, Galbraith described Kreuger as the ’Leonardo of larcenists’.

28 Partnoy (2009, 25) observes that ‘[T]hroughout their lives Ivar and Greta would share this bond as the two most famous people from Sweden during the 1920s’. Kreuger sponsored Garbo’s training and sponsored her early films.

29 The importance of maintaining secrecy was highlighted in the Final Report of Price, Waterhouse & Co. on the Kreuger & Toll Group of Companies, 1932 (as cited in Hunt 1936, 110). The Report, commissioned by the Swedish Investigating Committee after Kreuger’s death, is discussed later.

30 Kreuger’s life-long banking associate Oscar Rydeck, an emerging star at Swedish Credit Bank in the early 1920s, effectively acted for those banks — thus, indirectly Kreuger controlled all the shares of Swedish Match.

31 Partnoy (2009, 12–13).

32 Partnoy (2009, 44). In sum by the mid-1920s, there were five major companies in the Kreuger empire: three raised monies from the public, Kreuger and Toll A.B., IMCO and Swedish Match, and another two group finance companies CIC and N.V. Financieele Maatschappij, shuffled funds around the group.

33 Partnoy (2009, 41) notes: ‘By incorporating International Match in Delaware Lee, Higginson would give Ivar and themselves maximum flexibility [in raising funds and disclosing as minimal as possible to the market]’.

34 Partnoy (2009, 41, 48–50).

35 Partnoy (2009, 52–53).

36 Partnoy (2009, 202) observes that the April 1932 Price, Waterhouse Report investigating Kreuger & Toll Holding A.B. concluded that its 1930 Balance Sheet: ‘misrepresented the true financial position of the company‘. It was estimated then that the loss at the time was 2 billion kronor, more than Sweden’s national debt. Partnoy (211–213) notes that the actual loss to the investors of Kreuger and Toll A.B. and IMCO proved to be much less than was originally forecast, but it was still a substantial amount.

37 Golden debentures had the features of very high interest yields (6.5% p.a. for 20 years) and priority in repayments, if any default were to occur. The interest was payable in cash or gold.

38 For example, Final Report of Price, Waterhouse & Co. on the Kreuger & Toll Group of Companies, 1932, 67 Volumes which followed their 57 ‘fact finding’ reports; also evidence about Kreuger group activities placed before the US Senate Committee on Banking and Currency, The Pecora Report: The 1934 Report on the Practices of Stock Exchanges from the “Pecora Commission”. Hunt (1936, 107–111) provides details of those frauds based on the Price, Waterhouse & Co. Final Report, and especially how a significant amount of fictitious earnings occurred over more than 14 years.

39 Flesher and Flesher (1986, 423).

40 Partnoy (2009, 204) and Flesher and Flesher (1986, 430–432) agree that while the corporate group antics within Samuel Insull’s Utility Investments group (and other groups) influenced legislative changes, revelations of similar abuses on an international scale in the Kreuger case are seen as the stronger factor. Regarding the UK, Edwards and Walker (2020, 301–305) suggests that the Leasco-Pergamon takeover was one of a series of events that raised concerns about the quality of corporate reporting and formation of the UK Accounting Standards Steering Committee.

41 As cited in Partnoy (2009, 226), it was reported in 1984 in the Financial Times, that Kreuger was viewed as a swindler, perpetrating ‘one of the top-five financial scandals of all time’. The five scandals were: The South Sea Company, Overend Gurney Company, City of Glasgow Bank, Kreuger and Toll, and Insull Utility Investments.

42 American Certificates are part bond, part preferred stock, and part profit sharing option. Kreuger added another attraction to the certificates, namely that, while they were issued to investors at US$28, they could be redeemed for that price even if the price had fallen below US$28.

43 Clarke, Dean, and Oliver (1997, 266–274) and Clarke and Dean (2007, 187–195) suggest that tinkering with conventional consolidation accounting rather than a major group accounting rethink has been a feature of regulatory responses to the types of abuses and related criticisms evident in the Maxwell and Kreuger cases, and say, Enron and WorldCom (see note 23).

44 Clarke and Dean (2007, 195–200) discusses the benefits of proscribing wholly-owned subsidiaries, replacing them with divisions or branches; and also, the related issue of ensuring all investments in subsidiaries, whether control exists or not, are accounted for in a similar way. This discussion was in the context of using a market-based system of valuing investments (CoCoA) as suggested in the Appendix.

45 A similar presentation identifying parent and subsidiary data would apply for the Group Statement of Financial Performance and the Group Cash Flow Statement.

46 The other cases mentioned are discussed in Clarke, Dean, and Oliver (1997).

47 ‘Minsky Moment’ refers to economist Hyman Minsky’s financial instability hypothesis. A ‘Minsky Moment’ is said to occur when risky financial deals lead to an accumulation of debt unable to be covered by revenues and reduced asset backing, thus resulting in severe financial deleveraging.