Ireland must learn the lessons of recent corporate governance failures in Ireland and Irish-listed companies must meet evolving international market expectations if they are to attract international investment, the Chief Executive of the Irish Stock Exchange, Deirdre Somers has said.
Somers (pictured) made her comments at a special conference on corporate governance hosted by the Irish Stock Exchange in Dublin today.
“Companies must consider whether their historical practices, although accepted in the past, will meet market expectations in the future,” she said.
Somers also said that investors had a particular responsibility in respect of publicly quoted ...view middle of the document...
Government must ‘lead by example’
According to O’Connor, while the Combined Code was a key influence on corporate governance practices in listed companies, it was not a substitute for ethical behaviour, company law or sectoral regulation.
He also called on the Government to “lead by example” by ensuring that public-sector companies adhered to the highest standards of corporate governance.
THE HUMAN ELEMENT AND THE TEMPTATION TO MANAGE EARNINGS
 Section 5 (d), Companies (Amendment) Act 1986.
 Brennan and McGrath (2003).
Accounting is a human process and, as a result, has weaknesses. Stock markets are
excessively focused on short-term quarterly / half yearly earnings announcements.
This can pressurise some managements into managing earnings. Earnings can be
managed by exploiting ambiguities in accounting rules.
There are two motivations to manage earnings:
1. Market expectations: Motivations to meet market earnings expectations may
override common sense business practices. Stock markets can be unforgiving of
companies that fail to meet earnings expectations (generally measured by financial
analysts, as analyst forecasts)
2. Smooth earnings: Share prices are lower for companies with erratic earnings
patterns as such companies are perceived by the market to be riskier. Managers
are motivated to manage earnings to achieve a smooth pattern for the purposes of
a higher share price. In good years, managers make overly prudent subjective
judgements which have the effect of lowering profits. In bad years managers are
less prudent and can release previous prudent provisions to the profit and loss
account, thus increasing reported profits. Bad debt provisions would be suitable
for such management, especially in financial institutions where the provisions are
very large. A very small change in bad debt assumptions could have a material
effect on amounts of reported profits. Academic research has shown that such
practices are commonplace and have the effect of allowing companies to report
profits which are artificially smooth.
Both motivations to manage earnings are driven by management trying to operate in
the best interests of shareholders (by keeping their share price high). However, what
starts as minor accounting adjustments carried out in the best interest of shareholders,
can end up as financial statement fraud. At what stage does earnings management
(legitimate activity practiced widely) become earnings manipulation (financial
statement fraud)? To what extent do earnings reports reflect the wishes of
management, rather than the real underlying financial performance of the company?
The widespread practice of managing earnings has lead to the erosion of, and has
raised questions concerning, the quality of reported earnings.
EXPLOITING AMBIGUITIES IN THE RULES
Many accounting and auditing failures...