Back from the brink

A new Monash research unit is looking at ways of preventing corporate collapses and promoting greater corporate social responsibility. FIONA PERRY reports.

The collapse of corporate giants Worldcom, HIH and Enron in recent years sent shockwaves around the world, affecting share prices, business and consumer confidence, and national and international economies.

In the case of US energy giant Enron, the collapse of the company represented the biggest bankruptcy in US history. Thousands lost money they had invested in the company, and more than 4000 US employees were laid off. And international accounting firm Andersen, Enron's auditors, was charged with obstruction of justice by a US federal grand jury for destroying company documents, a move its lawyers described as a "corporate death penalty".

According to Dr Ken Coghill, co-director of the new Monash Research Governance Unit (MGRU), the collapse was the result of a complex set of interactions that occurred between the corporate, government and civil sectors.

"At its most superficial, the Enron collapse appears to have arisen from the improper, if not illegal, actions alleged to have been taken by a small number of very senior leaders within the corporation," he says.

"But it goes much further than that. The auditors failed to report as they should have, which may have been due to the actions of leaders within the auditing firm. And the firm's subsequent actions in relation to the destruction of relevant documents demonstrated the limitations of the law in determining the conduct of individuals and organisations."

There was also a perceived conflict of interest in Andersen providing both auditing and consulting services to Enron, says Dr Coghill.

"While this is a common practice, it arose as an issue of major concern in this case and others, leading to calls for regulatory reform, not just in the US, but worldwide."

Enron actively resisted attempts to reform the regulatory environment it operated in, and donated money to those members of Congress who later resisted reform proposals.

"The extent to which Enron was able to influence individual members of Congress is in part a consequence of the constitutional design of the US," Dr Coghill says.

"Individual politicians are more independent of their parties and more dependent on personal fundraising. The Enron episode has renewed calls for reform of political donations in the US."

The civil society sector - the professional and industry associations of the auditing profession - was also a player in the episode, through its advocacy or silence on the issue of regulatory reform. It now appears likely that the US will reconsider the highly prescriptive auditing legislation it enacted, which, ironically, allows for greater infringement of laws than its Australian counterpart, which relies on broad principles.

"Under the American system, anyone who wasn't caught by that very narrow legal definition of what is an illegal auditing method might get away with it, whereas under Australian legislation, they might be prosecuted," Dr Coghill says.

The Enron case is just one of many cases of corporate governance that Dr Coghill and researchers in the Monash Governance Research Unit are examining in an attempt to design improved systems and interaction between government, business and the community, both in Australia and internationally.

Dr Coghill established the unit in the Faculty of Business and Economics earlier this year with co-directors Professor On Kit Tam and Professor Mohammed Ariff.

"Our aim is to become a world authority on the relationships between the sectors of society, and the way they are interconnected and interdependent," Dr Coghill says.

Work is currently under way on a comprehensive index that will help identify risk factors, improve transparency and accountability of institutions, assist in policy development and address issues of corporate responsibility.

"Poor governance affects global economies, corporate performance, trade, social development and political stability," Dr Coghill says. "We intend to research and reform those areas of governance that undermine our social and economic development."

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