Natalie Gallery

The Incentives of Australian Public Companies Lobbying Against Proposed Superannuation Accounting Standards

The release of AASB 1028 Accounting for Employee Entitlements followed a period of intense lobbying and debate, resulting in a standard that contained significantly less stringent requirements than those proposed in the preceding exposure draft. This paper examines the incentives for public companies to lobby on the proposals in ED 53 Accounting for Employee Entitlements for the recognition of superannuation commitments of Australian companies. First, it analyses written submissions of public companies to identify the relative importance of superannuation as opposed to other types of employee benefits, and to identify the issues within superannuation that were of particular concern. Second, characteristics of lobbying companies are compared with non-lobbying companies to identify whether the types of arguments put by lobbyists are indicative of systematic differences between lobbying and non-lobbying companies. It is found that companies responding to ED 53 were predominantly concerned with issues relating to defined benefit superannuation plans and the adverse effects of the proposals on income volatility. Consistent with this, companies sponsoring defined benefit plans were more likely to lobby against the proposals. Companies that chose to lobby were also larger in size and had higher income volatility than non-lobbying companies. The paper provides a mapping between the arguments used by lobbying companies and their economic characteristics and evidence that, at least in the case of superannuation issues, lobbying behaviour truthfully revealed the preferences of lobbyists. The findings differ from those of comparable U.S. studies, the most obvious reason for this being institutional differences. This underscores the need to control for institutional differences and to exercise caution in generalising results across countries.

Paradox of choice in a mandatory pension savings system: challenges for Australian retirement income policy

As the Australian pension system has become increasingly privatized and less regulated, decisions about the quantum and nature of pension investments have progressively shifted to pension fund members. This choice environment provides members with the ability to control their own pensions, but it also creates challenges for ensuring pension assets are managed in way that will maximize returns and, ultimately, retirement benefits. Government initiatives to address these challenges have principally focussed on disclosure and education and not on the more pervasive behavioural constraints that limit the effectiveness of the existing policy. We advocate policy solutions consistent with libertarian paternalism where the government provides a competitive choice environment, but actively intervenes to set suitable pension savings and investment defaults.

Financial Literacy and Pension Investment Decisions

The call for enhanced financial literacy amongst consumers is a global phenomenon, driven by the growing complexity of financial markets and products, and government concerns about the affordability of supporting an ageing population. Worldwide, defined benefit pensions are giving way to the risk and uncertainty of defined contribution superannuation/pension funds where fund members now make choices and decisions that were once made on their behalf. An important prerequisite for informed financial decision-making is adequate financial knowledge and skills to make competent investment decisions. This paper reports the findings of an online survey of the members of a large Australian public sector-based superannuation fund and shows that although respondents generally understand basic financial matters, on average, their understanding of investments concepts, such as the relationship between risk and returns, is inadequate. These results highlight the need for education programs focusing specifically on developing fund members’ investment knowledge and skills to facilitate informed retirement savings decisions.

Cash-based related party transactions in new economy firms

Purpose - This paper aims to investigate associations between related party transactions (RPTs) and governance and performance factors of new economy firms. Design/methodology/approach - Previous research has examined the RPTs of large US firms. In contrast, the authors focus on smaller, newly listed Australian firms. Referred to as “commitments test entities” (CTE), these firms are distinguished by the unique Australian Securities Exchange listing requirements applying to them, and associated additional (quarterly cash flow) reporting requirements. Findings - While strong corporate governance characteristics may be expected to constrain the amounts of payments and loans to related parties, we find only weak evidence to support that proposition. The results show that financial condition dominates the decision to engage in RPTs and suggest that external monitoring (associated both with larger firm size and the quarterly reporting phase) are a more effective restraint on the magnitude of RPTs for these high-risk CTE firms. Research limitations/implications - The findings are generally consistent with the “conflict of interest view” proposed by Gordon Practical implications - The findings suggest that external monitoring may be a more effective control over RPTs than internal corporate governance mechanisms in this institutional context of small “cashbox” firms. Since RPTs may not be in the best interests of shareholders, extending mandatory RPT disclosures to all periodic cash flow reports warrants further consideration by regulators. Originality/value - This study contributes to the limited research on the effects and implications of RPTs.

Rethinking Financial Literacy in the Aftermath of the Global Financial Crisis

Systemic risks and other factors that contributed to the global financial crisis have highlighted the need to reconsider the scope and nature of financial literacy initiatives and programs. In this article, we argue the case for rethinking financial literacy and the need for integrated solutions that explicitly incorporate solutions to behavioural shortcomings exhibited by individuals in their financial decision-making. While recognising the need to consider behavioural biases in individuals’ financial decisions, to date regulatory responses have largely ignored those biases in their proposed education and other strategies designed to address poor financial literacy and improve financial disclosure that, in turn, will improve financial decision-making.

The impact of regulatory reforms on the earnings forecasting behaviour of IPO firms

Purpose – The purpose of this paper is to jointly assess the impact of regulatory reform for corporate fundraising in Australia (CLERP Act 1999) and the relaxation of ASX admission rules in 1999, on the accuracy of management earnings forecasts in initial public offer (IPO) prospectuses. The relaxation of ASX listing rules permitted a new category of new economy firms (commitments test entities (CTEs)) to list without a prior history of profitability, while the CLERP Act (introduced in 2000) was accompanied by tighter disclosure obligations and stronger enforcement action by the corporate regulator (ASIC).Design/methodology/approach – All IPO earnings forecasts in prospectuses lodged between 1998 and 2003 are examined to assess the pre‐ and post‐CLERP Act impact. Based on active ASIC enforcement action in the post‐reform period, IPO firms are hypothesised to provide more accurate forecasts, particularly CTE firms, which are less likely to have a reasonable basis for forecasting. Research models are develo...

Applying Conceptual Framework Principles to Superannuation1 Fund Accounting

The Australian accounting standard AAS 25, Financial Reporting by Superannuation Plans, was the first pension accounting standard internationally to apply established conceptual framework (CF) principles. In Australia those principles have guided standard setting for more than a decade. However, AAS 25 has been criticized for failing to provide useful financial information. The analysis provided in this article addresses this paradox. The findings reveal major anomalies in AAS 25 associated with the treatment of accrued benefits that distort financial position and performance measures. The conceptual flaws in the standard are attributed to the misapplication of CF principles and an absence of adequate guidance in the CF for non-corporate entities such as superannuation funds. Distorted financial information produced by superannuation plans has potential undesirable taxation and social outcomes. Consequently, there is an urgent need to update the Australian and international conceptual frameworks to provide guidance for revising accounting standards that better reflect current fiduciary and ownership relationships in non-corporate entities such as superannuation funds. [ABSTRACT FROM AUTHOR]

Corporate Social Capital and Firm Performance

Traditional corporate social capital formulations have been based on a firm’s positioning within its network of market place alliances. This paper extends this model by incorporating additional firm status attributes into an integrated model for corporate social capital. An empirical study of some 155 firms in the global Information Technology sector was conducted, exploring the linkage between elements of corporate social capital and firm performance. A key contribution of this research is the specificity of the linkages identified between particular aspects of corporate social capital and firm performance. The results find that human capital is the most predictive of firm performance. Beyond human capital, a firm’s market network centrality and financial soundness were significant predictors for at least one firm performance measure. Surprisingly investments in internal capital and R&D were found in some circumstances to detract from a firm’s performance. Interestingly these effects were found to be moderated by financial soundness i.e. the negative effects were largely for firms with poor financial performance.

Were regulatory changes in reporting “abnormal items” justified?: Evidence of intra‐period classificatory earnings management practices in Australia

Purpose – Managers generally have discretion in determining how components of earnings are presented in financial statements in distinguishing between “normal” earnings and items classified as unusual, special, significant, exceptional or abnormal. Prior research has found that such intra‐period classificatory choice is used as a form of earnings management. Prior to 2001, Australian accounting standards mandated that unusually large items of revenue and expense be classified as “abnormal items” for financial reporting, but this classification was removed from accounting standards from 2001. This move by the regulators was partly in response to concerns that the abnormal classification was being used opportunistically to manage reported pre‐abnormal earnings. The purpose of this paper is to extend the earnings management literature by examining the reporting of abnormal items for evidence of intra‐period classificatory earnings management in the unique Australian setting.Design/methodology/approach – This...

Unintended consequences of regulatory reporting requirements for small and medium size construction entities: Australian evidence

The Queensland Building Services Authority (QBSA) regulates the construction industry in Queensland, Australia, with licensing requirements creating differential financial reporting obligations, depending on firm size. Economic theories of regulation and behaviour provide a framework for investigating effects of the financial constraints and financial reporting requirements imposed by QBSA licensing. Data are analysed for all small and medium construction entities operating in Queensland between 2001 and 2006. Findings suggesting that construction licensees are categorizing themselves as smaller to avoid the more onerous and costly financial reporting of higher licensee categories are consistent with US findings from the 2002 Sarbanes-Oxley (SOX) regulation which created incentives for small firms to stay small to avoid the costs of compliance with more onerous financial reporting requirements. Such behaviour can have the undesirable economic consequences of adversely affecting employment, investment, wealth creation and financial stability. Insights and implications from the analysed QBSA processes are important for future policy reform and design, and useful to be considered where similar regulatory approaches are planned.