Case study in aggressive financial reporting

hybrid debt-equities in Australia

Tyrone M. Carlin, Nigel Finch

Research output: Chapter in Book/Report/Conference proceedingConference proceeding contribution

Abstract

With a global epidemic of corporate collapses and accounting irregularities at the turn of the new millennium, many commentators have focused on the creative uses of accounting to distort financial performance, and hence undermine the usefulness of financial reporting. This has sparked a crisis of confidence in accounting and corporate governance, which today is being tackled with increased regulation and the introduction of international accounting standards. Largely unnoticed over this period, has been the activity of many Australia listed corporations increasing their use of hybrid debt-equity securities. For issuers, these securities typically combine the dual attractions of high tax effectiveness and low cost of funds, while investors have exhibited strong demand for these securities because of the enhanced yields they typically offer in comparison to ordinary equity securities. From a financial reporting perspective however, these instruments can present a range of threats to transparency, consistency and comparability. The unconventional design and complexity of these securities can offer their issuer an unequalled regulatory arbitrage which, from a creative accounting perspective, provides ample opportunity to distort the true financial performance of the corporation. This paper reports on a study of a sample of hybrid securities issued by large Australian listed corporations. The paper focuses on the key financial reporting impacts of this sample for their 2004 reporting period. From a balance sheet perspective these include the frequency with which the securities were classified as equity and the resulting impact on leverage ratios and other traditional risk measures. The impact of these securities on reported earnings, key financial performance metrics and operating cash flow is also discussed.
Original languageEnglish
Title of host publicationProceedings of the Second International Business Research Conference
EditorsM. Hoque
Place of PublicationSydney
PublisherWorld Business Institute
Pages1-20
Number of pages20
ISBN (Print)0646455346
Publication statusPublished - 2005
EventInternational Business Research Conference (2nd : 2005) - Sydney
Duration: 5 Dec 20058 Dec 2005

Conference

ConferenceInternational Business Research Conference (2nd : 2005)
CitySydney
Period5/12/058/12/05

Keywords

  • hybrid securities
  • financial reporting
  • creative accounting

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