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To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jaccpubpol.2004.10.003 Byline: Paul Barnes Keywords: Audit; Going concern; Bargaining power; Misinformation Abstract: It is shown that, in the absence of transaction costs and in line with the Coase Theorem, the going concern decision is efficient in the sense that bias arising from either Type I or II errors is not expected. However, when transaction costs in the form of legal costs, are introduced, bias is expected. The direction of the error depends upon the auditor's relative bargaining power. It is also shown that its relative bargaining power provides an incentive for the client company to mislead. Finally, certain empirical observations pertinent to this analysis are discussed together with the regulatory implications. Author Affiliation: Nottingham Business School, Burton Street, Nottingham NG1 4BU, UK

The effect of transaction costs on auditorEs going concern decision is analyzed in the line of Coase Theorem. It is noted that in the absence of transaction costs, bias arising from Type I and II errors is not expected but on introduction of the transaction costs, bias is expected and the direction of the error depends upon the bargaining powers of the auditor. It is also noted that relative bargaining provides an incentive for the client company to mislead.

Results of a survey conducted by the University of Nottingham Business School reveal the high level of susceptibility of organizations to financial fraud among EU companies. Furthermore, respondents reported their belief that incidence of frauds will escalate. Fraud was found to be less common among British organizations. Also, variation in opinion was also found among different industries, with respondents from the insurance and construction sectors considering themselves to be vulnerable and those from education and manufacturing believing themselves to be free from fraud. Larger organizations were found to be more susceptible. The main reasons given for fraud were economic, followed by the implementation of new technology. Better fraud management can be achieved through improvements in internal controls.

The recent scandals involving British football underscore the need for the UK Football Assn (FA) to address the issue of financial controls. Terry Venables and Brian Clough, widely considered to be two of the best football club managers in the country, were at the heart of these scandals. Venables was disqualified for directorship in one UK company for violating company law inside and outside the area of football, while Clough and his assistant Ronnie Felton are being accused of misconduct for accepting illegal payments. The FA denies that such behavior has become so commonplace in British football that fans have come to consider it as an acceptable price of success. Th association stresses that illegal practices can now be more easily spotted because it has adopted more stringent financial regimes.

The prospects of UK's building societies industry for 1993 appear to be dim. The deregulated industry's many difficulties include contending with the effects of competition introduced by the Building Societies Act of 1986, falling house prices and losses due to bad debt provisioning, arrears, repossessions, and mortgages. If they continue to incur losses, it is possible for UK's eight biggest societies to fail to meet the capital adequacy requirement imposed by the Building Societies Commission as a sign of the building societies' safety. Presently, the 'desired capital' for the entire industry is placed at 4.72% of 1990's shares and deposits liability, while the 'capital available' is placed at 5.94%. With the industry's poor performance, the current margin between the desired capital and the capital available is likely to diminish.

The UK Building Societies Act of 1986 deregulated the building societies, which previously had been limited to making mortgage loans. The Act allowed building societies to compete with banks for business up to set aggregate limits, and allowed building societies to offer unsecured loans to companies. Building societies had little expertise in corporate lending, and many building societies made questionable loans in order to gain market share in a competitive market. Building societies provided a stabilizing force in the UK economy prior to 1986, but with the recent recession and the high exposure of building societies to questionable loans and the declining real estate market, the UK may experience a banking crisis similar to the secondary banking crisis of 1973, which was brought about by declining property prices.

The public has been led to believe that the successful prosecution of inside traders who manipulated the 1986 Guinness-Distillers takeover bid is evidence that the UK financial markets are operating within the law. However, a survey of data connected with the takeover bids of approximately 600 UK firms since 1987 indicates that insider trading in securities has been prevalent in the UK financial markets since the Guinness affair. The data reveals an average 25% increase in share price prior to the public announcement of a takeover bid. Insider trading in securities is a fact of life, and if insider trading were legalized, investors could explicitly factor the effects of an imminent takeover bid into their calculations when making a decision on whether to accept a bid offer.

The deregulation of the savings and loan (S&L) industry in 1982 led to a period of abuse and fraud and poor investments that has led to 350 S&Ls being placed in receivership or in the Federal Savings and Loan Insurance Corp's Management Consignment Program. Approximately 500 more S&Ls are economically insolvent, and the cost of the S&L debacle is estimated at $300 billion. After deregulation, the S&Ls turned to areas in which they had little expertise, particularly real estate. S&L auditors were cited by the US General Accounting Office with the failure to properly supervise the industry and with failing to detect widespread fraud. The lessons for other countries considering deregulation are that prior planning is necessary before deregulation is implemented: adequate control systems should be in place to prevent fraud, and adequate resources must be provided to ensure feedback and control.

Research by the Universities Funding Council reveals that accounting research is rated low. This is probably the result of the increased use of creative accounting resultant increase in financial scandals, which is being ignored by researchers, and the lack of independence of academic accounting researchers from the Institute of Chartered Accountants in England and Wales. The academic arm of accounting is passive and research often does not relate to practice. Academic accounting researchers are in league with the accounting profession to keep financial reports credible by keeping them complex, thus enhancing their authority. Academics serve to give justification to the complexity, which is enforced through standardization. Academic accounting needs to recognize ethics just as the more established vocational disciplines such as medicine have, and need to take a disinterested approach to the fundamental issues.

The public share floatation of Abbey National, the first building society to convert to PLC status, was chaotic. The offer of 750 million shares to existing members and employees was oversubscribed, allotments were not made in full, and shareholders were prevented from selling their shares until they received definitive share certificates. The Building Society Commission criticized Abbey' poor assessment of the conversion's consequences and its implementation of an inadequate conversion timetable but took no regulatory action. The Abbey floatation reveals to building society shareholders the volatility inherent in public share ownership and illustrates the ineffectiveness of regulators. The antagonism created by the floatation has increased the likelihood of the share holders welcoming a takeover of Abbey.

Statistics on business failures and audit reports in England indicate that many companies that fail do not receive qualified audit reports, and that many companies that do get a 'going concern' qualification survive. One reason for this gap is the way in which auditing standards operate. Conflicts of interest may also contribute; auditors may be reluctant to risk losing a client by issuing a going concern report. A new auditing guideline is needed, and the role of the auditor should be more clearly defined. It may no longer be enough for auditors to verify that a company's financial statement is fairly presented. Auditors may also have to start making clear statements that companies are facing financial difficulties.

The events, legal issues, regulatory arguments, financial consequences and court battles involving the insolvency of four British corporations operated by Jim Raper are detailed. The companies involved are St. Piran, Gasco, Milbury and Westminster. Ethically questionable practices involving Raper which lead to the collapse of Milbury are summarized. Investigations are still pending.

A report by the Department of Trade and Industry reveals how inadequate controls in the London Stock Exchange coupled with the unlawful activities of Jim Raper destroyed Milbury plc.

Several chartered accountants have been investigated by the Institute of Chartered Accountants in England and Wales for their role in the Glamorgan Building Society scandal. Errors and omissions in the Glamorgan's accounts were first discovered when Glamorgan was acquired by another building society. Subsequent investigations revealed conflicts of interest and advances made on misleading information. The Disciplinary Committee of the Institute expelled one of the bank's directors, admonished another director, and reprimanded the bank's auditor. No other disciplinary measures have been taken against the individuals involved in the scandal, and the Registry of Friendly societies and other professional bodies have made no attempt to investigate the matter.

In Great Britain, under the Fair Trading Act of 1973, the Monopolies and Mergers Commission investigates mergers that: involve control over 25 percent (or more) of British markets, result in 30 million pounds sterling (or more) of total corporate assets, or adversely affect the public interest. The law and the Commission were established to encourage competition, fair pricing practices, reduced consumer costs, and balanced distributions of industry and employment. However, with the proliferation of mergers in Britain, some critics of the system point out that proposed mergers do not have to benefit the public (since all that must be demonstrated is that the merger will not hurt the public). Moreover, while shareholders benefit economically from most mergers, the economy as a whole seldom benefits from such reorganizations since they move industries closer to monopolistic markets.