Maxwell

Content

Content........................................................................................................................... ........ .......... 1 Company Background Backgroun d............................................................................................ .................................................................................................... ................ ........ 2 Issue 1 – Reporting Standard Stan dard - Overstated Overs tated the Profit Prof it in 1970’s 197 0’s............................................. .............................................3 3 The successful investigation carried out by Price Waterhouse showed the important of  unify accounting standards. standards. The report was honored honored as an instrument in the accounting  profession deciding deciding to confront confront the issue of of uniform accounting accounting standards. standards. An Accounting Standards Committee Committee had been set up since then in order to unify the accounting standards in financial reporting treatments treatments and audits. However However,, in order to keep the credibility of  insisting accountants, government government was invited by account profession to impose some minimum standards for consistent financial reporting treatments......................................... ........................................ 3 Issue 2 – Improper Use of o f Fund in 1990’s 199 0’s................................................................ ........................................................................ ............. ..... 4 The length of time one accountancy firm can audit the books of a particular company or  group of companies should should be limited. In this case, Coopers had worked worked for Maxwell since the early Seventies, by changing the firm in a regular time can avoid the impacts of  “window dress” ...................................................................................................................... . 4 Issue 3 – Independent Non-Executive Directors ................................................................... 5 Issue 4 – Power and Authority................................................................................................ 6 There should be a clearly accepted division of responsibilities at the head of company, company, which would ensure a balance of power and authority. If the chairman is also the chief  executive, like Maxwell, Maxwell, it is essential that there should be a strong and independent element on the board, with a recognized senior member....................................................... member....................................................... 6 Who is to Blame for? ....................................................................................................... ....... 7 Main Recommendations Recommenda tions.............................................................................................. ...................................................................................................... ........... ... 8

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Company Background

Robert Maxwell was a British media proprietor and famous in the media industries from the 1960s till now. The following timeline illustrates how he had expanded his business empire since his young. May

1951Pergamon Press (Butterworths) is established

July

1964Pergamon Press is floated on London Stock Exchange 1969Maxwell is defeated in the battle for the News of the World 

June

1969A disputed takeover bid for Pergamon from Leasco

July

1971Department of Trade and Industry (DTI) critical report 1974Regains control of Pergamon

Feb.

1981Gains control of British Printing Corporation (BPC) Renamed British Printing and Communication Corporation (BPCC) 1984Purchases Mirror Group Newspaper  1987Bids unsuccessfully for the US publisher Harcourt Brace Jovanovich Renamed BPCC as Maxwell Communications Corporation (MCC) 1988Purchases US publisher Macmillan for $2.6bn

March

1991Purchases New York Daily News newspaper  Pergamon is sold for £440m Been brought down in scope to an English-language weekly newspaper 

May

Mirror Group Newspapers (MGN) is floated on London Stock Exchange

 Nov.

Maxwell vanishes overboard from his yacht Suspends trading in MCC and MGN shares

Dec. March

Maxwell’s business empire collapses 2001DTI report into MGN

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Issue 1 – Reporting Standard - Overstated the Profit in 1970’s Summary

In 1969, since Maxwell wanted to grow his business empire, with Pergamon as the basis, he made an agreement with Saul Steinberg (head of Leasco), that merge their business, with Leasco purchasing Pergamon Press and Maxwell accepting a subordinate role in the combined enterprise. Leasco was a profitable company with $27m profits and $1bn total assets in 1968, Maxwell therefore wanted the accounts of Pergamon could show a substantial profit at that time since this would definitely support the share price and assist his negotiations with Leasco. Problems

Sunday Times questioned about the audit procedures used by Chalmers Impey on Pergamon’s accounts. For instance, alleged that stocks had been overvalued. Also, Leasco’s financial advisers find that it was difficult to extract necessary information from Pergamon, to receive answers to their questions from Maxwell, and started to doubt about the future  profitability of Pergamon. Results

After the independent audit of Pergamon’s 1968 financial statements carried out by Martin Harris, he found that the profit should be $140,000 instead of $2.1m. Chalmers Impey then resigned as an auditors and Maxwell was investigated by the Board of Trade (renamed as Trade and Industry, DTI subsequently) in 1969. In 1971, the report published by DTI, it stated that Maxwell was not in their opinion a person who can be relied on to exercise proper stewardship of a publicly quoted company. Solutions

The successful investigation carried out by Price Waterhouse showed the important of  unify accounting standards. The report was honored as an instrument in the accounting  profession deciding to confront the issue of uniform accounting standards. An Accounting Standards Committee had been set up since then in order to unify the accounting standards in financial reporting treatments and audits. However, in order to keep the credibility of insisting accountants, government was invited by account  profession to impose some minimum standards for consistent financial reporting treatments.

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Issue 2 – Improper Use of Fund in 1990’s Summary

In 1990, Maxwell Communications Corporation (MCC) had to repay part of $3 billion  borrowings; the company faced a financial crisis, so he made a decision to float 49% of Mirror  Group of Newspaper (MGN), but Maxwell pledging shares in MCC as collateral for loans. In 1991, Maxwell ran short of cash, sold the Dutch group Elsevier for ￡440. MGN and MCC’s shares were also pledged as collateral for further loans to Maxwell’s private companies. Maxwell used the pension fund ($767million) to made substantial investments in Maxwell Communication Corporation shares, this did not become known to the trustees of the funds. The accounts were "window dressed" Results

After the death of Robert Maxwell, his empire collapsed. His sons, Kevin Maxwell and Ian Maxwell were arrested by London Police working with Serious Fraud Office (SFO), Kevin Maxwell admitting debts of ￡400million, and Goldman Sachs was disciplined by their  regulatory organization. As a result of the collapse, many pensioners suffered anxiety and loss and the employees of Mr Robert Maxwell’s companies suffered uncertainty and redundancy because the pension fund asserts are likely to be worthless if the company goes into liquidation. Solutions

Maxwell should sell assets for cash if additional fund was needed, he used the pension fund in an improper way and used the loans to support his private companies was not acting in a good corporate governance. On the other hand, Maxwell should increase the transparence of the use of loans. Although the business decisions may not need to disclose, the shareholders have the right to know how the loans were used. The length of time one accountancy firm can audit the books of a particular company or  group of companies should be limited. In this case, Coopers had worked for Maxwell since the early Seventies, by changing the firm in a regular time can avoid the impacts of “window dress”

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Issue 3 – Independent Non-Executive Directors Problem

MGN ran under the control of Robert Maxwell, he was an executive chairman and the independent directors had not been effective in exercising control over the chairman. Robert Maxwell had not reacted favorably when he had been told that non-executive directors have to  be appointed, but had eventually agreed that it was essential. Nevertheless, non-executive directors had no function in Robert Maxwell’s world.

Solutions

Independent Non-Executive Directors (INED) should include in the board with sufficient caliber and number for their views to carry significant weight. Also, they should bring an independent judgment to bear on issues of strategy, performance, resources, and standards of  conduct. Besides, the majority of INED should be independent of management and free from any  business or other relationship which could materially interfere with the exercise of their   judgment.

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Issue 4 – Power and Authority Problems

Robert's death triggered a flood of revelations about his controversial business dealings and activities. He had used hundreds of millions of pounds from his companies' pension funds to finance his corporate debt, his frantic takeovers and his lavish lifestyle without adequate authorization. Result

Maxwell filled for bankruptcy protection in 1992. Robert’s sons, Kevin and Ian, were declared bankrupt with debts of £400 million. They went on trial for fraud with two former  directors in 1995. Solutions

There should be a clearly accepted division of responsibilities at the head of company, which would ensure a balance of power and authority. If the chairman is also the chief  executive, like Maxwell, it is essential that there should be a strong and independent element on the board, with a recognized senior member.

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Who is to Blame for?

Robert Maxwell failed to carry out all his duties that he had undertaken as a director, and his sons Kevin and Ian Maxwell should be blamed for. Kevin gave very substantial assistance to his father; Ian signed the documents without considering the implication. The accountants Coopers and Lybrand Deloitte bore a major responsibility for failing to report pension fund abuses to trustees. Goldman Sachs also bore substantial responsibility for manipulation of the MCC.

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Main Recommendations

Lack of internal controls was a huge problem on Maxwell’s case. Had auditors and regulators insisted on changes, the magnitude of the fraud would have been less devastating. Department of Trade and Industry suggests that although many of the deficiencies in legislation and regulation which permitted the events at Mirror Group Newspapers to occur  have been rectified, there remain some important matters which still require being addressed or  considered including: 1. Providing more assistance to and encouraging training for trustees who perform the vital role of the stewardship and investment of Pension Schemes. 2. Providing a statement of Guidance on the role and duties of advisers on a flotation. 3. Building on the radical changes in particular by imposition of severe sanctions against companies who do not report fraud. 4. Addressing the regulation of markets in securities to provide more effective control over  firms that operate on a transnational basis to ensure the fair, open and transparent conduct of  such markets and more effective investor protection. 5. Providing more detailed guidance on the audit of business "empires". 6. Addressing the issues relating to auditor independence with a view to maintaining public confidence in the audit and discouraging a firm which provides audit services to a company from acting as reporting accountants on that company. 7. Making non-executive directors more accountable, separating the offices of chairman and chief executive, and providing extra statutory Guidance on the duties of all directors to amplify the general principles that it is proposed be incorporated into the Companies Act. 8. Avoiding an "expectations gap" by making the public aware that regulation cannot entirely eliminate fraud, malpractice or manipulation of the markets.

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Lessons Learn from the Case

The most important lesson from all the events is that high ethical and professional standards must always be put before commercial advantage. The reputation of the financial markets depends on it. On the other hand, the ultimate victims of major frauds are often the employees of the defrauded companies. Careers and finances of many mid- and senior-level employees can be destroyed for life. Big frauds are orchestrated at the top for the benefit of the owners or senior management, not for the employees. The biggest defense may be an educated workforce, so employees are their own watchdogs. Furthermore, there was no clear guideline for corporate governance before cases like Maxwell happened, and Cadbury Report (1992) is indeed the first guideline in the world that aims to investigate the British corporate governance system and to suggest improvements restore investor confidence in the system. Since then, many countries have finally learned the lesson from Maxwell and set out its own Code of Practice to give recommendations on the arrangement of company boards and accounting systems to mitigate corporate governance’s risks and failures. The positive effect of corporate governance on different stakeholders ultimately is a strengthened economy, and hence good corporate governance is a tool for socioeconomic development.

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The above table shows the code of corporate governance and key code recommendations in relation to four core areas identified by EIRIS (Ethical Investment Research Services). As we can see from the graph, after all these years, UK’s corporate governance is now well-developed and even superior among the developed countries. A detailed analysis of  several UK corporate governance reports also revealed that the UK has been able to influence US corporate governance regulation. To conclude, corporate governance is one of the critical issues in business today. For companies, good governance means securing access to broader based, cheaper capital. For investors, a commitment to good governance means enhanced shareholder value. For both, good governance equals good business.

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Bibliography Information 

The Pergamon phenomenon 1951–1991 Robert Maxwell and scientific publishing

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EIRIS How Global Is Good Corporate Governance

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The DTI Report

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