Introducing a new age of materialism

Can the decline in corporate ethical standards be blamed on the increasingly materialistic society in which we live? Barry Cooper and Philomena Leung discuss why they think it can

Accountants, auditors, investment banks and law firms, whose independence and integrity had traditionally been relied upon, were often seen to join the rush, under the threat of being left behind in access to riches from the new dot.com revolution. In this new age of corporate and professional behaviour, the belief in the revolution was so pervasive that the gatekeepers became servants to the new players, rather than remain as the traditional, independent guardians. The traditional brakes on the system no longer worked. All too often, those whose mandate it was to act as a gatekeeper were tempted by misguided compensation policies within their firms, which emphasised more fees at whatever cost, to forfeit their autonomy and independence.

Excess in corporate life isn't new. However, this time, an increasingly angry public has seen its superannuation and pension savings badly mauled, and respect for corporate managers, regulators and the accounting profession has arguably sunk to an all time low. Much has been written on the corporate greed and betrayal of the public trusts by accountants and auditors, and any analysis of three of Australia's biggest recent corporate scandals, namely HIH Insurance, Harris Scarfe and One.Tel, provides compelling evidence of how accountants and auditors, together with other professionals such as lawyers, failed in their gatekeeper role.

However, taking a different perspective, the recent spate of corporate collapses have been categorised by social commentators in Australia, such as Ross Gittins and Hugh Mackay, as the corporate greed and collapses arising from a new age of materialism that we as a community have embraced. They have observed that corporate greed in recent times is as much about morality and culture as about economics. Also, the Hon. Justice Owen, Royal Commissioner for the HIH Insurance collapse, lamented that for all the breaches of law and flaws of the system he identifies, for all the thoughtful remedies he advances, the core problem is something he simply cannot fix. Australia's worst corporate disaster, Owen suspects, was at heart a profound failure of morality.

During the 1990s, there were fundamental changes in Australian society, together with changes in corporate and professional culture. The rise of economic rationalism in the 1980s, which gathered pace in the 1990s, had been the politicians' response to the electorate's increased materialism and the higher living standard that a more efficient economy could deliver. The advice by economists to politicians on the need to cut protection and reduce government regulation, was straight out of Economics 101 and which had been doctrinaire and politically unpopular until the 1980s. The reforms have worked but an ancillary development has been the way money has invaded our lives where it formerly played a lesser role. Examples in Australia are how sport has been taken over by media companies and professionalised; how the weekend has been commercialised, which means more of us now have to work on weekends; how we are now more litigious so that after an accident we think about how we can turn misfortune into cash; how school fetes are cancelled because public risk insurance is too expensive; how houses are getting bigger as families shrink. So while we are all happy to attack evil economic rationalists, greedy businessmen or stupid politicians, it's just not done to attack materialism, as that would come altogether too close to home.

However, this new age of materialism is not a peculiarly Australian phenomenon. The American social researcher, David Myers, has provided impressive evidence for similar changes in values in the United States. He observes that average Americans have doubled their real incomes and have access to relatively cheap goods and services such as espresso coffee, mobile phones, four-wheel drive vehicles and the Internet. And, yet, he also observes that Americans have less happiness, more depression, more fragile relationships, less communal commitment, less vocational security, more crime and more demoralised children. Through a series of polls, Myers noted, for example, that the proportion of students going to college believing it essential they 'become well-off financially' rose from 39% in 1974 to 74% in 1990 and that, over the same period, the proportion that hoped to 'develop a meaningful philosophy on life' slumped from 76% to 43%. This reversal stayed unchanged throughout the 1990s.

Rewards

The point is that once you appreciate the way our community values change, the reason for many of the developments in the corporate world becomes clearer. The new age of materialism could help explain why, in recent years, Australian CEOs have been awarding themselves unprecedented and huge pay rises and have become much more ruthless in their attitudes to customers and employees. Corporate boards often justify astronomical salary and bonus payments by the need to compete on the international market and to reward CEOs for the positive impact they can have on the share price. However, with the average wage for Australians will full time jobs being $45,000 per year in 2002, the social researcher Hugh Mackay observes that the community perception of employee exploitation is heightened by revelations of multi-million dollar salaries and perks for senior executives. Even after the criticism of the excesses of 2001-2002, the governance debacle relating to rogue trading at the National Australia Bank (NAB) during 2004, which resulted in the resignation of the CEO, meant he walked away from the bank with a reported $3.27m payout, including a payment in lieu of six months' notice. However, he had to forgo almost $1.3m in shares. Nevertheless, all of this was cold comfort for NAB's shareholders and the bank itself, which has endured a substantial loss of reputation along with the money.

This heightened materialism, as discussed above, also provides a context for the arguably declining ethical standards among company directors, accountants and auditors. David Knott, the then chairman of the corporate regulator the Australian Securities and Investment Commission, has strongly criticised the outbreak of management greed, the failure of boards to put a brake on excessive and structurally unsound remuneration practices, the focus on short term pay-offs and the behaviour of analysts, and at least some auditors, in foregoing their ethics in return for record level fees and commissions. At the same time, others have also lamented the regulators caught sleeping.

A review of the key features of recent collapses illustrates a number of commonalities. These include a dominating leader, a culture of outputs over prudence, a series of earnings management practices seemingly encouraged by senior management, and a wilful blindness about discrepancies. An unfortunate symptom of ethical standards being more lip-service than practice prevailed in many of the major collapses, including Arthur Andersen, Enron, WorldCom and HIH Insurance. Consequently, in a corrupted corporate system fed by stock options, boardroom perks and consulting and underwriting fees, it seemed that enough was never enough. The seeds to the crisis in 2001-2002, particularly in Australia and the United States, were sown in the technology stock boom in the early 1990s, with the now bankrupt e-commerce companies then hailed as the way of the future. At the same time, the telecommunications revolution, in a new world of unregulated competition, required billions of dollars of investment in fibre optic cables, satellites and microwave towers. For example, the strategic decision by the now collapsed One.Tel to invest in its own telecommunications system was a major reason behind its eventual downfall. These new technologies demanded financial manipulation schemes to ensure that share prices held up and options, huge salaries and bonuses would continue to be paid. Even a first year accounting student could work out that this was all financially unsustainable.

As early as 1999, the then managing partner, Arthur Andersen US, was quoted on the firm's independence and ethical standards CD-ROM as saying that 'the day Arthur Andersen loses the public trust is the day we go out of business'. The rest is history and the accounting profession is now subject to more regulation than ever before because of its betrayal of public trust. Nevertheless, is it just the unethical and greedy accountants, auditors, investment bankers, lawyers, CEOs and CFOs that are to blame for arguably the worst period of corporate excess in modern times? As argued by Gittins and Mackay in Australia, and Myers in the US, the emergence of the new materialism is something for which we are all responsible and which provided the climate for corporate greed to flourish.

So, armed with the public knowledge of the recent corporate crises, what should be the accounting profession's future perspective? Do we really appreciate the problems? The IFAC research report, Rebuilding Public Confidence in Financial Reporting, released last July, appears to convey the message that there were a number of deeper problems. Is it the educational process that underpins the professionalism of qualified accountants, or is it just societal values? What happened to the monitoring of professional codes and corporate codes? While some accountants and CEOs are now reflecting on their deeds behind bars, we in the community should ponder on how values have changed. We should all perhaps reflect on our pursuit of increased materialism, and how such materialism has impacted upon our daily life and expectations. The sharply rising share prices, property prices and superannuation fund balances we all came to expect, were never really sustainable. Maybe we all, in some way, contributed to the new age of materialism and the resultant corporate and professional greed. Maybe there is also someone else to blame.

Barry J Cooper is professor of accounting education at RMIT University and Philomena Leung is professor of accounting at Deakin University, Australia.