ACC320 Contemporary Issues in Accountings -

Introduction

The economic costs associated with the failure of business are relatively large. The major parties that are affected severely because of business failure include the capital providers, government, employees and the management (Spaliara & Tsoukas, 2017). The term “corporate failure” refers to the discontinuation of the operations of a company that further leads to an inability to reap revenue or profit or pay the expenses of business. In other words, corporate failure is a term that is used for the inability of the organizations, to conform to the strategic path that was developed for achieving the legal and financial objectives (Salman et al., 2015).

The corporate failures occur usually because of the incompetence, poor management and the bad marketing strategies. There are a number of causes behind a corporate failure. This research is one of the efforts to explore the major causes

Practical Motivation

Organizations are now operating in a highly dynamic business environment and are exposed to a number of threats that can lead to failure of the organizations. The issue of corporate failure is of high interest for managers, accountants, general public and regulators. Corporate failures affect the whole organization including all its internal and external stakeholders such as customers, employees, shareholders and government (Kusumaningtias et al., 2016). This is because corporate failures result in huge financial losses. The financial crisis hits the organization that is operating in a wider economy, and the number of organizations that are filing for the insolvency is also increasing. The contemporary issues of corporate failure are important for the organization’s stakeholders and the researchers who are exploring the issues of accounting. This is because it is one of the complex issues that leads to closure and collapse of an organization (Lakshana & Wijekoon, 2012).

Theoretical Motivation

The topic that is being addressed in this research which is corporate failure is subjected to research and discussion by the accountants, equity shareholders, bankers, creditors, management experts and the marketing experts. In addition, this research topic has also attracted the attention of international and local commentators, as the corporate failures have the potential to destabilize the economic system, by increasing the levels of unemployment, poverty, increase in crime rates and reduced tax earnings. There is however, a lack of studies that have been conducted in Australia regarding the impact, causes and factors influencing the corporate failure. This research is one of the efforts to contribute in the existing theory of corporate failures or extend the research on corporate failures.

Literature Review

Lakshana & Wijekoon (2012) conducted a study on determining the influence of corporate governance characteristics on the corporate failures. Some of the major characteristics of corporate governance that are related negatively with the corporate failure include the size of the board, directors, audit committee and the board members. On the other hand, the findings of study indicate that duality of the CEO is positively associated with likelihood of corporate failure (Lakshana & Wijekoon, 2012).

Allen, Imbierowicz, & Rauch (2016) also conducted a study to determine the role of corporate governance in the financial crisis and the corporate failures. The authors indicated that the ownership structure is one of the major elements of corporate governance that have an influence on the corporate failures (Berger et al., 2016). In addition, the author also indicates that the non – CEO managers also influence the corporate failures, as they take high risks that results in the failure of the organization (Berger et al., 2016).

The stakeholder theory is a theory that that explains the relationship between stakeholders and corporates. The stakeholders can be defined as the individuals or the groups that have an influence on the achievement of purposes of the firms (Lontah, 2014). The stakeholders are the ones who contribute in the overall profit and benefits of an organization. The stakeholder’s theory is based on the approach of deontology. This particular approach focuses on the rights of the individuals. According to the theory of stakeholders, the success of an organization is dependent on the satisfaction level of the stakeholders (Kusumaningtias et al., 2016).

The agency theory on the other hand is an economic or a management theory that focuses on explaining the self-interests and relationships in the business organizations (Kumalasari & Sudarma, 2013). The agency theory describes the relationship between the agents/principal and the delegation of control. The agency theory explains that how the relationship can be best organized in a way in which principal determines the work and the agent makes decision or performs on behalf of the principal (Panda & Leepsa, 2017).

Apart from the corporate governance, another variable that is being studied in this research includes leadership (Umaru et al., 2013). In their study have determined the role and importance of leadership in the corporate failures. The findings of the authors indicate that leadership is one of the central elements that influences the failure or success of organizations (Umaru et al., 2013).

Heracleous & Werres (2015) also conducted a study on the relationship between corporate misalignment and the corporate failures. The corporate failures occur because of the development of patterns of misalignment. The overall process of misalignment starts with the dysfunctional leadership as well as the ineffective corporate governance. The strategic misalignment spread throughout the organization that further increases the gap between the organizational strategy and competitive environment that further leads to corporate failure. (Heracleous & Werres, 2015).

The above literature review indicates that the studies are consistent in terms of the direct impact of corporate governance and leadership on the corporate failures.

The hypotheses developed on the basis of the literature review presented above are given below:

H1: The corporate governance has a direct influence on the corporate failures

H2: The leadership in the organization has a direct impact on the corporate failures.

References

Allen, M.W. & Craig, C.A., 2016. Rethinking corporate social responsibility in the age of climate change: a communication perspective. International Journal of Corporate Social Responsibility, 1(1), pp.1-12.

Appiah, K.O., Chizema, A. & Arthur, J., 2015. Predicting corporate failure: A systematic literature review of methodological issues. International Journal of Law and Management, 57(5), pp.461-85.

Berger, A.N., Imbierowicz, B. & Rauch, C., 2016. The roles of corporate governance in bank failures during the recent financial crisis. Journal of Money, Credit and Banking, 48(4), pp.729-70.

Heracleous, L. & Werres, K., 2015. On the road to disaster: Strategic misalignments and corporate failure. Long Range Planning, 49(4), pp.491-506.

Kumalasari, K.P. & Sudarma, M., 2013. A Critical Perspective Towards Agency Theory. Jurnal Akuntansi Multiparadigma, 4(2), pp.269-85.

Kusumaningtias, R., Ludigdo, U., Irianto, G. & Mulawarman, A.D., 2016. Rethinking of corpoarte governance. Procedia - Social and Behavioral Sciences, pp.455-64.

Lakshana & Wijekoon, 2012. 2nd Annual International Conference on Accounting and Finance (AF 2012) Corporate governance and corporate failure. Procedia Economics and Finance.

Lontah, E.N., 2014. Stakeholder theory dan karya keselamatan schindler. Refleksi Hukum, 9(1), pp.37-50.

Panda, B. & Leepsa, N.M., 2017. Agency theory: Review of Theory and Evidence on Problems and Perspectives. Indian Journal of Corporate Governance, 10(1), pp.74-95.

Salman, K., Fuchs, M. & Zampatti, D., 2015. Assessing risk factors of business failure in the manufacturing sector: A count data approach from Sweden. International Journal of Economics, Commerce and Management, 3(9), pp.42-62.

Spaliara & Tsoukas, 2017. Corporate failures and the denomination of corporate bonds: Evidence from emerging Asian economies over two financial crises.. Journal of International Financial Markets, Institutions and Money, pp.84-97.

Umaru, U., Audu, A.R. & Paul, M.Y., 2013. Corporate Leadership Failure and Its Implications for the consolidation of Corporate Governance and Accountability in Nigeria. IOSR Journal Of Humanities And Social Science, 16(1), pp.53-58.