never stop learning: a better and larger gst?

DID accountIng stanDarDs aDD to the severIty of the gfc?Investigating the evidence

the Impact of terrorIsm on fInancIal marketsResilience of financial markets

Doctors want extra cash to work In the outbackImproving medical access

IDentIty challenge In chInaGaining insights into doing business in China

research

A better And lArger gSt?professor John freebairn argues the case for a broader gst and/or a higher rate

never stop learningEdition 2, 2012

world-class research across the disciplines of economics, finance, accountancy, management, marketing and social policy is ingrained into the very fibre of the faculty of business and economics. our academic researchers continue to enhance and expand our collective knowledge on issues and challenges of great relevance to our society, its prosperity and wellbeing.

uality research is the hallmark of this Faculty and is consistently recognised by our peers and independent international organisations. Earlier this year, the Faculty maintained its ranking as the only Australian university to be listed in the top-100 in Economics & Business in the influential Shanghai Jiao Tong Academic Ranking of World Universities.

2012 is a notable year for this Faculty and its research focus as it marks the fiftieth birthday of the Melbourne Institute. Since its formation in 1962 the Institute has been providing powerful economic and social research that has continually informed public debate and improved public policy decision making.

Every year the Faculty of Business and Economics produces two editions of this ‘Never Stop Learning’ magazine to highlight our research and engagement activities and this is our second edition for 2012.

Within this magazine you can read about research that is providing a deeper understanding of financial markets, research that provokes debate on the current structure of the GST, and research that builds our knowledge capital on conducting business in Asia. You can also read about a partnership with industry that provides practical experiences for our students, and a partnership that is advancing knowledge on issues facing industry in these economically turbulent times.

We hope you will enjoy this magazine and encourage you to become part of our community that never stops learning.

professor paul kofman Dean, faculty of business and economics sidney myer chair of commerce

Q

Authorised by: Dean, Faculty of Business and Economics. CRICOS Provider code: 00116. Intellectual Property:

For further information refer to Statutes and Regulations. Copyright: The University of Melbourne 2012. Copyright in this publication is owned by the University and no part of it may be reproduced without the permission of the University. Disclaimer: The information in this

publication was correct at the time of printing. The University of Melbourne reserves the right to make

changes as appropriate. As details may change, you are encouraged to visit the University’s website or contact the University of Melbourne Information Centre to obtain the latest information.

Deeper InsIghts In an ever changIng worlD

Never stop learning 3

researCH

4 australia’s leading centre for business and economics research

The University of Melbourne retains high global ranking

6 Doctors want extra cash to work in the outback

Improving medical access in the outback

7 the impact of terrorism on financial markets

Understanding the resilience of financial markets

8 a better and larger gst? Professor John Freebairn

argues the case for a broader GST and/or a higher rate

10 Integrated marketing communication

Achieving the right balance

H

12 Identity challenge in china Gaining insights into doing

business in China

14 Did accounting standards add to the severity of the gfc?

The role of accounting in the Global Financial Crisis

partnersHips

16 rising to the challenge A PwC and Faculty study on

how business can adapt in a turbulent world

liFelong learning

18 gsbe students dig deep Business practicums and

Rio Tinto working together

contents

Become part of a community

that never StopS Learning

4 6 7

12

18

10

16

8

14

fbe.unimelb.edu.au

facebook.com/ melbournegSBe

@Buseconews

benews.unimelb.edu.au b

AustrAliA’s leAding centre

for business And economics reseArchIn 2012 the faculty maIntaIneD Its rankIng as the only australIan unIversIty to be lIsteD In the top-100 In economIcs & busIness In the InfluentIal shanghaI JIao tong acaDemIc rankIng of worlD unIversItIes.

4 FACULTY OF BUSINESS AND ECONOMICS


for business And economics reseArch

Source: Thomson Reuters Essential Science Indicators 2012

tHe Faculty is highly regarded internationally for its research

achievements as it strives for excellence with a strategy of ‘quality over quantity’. Achievements are evidenced through rankings, success in the international journal publication arena, outstanding Excellence in Research in Australia (ERA) results, and in the Faculty’s ability to win highly competitive research funding.

The meeting of minds is the most important catalyst to significant research projects. The business and economics community at the University of Melbourne is dynamic, interdisciplinary, collaborative and international in focus. A strong research culture is supported by a dedicated research support team, formal and informal mentoring, and a rich program of seminars and visits from leading international academics. This commitment to community and quality programs has fostered a strong research culture and environment, which has in turn enabled research of the highest quality.

The Faculty continues to increase its lead over all Australian universities in terms of the number of papers published in journals listed in Thompson Reuters (ISI) Web of Knowledge, the premier tool for searching, tracking and measuring research in the sciences, social sciences, arts, and humanities.

Associate Dean Research, Professor Anne-Wil Harzing says “We consistently target, and very often achieve, what many other universities find very difficult, which is to get our studies published in the world’s best journals in our fields (often referred to as A*). Specifically, we target the best one or two journals in each discipline, in order to maximise the impact of our work. This set of values flows through our system where ‘top journal’ achievements are embedded in our academic hiring and promotion process”.

In addition to the research from economics, accountancy, finance and management and marketing departments, the Melbourne Institute, located within the Faculty, has been providing powerful economic and social insights since its foundation in 1962. The creation of studies such as the Household, Income and Labour Dynamics in Australia Survey (HILDA), the national longitudinal survey of doctors (MABEL), the longitudinal study of factors affecting housing (Journeys Home), and regular economic and social policy forecasts and updates ensures powerful research that allows the possibility that

the univerSity of meLBourne

iS ranked 28 in the worLd

(timeS higher education worLd univerSity rankingS 2012-13)

informed debate on economic and social subjects can occur in Australia.

australian comparison of papers published in IsI listed journals

700

600

500

400

300

200

100

2000-2004

2001-2005

2002-2006

2003-2007

2004-2008

2005-2009

2006-2010

2007-2011

University of Melbourne

Australian National University

University of New South Wales

University of Queensland

University of Sydney

University of Auckland


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a unique longitudinal survey of doctors by the melbourne Institute is improving understanding of australia’s medical labour market and is allowing for more informed public policies to be created.

Doctors want extra cash to work in the outback

doctors would need a salary increase of up to

$200,000 to entice them work in some country areas, a Melbourne Institute study has determined.

The research, Getting Doctors into the Bush: GP’s Preferences for Rural Location, investigated what incentives and compensation was needed to entice GPs to shift to rural locations.

Nearly 4,000 GPs were asked to choose between their current employment and two hypothetical job offers. The fictitious jobs included various working hours, town size and locations, overtime responsibilities, general staffing levels and levels of likely social interaction.

Sixty five per cent of respondents said they wouldn’t quit their current position for any of the country jobs.

The research found incentives equivalent to 130% of annual earnings – or about

CItY $237,000 – would be required for GP’s to accept a job in a remote, inland town with poor social interaction and a big workload.

An increase of about 64% of a doctor’s current average annual salary – or roughly $116,000 – would be required to encourage them to a basic job in an inland town with less than 5,000 people.

Moving to an inland town with between 5,000 and 20,000 people would require incentives of at least 37% of current earnings, or roughly $68,000.

One of the researchers Professor Guyonne Kalb, from the Melbourne Institute, said the desired compensation varied according to the practice location and workplace conditions.

“If on-call is low and hours worked do not change, the job becomes more attractive and the compensation required is less,” he said.

Professor Kalb said governments should

tailor incentive programs to specific regional areas.

“Designing schemes to encourage doctors to locate and remain in remote and rural areas requires an understanding of the various factors that motivate doctors’ decisions.”

“Incentive programs are currently based on the ‘average GP’ and the ‘average rural area’, but there is scope to make them more dependent on the type of area and population size,” she said.

The research used data from the Medicine in Australia: Balancing Employment and Life (MABEL) longitudinal survey of doctors. For more details see mabel.org.au

65% of reSpondentS

Said they wouLdn’t quit their current

poSition for any of the country

joBS

BY eoin HaHessy

Formed in 1962, the Melbourne Institute is Australia’s leading and longest standing research institute in the field of economics and social policy. to see the powerful research work it engages in and how you could partner or study with the Institute visit melbourneinstitute.com


research in the Department of finance has examined nine major bombings since 1998 that have been attributed to al Qaida to examine market efficiency, including a test of rumours that investors traded with advance knowledge of attacks.

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of terrorism not only devastate lives but seek

to rupture economies and the financial infrastructure that underpins them. Understanding their impact on financial markets allows us to examine the efficiency of these markets.

“Terrorist attacks provide a unique opportunity to calibrate the time taken for markets to react to release of unexpected price-sensitive information,” outlined Dr Les Coleman, who is author of the research. “Markets that are strongly efficient do not offer investors the opportunity to trade profitably using monopoly inside information. Therefore this analysis of market efficiency conducts two tests: how long is required for markets to fully impound the price impact of terrorist attacks; and, have investors with advance knowledge of the attacks traded profitably around them.”

Dr Coleman examined the nine major terrorist attacks by Al Qaida that were outlined in a 2005 list issued by UK Prime Minister Blair. He analysed market reaction around the attacks by using minute-by-minute tick data while conducting event studies with daily data. “The innovations of this research are that the list of terrorist attacks avoids subjectivity and biases inherent in previous studies of financial consequences of terrorist attacks, while the examination of market reaction provides granular analysis along the entire event timeline,” said Dr Coleman.

ACtS The nine attacks examined were roughly evenly spaced through the 1998-2005 period with at least one in each calendar year except 1999. They were geographically spread across Africa (three), Asia (three), Europe (two) and USA (one). The dates of the attacks were clustered, with seven of the nine attacks occurring between May and October; and most of the attacks occurred during the morning. Dr Coleman’s examination of these attacks and analysis of the market data has provided powerful insights.

Only four bombings moved a major stock market by more than 1% within 90 minutes of their occurrence. On the four occasions when this occurred the first market reaction occurred within 20-40 minutes and was largely completed within another hour. “This suggests that markets are very efficient in quantifying the financial impact of terrorists events, and matches other evidence that markets take well under a trading day to price in completely unanticipated impacts,” explained Dr Coleman.

Another major finding of this research was that the times of the attacks were not consistent with optimised insider trading. “The timings of the bombings were not particularly advantageous for insiders as they occurred either too early in the day when it would have been hard to surrept-itiously build positions ahead of the attack, or else late in the day when it would have been equally hard to surreptitiously close out positions after the attack. Thus insiders would be forced to hold positions

overnight which increase the risk of confounding events arising and eroding the trading value of their monopoly knowledge,” highlighted Dr Coleman.

This study reaffirms the semi-strong and strong efficiency of markets. In brief it showed that major markets such as Hong Kong, London and Tokyo, take less than half a trading session to fully price in the impacts of totally unexpected terrorist attacks no matter their location. Moreover this study confirmed that there is no conclusive evidence to support rumours that investors associated with Al Qaida have traded profitably ahead of any of their major attacks.

“The literature on the financial effects of terrorist attacks is still fragmented, but its tentative conclusions are confirmed here. Most terrorist attacks – like other unexpected events – have minimal, transient impacts on financial markets,” concluded Dr Coleman.

onLy four BomBingS moved

a major Stock market By more

than 1% within 90 minuteS of their

occurrence

tHe impaCt oF terrorism on FinanCial markets

stUDy FinanCe WitH Us

Major in finance as part of the Bachelor of commerce. Find out more at bcom.unimelb.edu.au

explore your graduate study options in finance at gsbe.unimelb.edu.au/courses/finance/

BY eoin HaHessy


Introduced in 2000, the current gst applies to about 60 per cent of private final consumption expenditure at a flat rate of 10 per cent. In 2010-11 the gst was estimated to collect $48.2 billion, or 13 per cent of all australian tax revenue. In a recent paper professor John Freebairn in the Department of economics argued for a broader gst base and/or a higher gst rate.

A better and larger gst?

current GST applies only to about 60 per cent of the

potential broad consumption tax base, with New Zealand the practical example of a comprehensive base. Removing tax expenditures and broadening the tax base would bring efficiency gains and simplify the GST argues Professor Freebairn.

The Australian GST exempts expenditures on basic food, water and sewage, health, education and child care, and in 2011 the Treasury estimated the revenue lost relative to a comprehensive broad based GST consumption base and flat 10 per cent rate for 2010-11 of $18.3 billion.

“Broadening the GST base to include all food would simplify the system, and it would reduce distortions to consumption choices between food and other ‘necessities’ now subject to the GST, including clothing and energy. Similar arguments to those for food can be made to broaden the GST base to include expenditure on water, sewage and drainage,” states Professor Freebairn.

Much debate on the GST has centred on the current flat rate and if it is equitable and efficient. Professor Freebairn highlights three arguments that have been made for a departure from the simplicity of a flat rate of GST tax. “First, and evident in the European VAT taxes, is a lower rate, including a zero rate, on ‘necessities’ for reasons of vertical equity. There is a consensus among economists, and many others, that using a multiple rate GST is a second best instrument to meet society equity objectives relative to the well-developed progressive income tax and social security system.”

“Secondly, departures from a flat rate on all goods and services might be contemplated for those products with external costs or benefits. In general, special taxes are in place to correct for external costs

tHe

associated with the consumption of alcohol, tobacco and gambling, and on the use of motor vehicles as a user fee for government provided road infrastructure and for pollution and congestion external costs. Many argue that the current special taxes on these products are in need of reform as a separate and distinct exercise,” highlighted Professor Freebairn.

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a more comprehensive tax base for the gst along the

lines of new Zealand would remove distortions to consumption and some

production decisions.


“A third argument for different rates of a GST on different goods and services relates to potential distortions to household decisions about leisure and home production. Neither is taxed by a broad based general consumption or income tax. In theory, higher consumption tax rates on goods and services that complement the untaxed items, and lower tax rates on substitutes, would provide efficiency gains,” underlined Professor Freebairn.

A key argument of Professor Freebairn is that revenue gains of a broader base and/or a higher rate GST can be used to reduce other more distorting taxes. State taxes being considered for removal or reduction this round are: stamp duties on insurance, conveyance duty on the transfer of property, stamp duty on the registration of motor vehicles, and payroll tax.

In 2009-10 these taxes collected $3.1 billion, $12.3 billion, $2.1 billion and $16.8 billion, respectively. Inefficiencies of these taxes in their present form have been articulated in the Henry Tax Review and Professor Freebairn highlights the benefits and impact that would accrue if changes were made. “A tax reform package involving an increase in GST revenue to

fund replacement of less efficient state taxes can be seen as rationalising the system of indirect taxation. An aggregate revenue neutral package will also have a close to zero net effect on the average cost of living, assuming that most of the indirect taxes are passed forward to households as higher prices.”

Professor Freebairn is acutely aware of the challenges of changing the existing structure of the GST but rebuts claims that more GST revenue would lead to negative economic consequences, “tax reform packages involving changes in the GST and changes to state stamp duties necessarily affect commonwealth–state financial relations. Clearly, this adds another dimension to, and additional challenges to the negotiation of, the package. However, the paper contests claims that a tax mix change package which collects more GST revenue would substantively reduce vertical fiscal imbalance, and the associated efficiency costs of lack of transparency, the blame game and a soft budget constraint.”

In summary, Professor Freebairn is of the opinion that Australia needs to change its GST structure to a similar model to

New Zealand. ”A more comprehensive tax base for

the GST along the lines of New Zealand would remove distortions

to consumption and some production decisions. Revenue gains of a broader base and/or a higher rate of GST would be recycled to fund reductions in other more distorting and less efficient taxes, including state stamp duties and income tax. Some gains in simplicity and operating costs would follow. The overall package can be designed to be revenue neutral and to have a similar pattern of vertical distribution of the overall tax burden as the current system.”

Professor Freebairn presented this paper at public lecture on 2 October 2012.

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Log onto fBe.unimeLB.edu.au

to view future puBLic LectureS at the facuLty

stUDy eConomiCs WitH Us

Major in economics as part of the Bachelor of commerce. Find out more at bcom.unimelb.edu.au

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IntegrAteD MArketIng coMMunIcAtIon A delicate balance

Integrated marketing communication is an established buzzword of marketing and communications practitioners, but how much is too much? when do consumers go from feeling valued by a company to just feeling harassed? new research by the Department of management and marketing aims to help companies to treat their customers with respect and not overdo either traditional or new forms of marketing.

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BY Danielle roller

Richard Gruner, a research fellow with the Department of

Management and Marketing, has been investigating how companies can delicately balance the scales between traditional methods and new media.

“Research has shown that personalised, digital communication does create a positive influence on brand equity and

dr on buyer behaviour as there is a perception that the firm is really trying to invest in their customer relationships. But, if there is too much personal communication, customers can perceive it as invasive and actively turn against a firm,” Dr Gruner explains.

Integrated Marketing Communications is an approach to brand communications where different channels work seamlessly

together to create an experience for the

customer. Various messages are ideally

presented with a similar tone and style

that reinforces a firm’s core message. The

idea behind this approach is that various

new, digital media (e.g., banner ads, social

media) and more traditional media (e.g.,

TV, radio, print) act as a unified force, rather

than permitting each to work in isolation.



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With most businesses feeling the need to jump onto the social media bandwagon and to use other highly measurable forms of digital communication, it is important to look at how much is too much and how the use of new media should be combined with the old.

The study has shown that the effectiveness of any integrated campaign does not depend on the social or digital media portion of the campaign, but revolves heavily on the firm’s investment in traditional media. However, too much traditional advertising can be the last thing a campaign needs.

“The more the better does not always apply,” says Dr Gruner, “If social media is combined with too much traditional media it can quickly reach saturation point and you go from building brand equity to eroding it.”

“Our aim is to provide some practical guidance on how to best combine digital marketing channels with traditional ones to improve new product success.”

As phase one of the research, Dr Gruner and his co-researchers Professor Bryan Lukas and Dr Robin Canniford, also from the Department of Management and Marketing, conducted in-depth interviews with a variety of marketing professionals from companies ranging from medium-sized to multinational corporations in the consumer durable goods sector. The interviews helped develop the researchers’ hypotheses, which revolve around the notion that right proportion of media investment in both traditional and digital media changes depending on various circumstances.

Thus, canny marketers must keep a close eye upon the delicate balance between digital and old media.

“For the purpose of the study, we separated digital media into two separate categories; social media communication and technology-based media communication. We found that the overuse of traditional media had a negative effect on customer perception of both types of media, but each in a slightly different way.”

Because social media allows for user

generated content and it is not seen as a medium for companies to push their products, this can have a positive impact on the

relationship a consumer has with a firm, building a feeling

that they have an authentic and reciprocal relationship. In this situation,

too much traditional advertising can undermine the perception of grassroots authenticity that social media has built. The clash between the kind of authentic communication consumers feel they have built up through social media and the kind of relationship created by traditional media can also lead to a feeling of incongruence, which can also have a negative impact on new product success.

On the other hand, technology-based media communication, such as electronic direct mail or search engine marketing, through paid ads on Google for example, are more of a one-way communication. These types of communication are a powerful tool for modern marketers, as they are highly measurable and can provide clear and reportable return on investment.

Richard Gruner explains, “Because this type of communication is highly targeted and personalised, the line between a consumer feeling personally valued by a campaign and feeling overloaded and bombarded with communications is a fine one.“

“We have discovered that it is very rare that it will be an overload of either social media or technology based media that tips the balance in the wrong direction.

It is typically the overdoing of traditional advertising that causes a consumer to distrust the new media message. Marketers who can get the mix right will ensure product and firm loyalty and build the strength of their brand.”

The qualitative research that has been conducted via in-depth interviews with marketing practitioners has aided the researchers to develop a rigorous questionnaire to be used in stage two of the research. The quantitative study of 128 firms aims to produce a model that can be applied to measure the success of an integrated marketing campaign and provide a guiding framework for marketers wishing to achieve a harmonious balance between the new and the old.

“Most of us are sick of receiving commercial messages that want us to buy more stuff we don’t need; our research aims to help marketers to develop an understanding of how, when, and where consumers are still receptive to communicated messages. This understanding can help foster mutually beneficial ongoing conversations where firms communicate with (rather than merely to) us.”

stUDy marketing WitH Us

Major in marketing as part of the Bachelor of commerce. Find out more at bcom.unimelb.edu.au

explore your graduate study options in marketing at gsbe.unimelb.edu. au/courses/marketing/

if SociaL media iS comBined

with too much traditionaL media

it can quickLy reach Saturation

point


as australia and china become ever more intertwined in this ‘asian century’ more knowledge is needed to enhance the ability of both countries and their economies to work closer together. David scott speaks with shea Fan, a phD candidate in the Department of management and marketing, to find out just how big a deal ethnicity is when doing business in china.

March, 2010 was a defining moment in Australia and

China’s growing business relationship, with Australian Rio Tinto executive Stern Hu sentenced to 10 years in prison for corruption and industrial espionage. While then Foreign Minister Stephen Smith described the sentence as ‘harsh’, he was at pains to point out that the case would not affect relations between the two countries, having as they do “a strong economic and broader relationship.”

But does the case highlight a growing tension between the Asia-Pacific region’s two biggest economic powers? In some regards, yes, says Shea Fan, a PhD candidate in the Faculty of Business and Economics Department of Management

30 and Marketing. “Many Australian organisations have established branches operating in China, and to ensure the success of the operation, many companies employ Australian-Chinese to work there,” says Ms Fan. “However, ethnic identity can sometimes lead to an escalation when business tensions arise, the Stern Hu case being just the most famous example.”

“Effective knowledge transfer between local headquarters and overseas units has always been a challenge for multinational corporations (MNCs). Expatriates are expected to facilitate much of this knowledge transfer and since there are many challenges for expatriates who work in foreign countries, individuals who are originally from the host country of

MNCs and share the same ethnic identity with host country employees (HCEs) are increasingly seen as ideal candidates for overseas assignments.“However there is conflicting evidence whether or not these expatriate employees are, indeed, effective in knowledge transfer.”

For Ms Fan, trust is the key determinant in whether effective knowledge sharing takes place.“Trust between people obviously encourages knowledge sharing and knowledge acquisition. However, if there is relationship conflict, this can discourage the sharing of information. So while Stern Hu’s former boss John Dougall may believe his former employee had been “thrown to the wolves”, it is perhaps little wonder that his convicted breach of trust was so harshly dealt with.”

However the issue is not just about successful knowledge transfer, but also one of perception and, more broadly, identity – how do Chinese people view Australian-Chinese workers who are employed by Australian organisations in China? And how is this trust earned or lost? For Ms Fan, it has meant taking a deeper look at how two different societies approach identity and social behavior: two terms she refers to as ‘ethnic identity confirmation’ and ‘social categorisation.’

“Identity is developed in social interactions,” she says. “We know who we are through others’ appraisal. After an identity is formed, we tend to maintain it. However, because the views of others are involved in our identity development, we may feel

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iDentity CHallenge in


frustrated when there is a discrepancy between how we view ourselves and how others view us.”

“On the other hand, categorisation is a cognitive activity which can help us use existing knowledge to infer unknowns and then reduce uncertainty. However, it also causes problems in social interactions. Once a categorisation is formed, people tend to generalise group characteristics to individual members, and more than that, tend to favor their ‘in-group’ members over ‘out-group’ members.”

Explaining the relationship between such categorisation and ethnicity Ms Fan says when people categorise others, they tend to use simplified criteria. “For example, some people use physical characteristics to categorise others. Once we put others in a category, we generate expectations accordingly. For example, if someone (could be either Chinese or Australian) sees an Australian-Chinese person as Chinese, he/she may expect this person to favor the Chinese in-group. If this Australian-Chinese person cannot meet the expectations, he/she may lose trust, or upset people.”

In social interactions, bicultural people can be categorised as members of either social group. The ambiguity of this type of identity increases the difficulty for identity confirmation. “When we categorise ourselves, we base our own identification with a certain group or our own motivation. So our own classification is more flexible and dynamic than the categorisation of ourselves that comes from other people. For example, an Australian-Chinese person may not view his/her Chinese identity as very important at work but others may believe it is important. That is why a discrepancy can happen between how we view ourselves and how others view us.”

Both of these elements were apparent in the Stern Hu case above, says Ms Fan. On one hand, Australian people viewed him as an Australian, and believed he should be treated according to the Australian standard. However, many Chinese people showed no sympathy to Mr Hu, and, indeed, criticised him for betraying ‘his own country’. “What role did his Chinese background play in the process? Three other senior managers of Rio Tinto in Shanghai also received sentences, longer

than Mr Hu’s, but because they are Chinese nationals, they did not receive equal attention from the media and the public. So it appears that Mr Hu’s identity did have some effect on the process.”

While her research is ongoing, Ms Fan says that ethnic identity, and the associated confirmation process, does require further consideration as Australia increases its business dealings in China. “A lack of ethnic identity confirmation can inhibit the knowledge exchange between local and expatriate employees and this obviously poses a unique challenge when doing business. More than this, it could also stop people from finding solutions to resolve conflicts that may arise,” she says.

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How do Chinese people view australian-Chinese workers

who are employed by australian organisations in China?


Did accounting standards play a role in the severity of the gfc? fiona lawry speaks to one academic who’s research has been investigating this issue.

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Global Financial Crisis (GFC) of 2007-2008 has been one

of the most closely analysed and reported events in modern history. The very fabric of world economic stability was seriously threatened and remains perilously in the balance. Five years on, Europe is still reeling, teetering on the edge of financial collapse.

The past five years have seen a great deal of analysis and finger pointing as those most affected seek to blame, and those charged with bringing the world to recovery seek to better understand what went wrong and how future stability can be achieved. Initial blame for the crisis was placed squarely at the feet of the banks that had become lax in their lending practices, leading to the subprime mortgage lending scandal which triggered the crisis. However the banks themselves and other commentators began to allege that it was in fact the accountants, auditors, and company directors who were to blame.

Dr Matthew Pinnuck, of the Department of Accounting, has been investigating whether there is evidence that accounting standards did in fact add to the severity of the crisis or whether the banks were simply shifting the blame and scrutiny from themselves.

Dr Pinnuck’s research examines the performance of financial reporting, in particular the use of fair values (FVs) on company and share value during the crisis. He says that, “In analysing the GFC, a large number of commentators have attributed blame to financial reporting, in particular to the use of fair value in reporting financial instruments in bank balance sheets.”

Fair value accounting (FVA) (or market value accounting) uses available market information to estimate the likely sale price of an asset. It aims to put a

tHe

realistic value on a company’s financial situation in terms of its assets and liabilities. This takes a degree of expertise in relation to the particular asset being valued, as opposed to relying on the historic value of the asset at purchase time.

Problems can arise when the market-based measurement does not accurately reflect the asset’s true underlying value. This can occur when a company is forced to calculate the selling price of assets or liabilities during unfavourable or volatile times, such as the financial crisis. For example, if the liquidity is low or investors are fearful, the current selling price of a bank’s assets could be much lower than the actual value.

Essentially, if crisis periods have the ability to skew the reported value of a company then some argue that historical cost accounting may be a more accurate way to reflect their true value. This traditional accounting method values assets at their original cost and excludes adjustments for inflation but factors in adjustments such as depreciation and impairment.

In the years prior to the crisis, financial institutions were widely exposed

to risky subprime credit and then during the crisis years of 2007 and 2008 they took large accounting write-downs as a result of the loss in value of the related securities (ie. housing values

dropped). Subprime credit

refers to loans made to people with less-than-perfect credit histories who present a tangible risk for the bank. In the lead up to the crisis many banks were using the ‘originate-to-hold’ model of on selling these risky loans to other banks, therefore they were not too concerned about lenders’ credentials because the loan would be passed on. The secondary banks were willing to take on these risky loans due to the perception that house prices would continue to boom. How wrong they were.

Dr Pinnuck explains, “the main issue from an accounting measurement point of view was that the markets for subprime related securities dried up during the crisis, making it difficult to value these securities. The decline in the prices of some assets leads to concern that prices will decline further and that the financial system will experience ‘distress’. The rush to sell these assets before prices decline further becomes self-fulfilling and so precipitous that it resembles a panic”, and the bubble implodes.

Dr Pinnuck found that the bulk of the commentary around the GFC and financial accounting has concentrated on the valuation objective, “however financial accounting also has a stewardship objective and financial reports could have either mitigated or exacerbated the crisis through this channel…where corporate managers of banks focus on short-term profits (because their compensation packages are linked to share-price performance).”

two iSSueS appear to have Been ignored in

the deBate aBout the contriBution

of fair vaLue accounting to the gfc

Did accounting standards add to the severity of the


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Financial accounting has two distinct roles: one is to simply report on the value of a company to enable share traders to establish a share price; secondly it enables shareholders and external capital providers (banks) to monitor the performance of company directors or chief financial officers – the stewardship role of financial accounting. When financial accounting is used as a metric to measure managerial performance, there is a view that historic cost accounting may be a more accurate measure than fair value accounting. Dr Pinnuck says, “there is an ongoing debate amongst standard-setters and academics as to whether financial accounting is primarily about valuation or stewardship.”

During crisis times a firm will have to write down the value of assets and there is a danger that companies and CEOs can misrepresent the magnitude of the write down to make the company look like it is more liquid than is actually the case, and distort its market value.

Dr Pinnuck reasons that if the fair value method has the potential to distort values during crisis times then a comparison should be made between fair value reporting in non-crisis or ‘normal’ times. He says, “Two issues appear to have been ignored in the debate about the contribution of FVA to the GFC. First, the existing debate has focused on the role of FVA during the crisis, but has ignored the possibility that the illusory FV gains on subprime securities before the crisis may have masked some of the underlying problems.”

Dr Pinnuck has found that there was no empirical evidence that fair-value accounting during the GFC added to the severity of the crisis, “there has been a lack of attention as to whether FVA in the years immediately preceding the crisis could have contributed to excessive lending.”

The discussion of the role that stewardship played during the GFC suggests that the credit market for subprime mortgages may

not have expanded as quickly if firms had to use conservative accounting, due to the reduced likelihood that they would make excessive loans based on market value rather than a perception that house prices would always continue to rise. Dr Pinnuck suggests that “an accounting system that requires timely recognition of losses, but that discourages recognition of unrealised gains (which FV encourages), could be a way forward.”

He also found that, remarkably little attention has been paid to the role of auditors in the implementation of FVA standards in the complex banking industry. He says, “While FVA standards per se may not have added to the severity of the crisis, there may have been weaknesses in their application that contributed to the crisis. Auditors are critical economic agents in this process. However, there is very little evidence, both in normal times and crisis

times, concerning the quality of auditing in the banking industry.”

Having concluded his research, Dr Pinnuck remains concerned that while the GFC and its aftermath presents an opportunity to learn from past mistakes, that much of the “existing debate, commentary and academic research is too narrow in focus and needs to be broadened before any definitive conclusion as to the success or failure of the current financial reporting model can be made.”

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Major in accounting as part of the Bachelor of commerce. Find out more at bcom.unimelb.edu.au

explore your graduate study options in accounting at: gsbe.unimelb.edu.au/courses/accounting/


the faculty of Business and economics and pwc have recently announced the results of the first stage of their groundbreaking agility study. in this study leading australian and new Zealand organisations shared their inner

workings in a world first study to understand the value and elements of organisational agility. the study involved 60 executives from 18 organisations that span some of the highest profile organisations in australia and

new Zealand including aSX top 50 to government departments and private businesses.

the result has been the creation of a horizon, velocity and plasticity (hvp) agility model and continuing collaborative research will continue to produce an agility index as a tool to confirm that agility generates

greater shareholder returns. here Professor Graham Sewell, head of the department of management and marketing expands on this study.

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is a simple truth that, to compete and survive, organisations have always had to withstand the

turbulent winds of economic, social, and technical change. An agile organisation is able to rise to the challenges of this turbulent world by achieving sustained competitive advantage through continuous adaptation. Yes, it’s easy to state but much harder to achieve so the first stage of the agility study has set out to discover exactly what makes an organisation agile. Armed

It with this knowledge, any organization ought to be able to determine whether it is agile or not and what it needs to work on to become more agile. A one-size-fits-all response is clearly not the way to rise to this challenge. Remember the old fable of the fox and the hedgehog. By curling into a ball a hedgehog has only one response to any sort of threat but foxes have agile minds; they can respond to circumstances in a variety of ingenious ways and in doing so, turn threats into potential opportunities. So you might reasonably expect entrepreneurial start-ups and innovative small business to be more like foxes than hedgehogs but can large organisations – even multinational corporations and big government agencies – be truly agile? In other words, we are interested in learning from the foxes of the organisational world so that we can teach the hedgehogs how to develop new strategies for sustained success.

For this first stage of the agility project, researchers from Melbourne University’s Department of Management and Marketing teamed up with PwC to undertake a major trans-Tasman study of the sources of organisational success in Australia and New Zealand. PwC’s long-term relationships with diverse corporate and government clients has given the university’s experienced management

researchers unprecedented access to top executives from some of the most important players in the Asia-Pacific region. These include ASX Top 50 firms and key government agencies as well as enterprising small and medium-sized companies. Our sample is a who’s who of the Asia-Pacific’s New Economy, taking in dynamic internet-based firms, mining, and financial services but also including more traditional sectors like manufacturers, health care providers, and bricks-and-mortar retailers.

Now that the this stage of the project is complete we can confidently say that we know what makes an organisation agile. First, it must be able to spot threats and opportunities well in advance. We call this ‘Horizon’ and you can think of it in terms of distance and time. Agile organisations have far-reaching horizons that not only stretch across physical geography but also well into the future. In short, they have a really good idea of what’s coming and where it’s coming from. But looking out for what’s coming isn’t simply the job of the top management team. Everyone in the organisation should looking for what’s out there; using their formal and informal networks to scan the environment and pass on the intelligence to the right people at the right time. Remember, the CEO only sees the horizon from one point of view.

how busIness can aDapt In a turbulent worlD

rising to tHe CHallenge


Knowing what’s coming – for good or ill – is important but it’s only the starting point. The next feature to look for in an agile organization is ‘Velocity’. This is the capacity to shift resources around the organisation quickly and efficiently to the parts where they are most beneficial. Take the example of one of the sample firms. Within 24 hours it had completely redeployed its entire manufacturing workforce to deal with an unexpected product recall. It could not have done this if everyone in the organisation wasn’t mentally and emotionally equipped to deal with such a disruption to business-as-usual. We call this mentality an ‘Agile Mindset’ and without it, your chances of being agile are low.

This brings us to the final feature of agility; what we call ‘Plasticity’. This is the ability to create or dissolve relationships quickly but without the usual messiness of a breakup. Another of our sample firms wanted to expand into overseas markets but the GFC meant that normal office leasing contracts were risky because it made it harder to pull out of a new location quickly if the

need arose. So they negotiated shorter contracts where the premium they had to pay was more than offset by the flexibility it gave them. But it’s not just in the realm of business-to-business relations where Plasticity is important. Many of the most agile organizations we studied made extensive use of social media to connect people across the organisation, allowing employees to share information and create innovations through new and unexpected relationships. Seeing something like social media as a resource for employees in this way, rather than as a distraction, is crucial to agility.

So now that we know what agility is, where do we go from here? The next stage of the project is to develop an agility index. This will involve the development of a powerful set of diagnostic tools that can quickly and accurately determine an organisation’s agility by measuring its levels of Horizon, Velocity, and Plasticity. Melbourne University and PwC are again teaming up to identify a large sample of Australian and New Zealand organisations and use our diagnostic tools to rank them in terms of their agility. It is not, however, whether

you are near the top or the bottom of the rankings that will determine the success or otherwise of your organisation. After all, some organisation will always need to be more agile than others depending on things like their size, age, and sector. Rather, it’s how you compare with your direct competitors on a global scale. If you are less agile than your competitors then chances are you need to work on your Horizon, Velocity, and Plasticity; and you need to do it quickly if you are to rise to the challenge of an increasingly turbulent world.

For more information on the agility study and to watch Professor Sewell and Richard Shackcloth, Partner at PwC, discuss the research pwc.com.au/consulting/agility-study

an agile organisation is able to rise to the challenges of this

turbulent world by achieving sustained competitive advantage through continuous adaptation.

within 24 hourS it had compLeteLy

redepLoyed itS entire

manufacturing workforce

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there are many ways in which partnering with the Faculty of Business and economics can benefit your organisation and staff.

Find out how you can engage with us at fbe.unimelb.edu.au/engage

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Tinto has a University wide partnership and as part of

this partnership they sponsored eight students and two academics – Dr. Danielle Chmielewski-Raimondo and Dr. Albie Brooks – to assist Rio Tinto-Alcan to further enhance their indigenous engagement strategy.

The students formed two groups to tackle the issues posed by the Ely Bursary scheme that forms part of the Ely Bauxite Mining Project Agreement; these issues were focused on marketing the Ely Bursary to the six Indigenous communities covered by the Agreement, and improving the business processes for the Ely Bursary.

Dr. Danielle Chmielewski-Raimondo led a team of four students who were responsible for developing a marketing strategy for the promotion of the Ely Bursary to the eligible indigenous communities. This project required the students to develop a communications strategy culminating in the production of a DVD and a brochure.

Dr. Albie Brooks worked with a team of four students who were required to: assess the current processes for managing the Ely Bursary, review world’s best practice in bursary/scholarship management and recommend improved management processes for the Ely Bursary including the application process, measuring

LifeLong Learning

72 gsbe students completed business practicums throughout the winter of 2012 and one of the hosts was rio tinto alcan in weipa, situated in the cape york peninsula in far north Queensland. business practicums provide these graduate students with real experience in a workplace environment, working on a challenging project within a team.

Business practicums & rio tinto working together

gsBe students

dig deeprIO

WeIpA

outcomes from the bursary and overall governance of the bursary.

To ensure the success of the projects, the students and academics undertook cultural awareness training provided by Rio Tinto Alcan and they met and interviewed Elders of the indigenous communities. In addition, the group took the opportunity to participate in NAIDOC (National Aborigines and Islanders Day Observance Committee) Week celebrations which provided valuable insights into indigenous communities.

The students presented their findings to the Rio Tinto Alcan and the Ely Committee at the end of the two weeks. Feedback from Rio Tinto Alcan has been excellent; they were extremely impressed with the students’ enthusiasm and quality of their work. In addition they commented on how happy they were with the work and insights that Dr. Danielle Chmielewski-Raimondo and Dr. Albie Brooks provided on the projects.

Many of the students who participated in the Business Practicum have noted that it has provided them with a great opportunity to not only enhance their academic and employability skills but to also gain a greater understanding of indigenous issues and what true corporate social responsibility looks like. They were very impressed with the manner in which Rio Tinto Alcan practices corporate social

responsibility and how seriously it takes the issue, particularly in regards to traditional land owners.

Speaking to those involved from the Faculty, there was a real sense that this project was unique and impacted both on students and the academics involved, as Dr. Danielle Chmielewski-Raimondo outlined, “this was one of the most memorable, enjoyable and interesting experiences that we have all had. Working with Rio Tinto Alcan Weipa made us all realise that for some companies, corporate social responsibility is not just a box that needs to be ticked by the company, but is a company ethos that underpins every single business decision that the company makes. Thanks to our work with Rio Tinto Alcan in Weipa and the Ely Committee, we all now have a much better understanding of the issues and difficulties Indigenous communities face and the crucial importance of Education as a means of providing Indigenous youth and communities as a whole with a future.” Dr Albie Brooks echoed these comments ‘this was a unique cultural experience that gave our students significant learning experiences.’

For information on graduate study at the Faculty log onto gsbe.unimelb.edu.au

dig deep

LifeLong Learning

many of the students who participated have noted that it has

provided them with an opportunity to gain a greater understanding of

indigenous issues and what true corporate social responsibility

looks like.


BuSineSS practicumS

provide graduate StudentS with

reaL eXperience in a workpLace environment

Whatever number you look at, it makes sense

Join a community that never stops learning fbe.unimelb.edu.au

2012 28 50 9 1The University of Melbourne is the first and only Australian university to rank in the top 100 for Business and Economics in 2012. Academic Ranking of World Universities, Shanghai Jiao Tong University 2012

The University of Melbourne is ranked no. 28 globally. The Times Higher Education World University Rankings 2012-2013

For half a century, the Melbourne Institute, located within the Faculty, has been providing powerful social and economic research since its establishment in 1962.

The University of Melbourne is ranked no. 9 in the world for graduate employability. QS World University Rankings 2012

The University of Melbourne is the no. 1 Australian university. The Times Higher Education World University Rankings 2012-2013

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