Background
Discuss about the Abandonment of the Social Contract by Banks.
IFRS is the organisation that in recent time developed the aim of business affairs common language development so that the accounts information can be made comparable and readable with other companies. But here the question is about their deliverable in this regard. Prof. Ray Ball in an article addressed the question (Subramanian, 2016). The above shift in approach of IFRS is focused on the capital market of global market. The financial approaches of IFRS are also useful for the foreign direct investment attracting. The developed mechanisms are focused on the movement of debt and equity capital facilitation process. The general perception in the accounting field is that the changes would bring greater transparency, efficiency in the transaction, reduction in the cost of capital and improvement in the comparability. But are those current moves sufficient for delivering the promises made by the organisation? Prof Ball in his 2006’s view, expressed that the difference in the accounting standard of different nations can be justified by the diverse culture and people of the nations and their diverse laws and the companies. In his 2016’s analysis he shows more off a conscious approach where he expressed that the good impact of these standard are yet to be fully assessed. But here recognised that the adoption of the IFRS standards can be historically states as innovative approach which has somewhat uncertain impact worldwide. The adoption of the standard was uniform where the general apprehension was the lack of uniformity at the time of adopting. But here the significant challenge is the implementation uniformity and there the political and economical factors are playing the vital part to provide the challenges (Subramanian, 2016). The key problem as analysed by Prof Ball, in the principle based IFRS framework which demands judgement and estimation leading to choice of accounting policy discretion creation. Because of this reason the outcome would differ because of the variation in technique and variables. He also pointed that the fair value based accounting system in IFRS is difficult to follow for the low information availability based emerging economy. At the time of discussion the regulatory environment Prof Ball mentioned the lack of proper infrastructure in the effective and uniform implementation process of the standards. Therefore in the concluding remark the article expressed the view of Prof Ball where he stated that the primary aim of IFRS is undermined because of the non-uniform implementation of the standards across the world. The non-adoption of major economy like USA, India, China and Japan is an additional issue but the future adoption commitment showed by the rest of the three economies is a hopeful sign (Subramanian, 2016). Under all of these circumstances the actual impact is elusive.
IFRS Adoption and its impact
According to the two US academics Baruch Lev and Feng Gu the major financial statements of a business organization such as the statements of the financial position or the balance sheets, Profit and loss statement or the income statement and cash flow statement are losing their importance in US as an essential documents for valuation of the business from the point of view of the investors. According to their arguments the underlying reason of losing the usefulness is the access of the investors in the other infiobrmation sources that are strong enough for making the quick up down in the stock prices of the company. The other reason of such reduction of the main financial statements is the increase in the investment in the knowledge-based intangible assets and the accounting of those intangible assets cannot be done with the traditional accounting process. According to them, intangible capital is the leading corporate value creator for the businesses in the US and due to the incapability of the traditional accounting process the different profitability [ROI & ROA] measures are overstated and the values of the intangible assets are understated. More over in USA the application of the ‘rules-based’ accounting standard of US GAAP[Generally Accepted Accounting Principle] and the more liquid nature of the US economy(compared to that of Australia) which involves frequent trading on the basis non-accounting information. That is why the US investors look in to the fundamental information with respect to a business that is related to the cash holding or the holding of the intangible assets of the business before making the investment decisions in that company rather than studding the major financial statements of the business that are gradually losing the importance.
On the other hand in Australia the application of the principles-based’ standards in the accounting process that is named as IFRS is used for accounting of net profit and the equity of the share holders with a primary objective to capture the summary of the transactions occurred in the business. According to the research done by CPA Australia on the basis of the annual reports of the companies that are listed in Australian Securities Exchange for a period of 24 years[1992-2015] reveal the fact that the net profit and shareholders’ equity that are reported in the financial statements have shown consistent reflection in the share prices of the company for the period under study. That is why the Australia the financial statements are comparatively more relevant [compared to USA] so far as investment decision making are concerned(Intheblack.com, 2017).
Differences in financial statement relevance between Australia and USA
The IASB [International Accounting Standards Board’s] has identified the defects in the process of presentation and structure of the four major financial statements of a business organization namely the income statement, the cash flow statement, the balance sheet and the statement of changes in equity.
The users of the financial statements often reported that the important values of Earnings before Interest and Tax (EBIT) and the value of operating profit is not clearly defined as per the framework of IFRS.
The defects also lies with respect to the presentation of the line items as some of the companies include the depreciation of the intangible assets for the calculation of the adjusted net operating profit but some of the companies do not follow the same process for the calculation of the adjusted net operating profit
The users of the financial statements are also facing problem regarding whether the items of the non-recurring, exceptional items will be included in the calculation for arriving to the value of the net operating profit or not.
More over the companies are trying more and more to represent the information related to the financial performance of the company in a format that are not prescribed by GAAP or the IFRS as in current world these two accounting standards are not enough for the presentation of a comprehensive accounting g standard.
In order to improve the communication value of the financial statements as per the 2017 to 2021work plan of IASB, new standards of accounting has been released with respect to the financial instruments, revenue and leasing. The organization has also proposed [to address the inconsistencies] improvement of the structural representation and the presentation of the additional line items and sub-totals in the financial statements (Intheblack.com, 2017).
The social contract refers to a kind of a unwritten contract between the society and an institution where the relationship of the institution with the society implies that the institution will fulfil certain social responsibilities for the welfare of the society through the operational process of the institution.
In any country there exists a strong social contract between the banking institutions and the society as the banking organizations are directly engaged in servicing the general public and interacts with the general public during the day to day operations. The four major banks of the Australia [National Australia Bank (NAB), Commonwealth Bank (CBA), Australia and New Zealand Banking Group (ANZ),Westpac (WBC)] that forms the base of the Austrian banking sector and there operations were being regulated by the different legislations of the government. As part of the fulfilment of the social contract the banking institutions delivered financial assistance to the business organizations in the form of credit supply so that the businesses can supply the required goods services to the community without any disruption.
Challenges faced in presentation and structure of financial statements
The implied term of the social contacts between the banking organizations and the social community is that the banking institutions are obliged to work with the small businesses and the consumers for the welfare of the society. As part of the consumer service the banking organization offers the ATM service to the individual consumers irrespective of the fact that a particular consumer is not client of the bank that is delivering the ATM service. The explicit term of the social contact is that, no action of the banking institution should not be responsible for reducing the welfare of the society which can be easily identified in an explicit manner(ABC News, 2017).
The charging of fees in case of withdrawal of money by the clients of the foreign banks is badly violating the explicit terms of the social contract with the population of the country as unnecessarily the foreign bank clients are paying the fees to the banks for money withdrawal during an ATM operation. Realising the violation of the explicit terms of the social contract the banking institution of CBA is the first bank that abolished the $2 fee of money withdrawal by the non-banking customers. Gradually the rest of the big four banks that is NAB, ANZ and WBC are working on the same way for fulfilling the explicit and the implicit terms of the social contract and for doing good for the society as a whole (Conscious Business Australia, 2018).
The major stake holders who are related with this case study and will be affected by the abolition of the ATM withdrawal fees from the foreign n bank customers are the customers, the banking organization and the businesses that are looking for loan from the banking organization. The abolition of the ATM withdrawal fees from the foreign bank customers will help the customers to save an amount of 500 million Australian dollars annually and the banking organization will lose around 10 million Australian dollars annually. The third stake holders of the operation who can be negatively impacted are the businessmen who are looking for cheap loan from the banking organization as shortage of money in the banking organization may affect the loan sanction process of the banking organizations. The fourth stake holder will be the society as a whole as due to the loss the banking organizations may reduce the number of operating ATMs and the resultant effects will be the sufferings of the common population of Australia.
The social contract in banking institutions
The customers are definitely benefitted with the situation and the small business organizations of the country are also ready to accept the decision of the banking organization for the society as whole. The big four banks on the other hand has taken this decision as a strategy of improving their operational reputation to the Royal Commission Australia and the government of UK (Financialservices.royalcommission.gov.au, 2018).
Organisational legitimacy refers to the quality of the relationship that an organization is looking to develop in between the social values associated with the activities of the organization along with the terms and conditions of the acceptable behaviours that are practised by the institution or the organization in the context of a larger social system in which the institution is belonging. The legitimacy of an organization is questioned when there appears a conflict between the social value and the values that are generated by the practice of the organization.
In the given case scenarios the legitimacy of the big four banks has been negatively impacted as the Australian Prudential Regulation Authority has launched an inquiry on suspecting a wide spread case of money laundering and banking malfunction and the inquiry has started with the Commonwealth Bank whose governance, culture and accountability is under scanner. The bank is currently accused of several financial scandals especially with respect to the offerings of the life insurance scheme that was allegedly trying to en-cash profit from the sick and dying customers of the bank. The bank is also accused of selling the life insurance policies on the basis of the medical insurances that are out of date and thus was deliberately forcing the customers to fail to present any kind of claim for the insured amount. The bank is also under the inquiry from senate and royal commission of Australia due to the acquisition of deception and forgery. The government of Australia is also accusing the operations of the banks for caring out money laundering activities and for breaching the counter terrorism financing rules. According to the financial intelligence agency of Australia (AUSTRAC) civil penalty proceedings has been initiated against the bank in Federal Court for the issue of the serious systematic non-compliance identified in case of the bank.
Thus before taking the decision of abolition of the ATM withdrawal fees the image of the banking organization was badly dented and almost all the regulatory organization of the country of Australia raised question over the legitimacy of the organization as the values and practices of the organization was in serious conflict with the social value.
Efforts of major Australian banks to fulfill social responsibilities
In order to improve their image the banking organization took the decision of abolishing the ATM withdrawal fees from the foreign bank customers in the eyes of the customers as well as the regulatory authority’s of the country. But though the customers have welcomed the decision but the government of Australia as well as the different regulatory organizations are strongly watching the impact of the decision and the other rival banks of the banking organization of the Australia.
Thus by the application of the strategy the Commonwealth Bank tried to recover the Cognitive legitimacy as the ,application of the strategy of abolishing the ATM fees from the foreign bank customers has helped the customers to understand the value of the organization or the purpose of legitimate existence of the bank in the eyes of the customers.
But the Commonwealth Bank has failed to attain the Socio-political legitimacy has a large number of operations of the banks is under scanner. The governmental organizations as well as the different regulatory authorities are strongly watching the operations of the bank so that the top four banks of the Australia cannot pass on the cost of 500million dollars which they are losing out due to the abolition of the ATM fund withdrawal fees. So the regulatory authority are not convinced with this step of the big four banks of the abolition of the fees and they are imposing Bank Executive Accountability Regime (BEAR) on sighting the wide spread reregulation in the banking sector of Australia that will force the banking executives to give up a large portion of the salary(Steadyshot, 2018).
The strategy of the Voluntary financial reporting and the voluntary reporting regarding the internal governance and the risk management capacity can be defined as one important strategy for recovering the organizational legitimacy of the big four banks of Australia that are accused of doing wide spread financial scams and mishandling of the banking funds that are deposited with the general public with good trust. This strategy can be described as an effective strategy as in support of this as an evidence the case of the New Zealand Police organization should be considered where the organization use the strategy of voluntary non-financial annual report disclosures in order to respond against the unpleasant media publicity for recovery of the organizational legitimacy (Samkin, 2018).
References
ABC News. (2017). ‘The game is up’: Big four banks drop their ATM withdrawal fees. [online] Available at: https://www.abc.net.au/news/2017-09-24/commonwealth-bank-and-westpac-axe-atm-fees-for-non-customers/8979250 [Accessed 8 May 2018].
Conscious Business Australia. (2018). The Profit and the Loss – The Abandonment of the Social Contract by Banks – Conscious Business Australia. [online] Available at: https://cbau.com.au/the-profit-and-the-loss-the-abandonment-of-the-social-contract-by-banks [Accessed 8 May 2018].
Financialservices.royalcommission.gov.au. (2018). Financial Services Royal Commission – Home. [online] Available at: https://financialservices.royalcommission.gov.au/Pages/default.aspx [Accessed 8 May 2018].
Intheblack.com. (2017). Do financial statements still matter?. [online] Available at: https://www.intheblack.com/articles/2017/12/19/financial-statements-still-matter [Accessed 8 May 2018].
Intheblack.com. (2017). The push to improve communication in financial reporting. [online] Available at: https://www.intheblack.com/articles/2017/03/01/improve-communication-financial-reporting [Accessed 8 May 2018].
Samkin, G. (2018). Australasian Accounting, Business and Finance Journal. [online] Available at: https://ro.uow.edu.au/cgi/viewcontent.cgi?article=1093&context=aabfj [Accessed 8 May 2018].
Steadyshot. (2018). C1 Q2: Organisational Legitimacy. [online] Available at: https://steadyshotunimelb.wordpress.com/httpsteadyshotunimelb-files-wordpress-com201303logo-jpg/ [Accessed 8 May 2018].
Subramanian, R. (2016). 10 years on, are international standards helping financial reporting?. [online] Available at: https://www.intheblack.com/articles/2016/10/04/10-years-on-are-international-standards-helping-financial-reporting [Accessed 8 May 2018].
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