Asian Review of Accounting

What lies beneath? Financial reporting and corporate governance in Australian banks
Anne Abraham Hemant Deo Helen Irvine

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governance in Australian banks", Asian Review of Accounting, Vol. 16 Iss 1 pp. 4 - 20
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ARA
16,1

What lies beneath? Financial

reporting and corporate
governance in Australian banks

Anne Abraham and Hemant Deo

School of Accounting & Finance, University of Wollongong, Wollongong,
Australia, and

Helen Irvine
School of Accountancy, Queensland University of Technology, Brisbane,
Australia
Abstract
Asian Review of Accounting 2008.16:4-20.

Purpose This paper aims to focus on a number of unexpected disclosures by major Australian
banks, to highlight the subjectivity of financial reports and their failure to present an accurate
portrayal of the underlying realities, and to propose that corporate governance disclosures are required
to provide reassurance that financial reports are trustworthy.
Design/methodology/approach Moucks institutional framework of financial regulation
portrays financial reporting as a game played within a set of rules. It provides insights about the
subjectivity of financial reports which are illustrated with archival evidence from banks reports and
activities.
Findings The banks financial reports were shown, in the light of later revelations, to portray an
unrealistic view of their operations. Disclosures about corporate governance practices play a strong
legitimising role, enhancing perceptions that financial reports correspond with organisational realities.
Research limitations/implications This study considers a narrow population of companies
within one industry. By extending the focus, greater evidence could be provided that accounting
standards and financial reporting requirements have lost their connection with business practices.
Practical implications In spite of financial reporting reforms, financial reports are becoming less
reflective of companies activities and performance. This questions the usefulness of accounting
standards, and the effectiveness of regulatory systems. Future reforms to accounting standards need
to address these issues.
Originality/value The paper demonstrates the contention that the financial reports of several
Australian banks fail to match the realities that lie beneath is really a broader challenge to the
usefulness and credibility of Australias system of financial reporting and regulation.
Keywords Financial reporting, Corporate governance, Banks, Australia
Paper type Research paper

Asian Review of Accounting

Vol. 16 No. 1, 2008
pp. 4-20
q Emerald Group Publishing Limited
1321-7348
DOI 10.1108/13217340810872445

Introduction
On 13 January 2004, National Australia Bank (NAB) unexpectedly announced through
the Australian Stock Exchange (ASX) that certain of its employees had been trading in
foreign currency in an unauthorised manner (Vit, 2006), adding to a growing number of
corporate financial scandals (Mak et al., 2005). Not surprisingly, the price of the banks
shares dropped immediately and a number of enquiries were launched. The employees
The authors acknowledge funding provided by the University of Wollongong through the
Faculty of Commerce Research Grant Scheme.

Asian Review of Accounting 2008.16:4-20.

had incurred, on behalf of the bank, losses estimated initially at $180 million (Oldfield,
2004a). This had occurred in spite of profound structural and regulatory change since
the deregulation of the Australian banking system in 1979. The failure of the financial
report of a major Australian bank[1] to portray an accurate picture of its operations
drew attention to the subjectivity of audited financial reports and highlighted the
increasing need for effective corporate governance policies.
Because banking is a significant, competitive, high-profile industry, its major
players must maintain their credibility in the marketplace in spite of occasional
revelations of unethical or illegal practices and a lack of accountability. The pattern of
crisis and recovery experienced by the four major Australian banks from the early
1990s to 2005 indicates that they have been able to maintain their legitimacy within the
subjectively constructed institutional environment (Mouck, 2004) in which they
operate. This paper proposes that the NAB foreign currency trading crisis, together
with other banking crises, brings into question the ability of financial reports to
transmit an accurate picture of events, and highlights the need for banks and other
companies to report on the corporate governance processes that underlie the
preparation of those reports.
The paper first provides a brief overview of other revelations by the four major
Australian banks over the past 15 years, all of which indicate a lack of assurance about
the systems underlying the figures provided in financial reports. The NABs response
to its foreign currency crisis is then explored, highlighting both the banks inadequate
disclosure and the predictable nature of the responses made by banking and regulatory
authorities. Moucks (2004) framework of objectivity and subjectivity in financial
reporting regulation is interpreted in the light of the Australian context, and the
Australian Stock Exchanges principles of good corporate governance (Australian
Stock Exchange, 2003) are shown to be a response to the changing institutional
environment in which the Australian banks operate. The four major Australian banks
compliance with these principles is documented, and implications for the future, not
only for these banks but for other companies, regulators, and the users of annual
reports, are then outlined. Finally, conclusions are drawn regarding public
expectations about corporate disclosure, accountability, and the need for reassurance
that there is a correspondence between financial reports and the systems and events
that underlie them.
Unexpected announcements by major Australian banks
The history of the banking system in Australia has been described as one of boom and
bust, with bank failures arousing much public antagonism even in the 1800s (Crane
et al., 2001, p. 64). The events revealed by NAB in January 2004, and its subsequent
recovery, represent another instance of the banks propensity to experience crises,
undergo investigations, and re-form their corporate image before another crisis
eventuates. Within the 15 years immediately preceding NABs shock announcement of
January 2004, each of the four major Australian banks announced unexpected losses or
expenses. The unexpected announcements of the early 1990s related to property
devaluations and the failure of the banks to recognize that they were grossly
underprovided in respect of bad debts. NABs unexpected announcement of 2002
related to its HomeSide mortgage division, and the 2004 announcement related to the
foreign currency trading losses already mentioned. In each of these cases,

What lies
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Asian Review of Accounting 2008.16:4-20.

Table I.
Selected unexpected
expenses/losses of
Australian banks

announcements of losses were followed by annual reports whose profit figures were
dramatically affected. The figures in Table I are taken from the banks annual reports
rather than from earlier announcements of the extent of losses, under-provisions or
write-downs.
In the early 1990s, all of Australias big four banks experienced problems with bad
and doubtful debt provisions, particularly ANZ, CBA and WBC. ANZ reported a profit
of $267m in 1991 after a charge for bad and doubtful debts of $1,037m. The following
year, in 1992, ANZ reported a loss of $579m (Australia and New Zealand Banking
Group Ltd, 1992, p. 34; Lloyd, 1992, p. 37; Kaye, 1992, p. 28), due to massive bad and
doubtful debt provisions of $1,600m. In the 1992 Report to Shareholders, the
provisioning charge was attributed to the worst recession since the 1930s in
Australia (Australia and New Zealand Banking Group Ltd, 1992, p. 15), resulting in a
devaluation of properties, particularly in Victoria, which was severely affected
(Australia and New Zealand Banking Group Ltd, 1992, pp. 9-10). This charge was
expected to be reduced in the years ahead, assisting the bank to return to profitability
(Australia and New Zealand Banking Group Ltd, 1992, p. 8).
In 1991, Commonwealth Bank of Australia (1995, p. 34) declared a profit of $883m,
after a provision for bad and doubtful debts of $1,026m. The following year, in 1992,
the banks bad debt problems were not over (Willmer, 1992), with the bad and doubtful
debts charge remaining high at $843m. In 1992, the profit of $409m was less than half
that of 1991 (Commonwealth Bank of Australia, 1995, p. 34). The year 1992 was
described in CBAs annual report as a difficult year during which economic activity
remained weak (Commonwealth Bank of Australia, 1992, p. 40).
WBC also struggled at that time with its bad and doubtful debt provisions. A profit
of $476m in 1991 was earned after making provisions of $1,119m, and in 1992 the
situation worsened, with a bad and doubtful debt provision of $2,802m, resulting in a
loss of $1,562. (Westpac Banking Corporation, 1992, p. 38). The 1992 expense included
new specific provisions relating to diminutions in value of property development
projects (Westpac Banking Corporation, 1992, p. 55), brought about by changing
valuation policy to current market value (Westpac Banking Corporation, 1992, p. 42)
because of a disastrous fall in the property market. This led to a WBC write-down of

Year

Bank

Significant
expenses/losses
($m)

1991
1992
1991
1992
1991
1992
2001
2002
2004

ANZ
ANZ
CBA
CBA
WBC
WBC
NAB
NAB
NAB

1,037
1,600
1,026
843
1,119
2,802
3,617
3,937
360

Net profit
for year
(after tax, ($m)
267
(579)
883
409
476
(1,562)
2,083
3,373
3,551

Nature of significant expense

Bad and doubtful debts
Bad and doubtful debts
Bad and doubtful debts
Bad and doubtful debts
Bad and doubtful debts
Bad and doubtful debts
Losses from HomeSide mortgage division
Losses from HomeSide mortgage division
Foreign currency trading losses

Sources: Australia and New Zealand Banking Group Ltd (1992), Commonwealth Bank of
Australia(1992), National Australia Bank (2002, 2004), Westpac Banking Corporation (1992)

Asian Review of Accounting 2008.16:4-20.

property by 34 per cent (Kavanagh, 1992, p. 18; Westpac Banking Corporation, 1992,
p. 12).
NABs 2001 annual report reflected the result of the collapse of its US subsidiary,
HomeSide, as a result of what was arguably Australias biggest corporate blunder of
that year (Durie, 2002, p. 72). The banks group net profit (after tax) attributable to
members of the company was $2,083m after writedowns of mortgage servicing rights
and goodwill in HomeSide Lending, Inc., after tax, of $3,617m had been taken into
account (National Australia Bank, 2001, p. 10). Despite the unexpectedness of the
HomeSide announcements of July and September 2001, and the size of the loss, NAB
was not punished by the market, with its share price increasing 47 per cent by June
2002 (Durie, 2002, p. 72).
In December 2003 the NAB group reported a profit after tax of $3,955m (National
Australia Bank, 2003, p. 82), and the next month, unexpectedly, it announced estimated
foreign currency trading losses of $180m, which eventually grew to $360m. They were
incurred as a result of the illegal practices of several rogue foreign currency traders
who, since 2001, had been taking advantage of the banks lack of internal controls
(PriceWaterhouseCoopers, 2004, p. 7; Australian Prudential Regulation Authority,
2004b). Rather than being revealed through the banks own internal control systems,
these revelations came about as a result of information about suspicious behaviour
provided by one NAB whistle-blower (Australian Broadcasting Corporation, 2004a, b;
Hepworth, 2004, p. 4).
Such is the trust of the Australian public in the major banks as investment vehicles,
and in the regulatory systems ability to respond to crises, that invariably they survive
revelations of an unexpected nature, even if these revelations are massive in size and
effect.
NABs crisis and response
It was revealed in the PriceWaterhouseCoopers (2004, p. 7) report that NABs losses on
unauthorised foreign currency exchange dealings had been building since 2001, but
had been concealed by four traders and their supervisor. The losses were incurred
through three major mechanisms. The first stage involved the smoothing of daily
losses in foreign currency options by moving profits from one period to another. This
practice, which appeared to be accepted by the currency options traders
(PriceWaterhouseCoopers, 2004, p. 13), was employed from late 2001 to May 2003
(Australian Prudential Regulation Authority, 2004b, pp. 15-16). In July 2003 a new level
of manipulation was adopted, with the concealment of losses by removing trades from
the banks system (Australian Prudential Regulation Authority, 2004b, p. 16). By
taking advantage of the one-hour trading window at the end of the day, traders
recorded fictitious, one-sided trades, thereby maintaining a rolling balance of currency
trading options. According to the PriceWaterhouseCoopers (2004, p. 12) report, the
foreign portfolio was overstated for the year ended 30 September 2001 by $4.16 million,
building to $360 million by 19 January 2004. In October 2003, NAB ceased its practice
of reconciling internal trades, which opened the way for a new level of loss concealment
involving the creation of fictitious one-sided options trades (Australian Prudential
Regulation Authority, 2004b, p. 17). Not only were losses concealed, but profits were
recorded, and the four traders involved were actually paid performance bonuses
totalling $790,000 for the year ended 30 September 2003 (PriceWaterhouseCoopers,

What lies
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ARA
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Asian Review of Accounting 2008.16:4-20.

2004, p. 17). The eventual unravelling did nothing to assure the public of the soundness
of NAB risk management processes, since it came about as the result of whistleblowing
by a staff member employed on NABs Melbourne trading desk (Hepworth, 2004, p. 4;
Australian Broadcasting Corporation, 2004a), and not as a result of the banks internal
or external audit processes or routine regulatory surveillance. The banks later
response reinforced its need to reassure the public that sound corporate governance
practices under-girded their financial reports.
These revelations took the Australian banking industry, the stock market and the
banking public by surprise, since in December 2003, just one month before its
unexpected announcement, the NAB group had recorded a profit after tax of $3,955m
(National Australia Bank, 2003, p. 82), with no hint of future losses or compromised
risk management practices.
Immediately and predictably, four inquiries were launched:
(1) by the Australian Prudential Regulatory Authority (APRA);
(2) by NAB itself;
(3) by the Australian Securities and Investments Commission (ASIC); and
(4) by PriceWaterhouseCoopers[2] (Oldfield, 2004c, p. 19).
APRAs inquiry was to be conducted in tandem with a broader review of about 15
Australian banks risk-management practices (Oldfield, 2004b, p. 1), and represented
not just a reactive investigation into the banks practices but a wider investigation in
keeping with its role as the watchdog of the Australian financial industry. In 2001, the
Australian Prudential Regulation Authority (2001, pp. 13-14) had identified Australia
as materially non-compliant with its third core principle of effective banking
supervision. This related particularly to whether directors and managers were fit and
proper as to expertise and integrity and whether operational policies and internal
control procedures were adequate. NABs investigation was undertaken in order to
establish a reliable estimate of exactly how great the losses were, how such a lack of
control could have eventuated, and, arguably, to re-establish some credibility with the
Australian public. Criticism of the board was harsh, with an unsuspected degree of
sloppiness in the banks risk management being uncovered (Sykes, 2004, p. 9). Such
was the publicity and sensationalism surrounding the scandal that it was even alleged
by one of the foreign currency traders that the bank actually knew of the breaking of
the risk-management rules (Oldfield, 2004b, p. 1).
The chairman of the NAB Board and the Chief Executive Officer, who had survived
NABs HomeSide crisis, resigned in February 2004. The release of the APRA and
PriceWaterhouseCoopers reports saw a challenge to the Principal Audit Committee,
which, they asserted, focused on processes rather than substantive issues (Australian
Prudential Regulation Authority, 2004b). The chair of this committee later resigned,
along with five other directors of the beleaguered board, calling into question the role
of boards and their responsibility in ensuring compliance with corporate regulations
(Cornell, 2004b, p. 17)[3].
NAB acknowledged these failures in its risk and control framework, deficiencies in
the governance structures, and an aggressive, risk-taking performance culture
(Australian Prudential Regulation Authority, 2004b, p. 72; Hewson, 2004, p. 82) which

Asian Review of Accounting 2008.16:4-20.

led to the suppression of bad news and a lack of transparency

(PriceWaterhouseCoopers, 2004, p. 32).
The Principal Board Audit Committee was reconstituted with a new chairman, and
the Principal Board Risk Committee also gained a new chairman. The four traders and
their supervisor were dismissed. In addition, a US Securities and Exchange
Commission (SEC) investigation into NABs relationship with its auditors, KPMG,
highlighted a perceived lack of auditor independence (Durie, 2004, p. 84).
NAB responded in March 2004 to the PriceWaterhouseCoopers report by
announcing changes to its board, dismissals of various individuals, and remedial
actions to strengthen control procedures (NAB Group, 2004). Later that month APRA
released its report, the result being that not only did NAB have to submit to
investigations, but it had to obey undertakings to institute improvements to its key
systems and controls (Australian Prudential Regulation Authority, 2004b, pp. 78-9,
Murray, 2004b, p. 27; Australian Financial Review, 2004a, p. 78). These restrictions
included increasing its total capital adequacy ratio, using standard methods to
calculate market risk, and closing its currency options desk for corporate business
(Baker, 2004, p. 55; Oldfield and Boyd, 2004, p. 1). In spite of these restrictions being
imposed by APRA, there was criticism of the regulators failure to detect problems
within NAB, since a year before the foreign currency losses were disclosed, it had
allegedly uncovered issues which had the potential to give rise to significant problems
in the future (Australian Financial Review, 2004a, p. 78). This further damaged the
banks reputation and integrity (Cornell, 2004a, p. 55).
The Directors Report, the Financial Review and Corporate Governance sections of
NABs 2004 report all portrayed a group shocked by the foreign currency revelations,
and working to rectify the systems that allowed the losses to occur. NABs 2004
Directors Report included the statement that:
. . . no further matter, item, transaction or event of a material and unusual nature has arisen in
the interval between end of financial year and date of report that in the opinion of the
directors has significantly affected or may significantly affect the operations of the group, the
results of those operations or the state of affairs of the group in future financial years
(National Australia Bank, 2004, p. 87).

The Directors Report (National Australia Bank, 2004, pp. 84-5), under the heading
Significant changes in the state of affairs, also included a lengthy discussion of the
foreign exchange trading losses of $360m, citing the PriceWaterhouseCoopers Report
of 2004: the losses arising from the foreign currency options trading increased
significantly between September 2003 and January 2004, with four traders exploiting
loopholes and weaknesses in systems and processes to hide trading losses and protect
bonuses.
Further, warning signals, both inside the Company and from the regulators and
other market participants, were not properly acted upon, in spite of the fact that the
Board had overall responsibility for corporate governance, including safeguarding
stakeholder interests and reviewing and monitoring risk management and
compliance. The company indicated changes it had made in its board,
management, risk and control frameworks, and culture, including information on
the companys whistleblower protection program (National Australia Bank, 2004,
p. 79), which, significantly, was also included in its 2003 Annual Financial Report
(National Australia Bank, 2003, p. 69).

What lies
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ARA
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Asian Review of Accounting 2008.16:4-20.

10

The unexpected revelation of NABs failure to manage risk adequately in its foreign
currency dealings has prompted all financial institutions in Australia to review their
management of trading (Whyte and Boyd, 2004, p. 64), since the major banks in
particular are focused on an aggressive pursuit of profits in relation to foreign currency
dealing (Baker, 2004, p. 55). Against the backdrop of a number of high-profile corporate
collapses in the late 1990s, there has been a growing public awareness of the need for
reform of corporate governance practices (Carlin and Ford, 2006, p. 75; citing Di Piazza
and Eccles, 2002). Consequently, in Australia and other countries there has been an
attempt to remedy ills ranging from board structure and relationship with
management to disclosure requirements and audit independence (Carlin and Ford,
2006, p. 75), in order to provide reassurance that the systems underlying financial
reports can be relied upon.
Regulatory framework
Financial reports are presented as objectively constructed images of reality, but in
many cases, subsequently these images are shown to have been flawed. Mouck (2004)
drew on Searles (1995) theory of institutional reality, likening the establishment of
acceptable forms of financial regulation, including financial reporting, to the rules of a
game, which, once set in place, become the framework by which the game is governed.
The game of financial reporting, therefore, is played by companies, which apply
these rules to their own financial operations, and produce reports which portray a
particular view of reality. These reports, while they are epistemologically objective
with respect to those rules, are the product of a system which in itself has no objective
basis (Mouck, 2004, p. 540). This can be described as a three-tiered system. First, an
institutional framework exists which is realist and objective, consisting of
taken-for-granted societal expectations. Secondly, within that framework, a system
of financial reporting rules and regulations is subjectively created, with which entities
must comply. Thirdly, as entities apply those rules and regulations, their financial
reports, while reflecting the necessity of measuring up favourably against those of
their competitors, are nevertheless perceived to be objectively constructed. Somewhere
in the process, however, reality has been redefined and what lies beneath the figures
has been submerged.
Corporate crises question the seeming objectivity of financial reports and reinforce
their subjectivity. This has a detrimental effect on organizations, which, eager to
appear legitimate, are subject to various kinds of institutional pressures from
regulatory authorities, from the taken-for-granted norms of society, and from the
pressure of copying successful organizations (DiMaggio and Powell, 1988). These
pressures all offer encouragement to provide a reassuring annual report. The
deregulation of the Australian banking system in 1979 changed the institutional
landscape in which the four major Australian banks operate. This has had an impact
on the way they apply financial accounting rules and regulations, with each bank
being acutely aware of its image and its need to maintain a reputation as being
profitable and competitive, while at the same time operating in a manner which
satisfies the expectations of society in terms of financial reporting and accountability.
Australian banks present their annual reports within the context of this institutional
framework, whose rules and regulations are the result of the deliberations,
pronouncements and reports of various regulatory bodies. Alongside the Australian

Asian Review of Accounting 2008.16:4-20.

Accounting Standards Board (AASB) and the requirements of the Corporations Act
(2001), regulatory authorities such as ASIC and APRA have been increasingly
tightening their reporting requirements in recent years, with more demanding rules
about corporate disclosure (Kavanagh, 2003, p. 12) and corporate governance
stimulating (or responding to) shareholders demands for higher performance by
boards, including audit boards. Because of the desire on the part of each bank to
present an image in keeping with societal expectations, both of governance and
profit-making, companies in crisis inevitably resort to public relations strategies to
minimise the damage to their reputation in the eyes of a public concerned with
legitimacy and image. The ASXs Corporate Governance Guidelines, issued in 2003,
offered companies an opportunity to establish themselves as legitimate by
highlighting their good corporate governance practices.
Corporate governance
In March 2003, the ASX Corporate Governance Council released its Principles of good
corporate governance and best practice recommendations (Australian Stock
Exchange, 2003), in which it outlined ten principles and 28 recommendations
intended to provide a guide for listed companies. Table II details Principles 4 and 7 and
their related recommendations, as they are particularly relevant to foreign currency
trading and reporting issues covered in this paper. Principle 4 relates to safeguarding
integrity in financial reporting, and Principle 7 highlights the recognition and
management of risk.
While not mandatory, the principles were accompanied with an amendment to the
ASXs listing rule 4.10.3, which required companies to disclose, in the section of their
report referring to corporate governance, the extent to which they had adopted the
Councils 28 recommendations (Australian Stock Exchange, 2005). Further, listing Rule
12.7 required all companies in the All Ordinaries Index, on the first day of their
financial year, to satisfy Recommendation 4.2 of the Best Practice Recommendations,
by having an audit committee. The top 300 of those companies, by capitalisation, were
further required to comply with the composition of their Audit Committee according to
Recommendation 4.2. These requirements were to apply to financial years beginning
after 1 January 2003, and thus were actual listing requirements for the 2004 annual
reports of the four major Australian banks.
The Financial Review section of NABs 2004 report demonstrated a desire to present
an image of integrity and exemplary governance, however there was no mention in
NABs 2003 report of the ASX Corporate Governance Councils recommendations. The
short paragraph on Trading risk management in the 2003 report (National Australia
Bank, 2003, p. 79) was changed in 2004 to acknowledge the groups attempt to continue
to strengthen its market risk control framework, and outlined the specific limits that
were in place to ensure prudent internal risk management and the meeting of
regulatory requirements (National Australia Bank, 2004, pp. 59-60). A greatly
increased section on disclosure controls and procedures and internal control over
financial reporting in the 2004 report outlined the discovery of unauthorised trading
in foreign currency options, referring to both the PriceWaterhouseCoopers and APRA
reports. The company acknowledged its commitment to addressing APRA and ASIC
enforceable requirements in both this section and the Directors Report (National
Australia Bank, 2004, pp. 63-65, 86).

What lies
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11

ARA
16,1

Principle

Recommendations

4. Safeguard integrity in financial

reporting

4.1 Require the chief executive officer (or equivalent) and the
chief financial officer (or equivalent) to state in writing to
the board that the companys financial reports present a
true and fair view, in all material respects, of the
companys financial condition and operational results
and are in accordance with relevant accounting
standards
4.2 The board should establish an audit committee
4.3 Structure the audit committee so that it consists of: only
non-executive directors; a majority of independent
directors; an independent chairperson, who is not
chairperson of the board; at least three members
4.4 The audit committee should have a formal charter
4.5 Provide the information indicated in Guide to Reporting
on Principle 4
7.1 The board or appropriate board committee should
establish policies on risk oversight and management
7.2 The chief executive officer (or equivalent) and the chief
financial officer (or equivalent) should state to the board
in writing that:
7.2.1 the statement given in accordance with best
practice recommendation 4.1 (the integrity of
financial statements) is founded on a sound
system of risk management and internal
compliance and control which implements the
policies adopted by the board
7.2.2 the companys risk management and internal
compliance and control system is operating
efficiently and effectively in all material respects
7.3 Provide the information indicated in Guide to Reporting
on Principle 7

12

Asian Review of Accounting 2008.16:4-20.

7. Recognise and manage risk

Table II.
Selected ASX principles
of good corporate
governance and best
practice
recommendations

Source: Australian Stock Exchange (2003)

Stimulated by the ASXs best practice disclosure requirements, NABs 2004 report
included an admission that the year had been one of transformation, with the foreign
currency trading disclosures being identified as a catalyst for renewal for the Group
(National Australia Bank, 2004, p. 70). Changes to the board and to the executive
management team, particularly regarding expertise, were outlined, as well as some
information about the attention paid during the year to the development of a more
integrated governance system (National Australia Bank, 2004, p. 70). The
non-financial sections of the report were therefore as reassuring as possible, given
the revelations of January 2004, and both acknowledged responsibility and pointed to a
better system in the future. In spite of this, however, the report revealed that five of the
ASXs recommendations had not been fulfilled (National Australia Bank, 2004, p. 78).
Table III indicates NABs failure to comply with the ASX principles of corporate
governance numbers 4 and 7, and presents the response of all four banks to the ASXs
recommendations for the years 2003 and 2004. There was a marked increase in the

Bank

2003

2004

ANZ

Statement of full compliance (Australia and

New Zealand Banking Corporation, 2003,
p. 39)
ASX principles of good corporate
governance not mentioned (Commonwealth
Bank of Australia, 2003)
ASX principles of good corporate
governance not mentioned (National
Australia Bank, 2003)

Full compliance detailed in a table

(Australia and New Zealand Banking
Corporation, 2004, p. 45)
Full compliance with ASX
recommendations (Commonwealth Bank of
Australia, 2004, p. 39)
Five instances of non-compliance, including
4.3 (temporary) and 7.2 (due to foreign
currency problem) (National Australia
Bank, 2004, p. 78)
Compliance with all ASX recommendations
except 9.4, on which there is qualified
compliance (Westpac Banking Corporation,
2004, pp. 68-69)

CBA
NAB

Asian Review of Accounting 2008.16:4-20.

WBC

Statement of compliance with all ASX

recommendations except 9.4 (shareholder
approval of equity-based executive
remuneration) (Westpac Banking
Corporation, 2003, pp. 66-67)

profile given to corporate governance from 2003 to 2004, particularly in the case of
CBA and NAB. While the 2004 reports were the first where reporting on the ASX
Corporate Governance principles was mandatory, NABs foreign currency crisis would
have underlined the need for all banks to reveal their corporate governance credentials.
These changes to the composition and presentation of the NAB annual report
indicate the necessity on the part of NAB to ensure that it presents an institutionally
acceptable image. Pressures to conform to regulatory authorities, to societal norms,
and to the successful behaviour of other organizations have already been mentioned.
The four major banks are in direct competition with one another, must conform to the
same regulatory requirements, are likely to copy one anothers corporate behaviour,
and all have a need to appear legitimate in the eyes of the public. Thus there is no doubt
that the NAB foreign exchange revelations impacted strongly on the other three banks,
as they did on Australias regulatory system. CLERP 9 (Corporate Law Economic
Reform Program), which became law in June 2004 (Corporate Law Economic Reform
Program Act, 2004), specified more stringent requirements for audit regulation and
corporate disclosure. While not a response to the NAB crisis, it did reflect an ongoing
public dialogue designed to improve the transparency and efficiency of Australian
business (Parliamentary Secretary to the Treasurer, 2004). This was strongly linked
to the promotion of shareholder participation and the achievement of one of ASICs
core responsibilities, i.e. market confidence (Lucy, 2004, p. 13).
APRAs report was critical of the market risk management practised by NAB
(Australian Prudential Regulation Authority, 2004b, p. 34). Although NAB initially
attributed the foreign currency losses to rogue trading, the APRA report indicated
that it was more related to lax risk management at the bank (Kruger, 2004, p. 37).
Further, APRA admitted that it had concerns about NABs risk management
strategy well before the banks massive foreign exchange losses were revealed
(Brown, 2004), so it would be hardly surprising that within the other banks, there
would have been substantial internal reviews of the policies and procedures regarding
risk management and ethical behaviour. APRAs mission can be described as
financial safety, to be achieved by promoting prudent business behaviour and risk

What lies
beneath?

13

Table III.
Selected responses to
ASX corporate
governance
recommendations in 2003
and 2004 annual reports

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Asian Review of Accounting 2008.16:4-20.

14

management on the part of the financial institutions over which it has authority
(Laker, 2004).
When it completed its investigation of NAB in March 2004, APRA also announced
that it was in the process of reviewing the risk management practices of other
authorised deposit taking institutions, asking them to satisfy themselves and APRA
that they could not face similar problems (Australian Prudential Regulation
Authority, 2004a). The subsequent investigation of banks foreign exchange options
trading practices was therefore focused towards acting on behalf of the beneficiaries of
those banks in order to ensure the health and behaviour not only of individual banks,
but by extension, of the Australian financial system. While APRA uncovered some risk
management control issues, there were none of the same magnitude of those at NAB
(Murray, 2004a, p. 47; Australian Associated Press, 2004). There is no doubt that risk
management moved up the agenda of boards, but a survey suggested this was
because of increased regulatory requirements rather than self-assessment (Murray,
2004a, p. 47). Whatever the reason the profile of risk management increased internally,
it is hardly surprising that the banks desire to present themselves as sound in these
areas would be reflected in their 2004 annual reports. Indeed, each of the other three
major banks response to the ASX requirements included more detail of their risk
management and governance structures in their 2004 reports than in the previous year,
as summarised in Table III.
The Australia and New Zealand Banking Corporation (ANZ) reported full
compliance with the ASXs corporate governance recommendations in both its 2003
and 2004 annual reports. During the 2004 year the group had reviewed its risk culture
to ensure the correct balance between risk and reward and continued a policy of
reviewing regular reports on key emerging risks, thus ensuring timely and
necessary mitigating actions in response to emerging risk issues (Australia and
New Zealand Banking Corporation, 2004, p. 51).
The Commonwealth Bank of Australia (CBA) made no mention of the ASX
corporate governance principles in its 2003 report, but did include an outline of the
regulatory system under which it operated as part of Australias financial system. Its
2004 report included a statement of compliance with all the ASX recommendations
(Commonwealth Bank of Australia, 2004, p. 39).
Like the Chairmans Reports of the other major banks, Westpac Banking
Corporations (2004) Chairmans Report also acknowledged the growing volume of
reporting and regulatory requirements, particularly in the light of the banks
corporate governance responsibilities. In addition, the chairman stated the bank had
complied with all ASX corporate governance recommendations except 9.4. This related
to the need for equity-based executive remuneration to be in accordance with
shareholder approved thresholds (Australian Stock Exchange, 2003). On this there was
no compliance in 2003 (Westpac Banking Corporation, 2003, pp. 66-7), and qualified
compliance in 2004 (Westpac Banking Corporation, 2004, pp. 68-9).
In fulfilling regulatory requirements in relation to corporate governance, the banks
provided the information required by regulators about the processes through which
their systems were conducted and their financial reports were produced. The focus so
far has been on what information was provided in the various annual and financial
reports, but in view of the NAB crisis, it is apparent that there is a great deal of

Asian Review of Accounting 2008.16:4-20.

information that was not captured by the regulatory requirements within which these
annual reports were prepared.
Implications for the future
The PriceWaterhouseCoopers (2004, pp. 40-9) report on NABs foreign currency crisis
revealed warning signs from a number of reports that were available to NAB and
may have alerted management to the problems ahead. APRA, the banks own internal
audit and KPMGs external audit report all highlighted areas that needed attention but
were unheeded by NABs Principal Board Audit Committee. NABs then head of global
wholesale financial services testified in court that he criticized the auditors attitude to
foreign exchange options trading in December 2001, two years before the crisis
revelations in January 2004 of massive foreign exchange losses (Hughes, 2005, p. 3).
Underlying NABs annual report issued in 2003, therefore, were unresolved issues
out of which erupted the later revelations. It is hardly surprising that users of financial
reports might ask the question: what else lies beneath the numbers and information
that are presented in the reports of any bank? Are there any guarantees to external
users of reports that the other banks do not have the same seeds of trouble in their
internal procedures? Clarke et al. (2003, p. 316), while referring to corporate collapses
rather than significant losses, contended that the unexpected nature of these events led
corporate regulators to emphasize specific governance rules that dictate the behaviour
of auditors, directors, company boards, audit committees, and corporate executives in
general, without acknowledging the need for self-imposed ethical behaviour. In the
case of the NAB, it appears that adherence to financial reporting disclosure
requirements did not guarantee immunity from a simmering crisis whose origins were
undisclosed by formal financial reporting requirements.
While the pressure is undoubtedly on corporations to comply with institutionally
established regulatory requirements, the pressure is also on regulators to achieve high
standards of corporate governance, including audit and disclosure. The current
institutional environment is one in which there are greatly increased political, public,
industry and business expectations that misconduct on the part of companies will be
prevented, minimized, and punished (Lucy, 2004, p. 6). As a consequence, the speed and
effectiveness of the reactions of regulators and law enforcement agencies are
scrutinized rigorously. Once a corporate collapse or scandal has occurred, the public
expect regulators to provide a proper accounting of what went wrong, and to ensure
that legislation is enacted and standards tightened so that the same mess cannot be
made again, or at least with the same ease (Lucy, 2004, p. 6).
There are wider implications of these events, however. Power (1994, p. 299)
proposed that the notion of audit had become so institutionalized within the social
world that it has gained the status of a cultural logic, deeply embedded in what has
become an audit society. This occurred because of a demand for assurance regarding
accountability. In this era of accountability and an audit culture, the NAB foreign
currency revelations contributed further to an undermining of public confidence in the
audit process, and in corporate disclosure. CLERP 9, as a piece of regulatory
legislation, can therefore be seen as at least a partial solution [. . .] to the disquiet about
governance and disclosure issues that has characterized the last few years, both in
Australia and internationally, in the wake of various corporate collapses (Lucy, 2004,
pp. 9, 15). Particularly relevant is the need for greater transparency in the reporting of

What lies
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15

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Asian Review of Accounting 2008.16:4-20.

16

risk management procedures, especially given the variation in the levels of such
disclosure (Carlon et al., 2003).
APRAs Prudential Standard APS 232 (Australian Prudential Regulation Authority,
2005b), released in April 2005, requires a whole of business approach to business
continuity management for authorised deposit-taking institutions (Australian
Prudential Regulation Authority, 2005a). Alongside the ASXs best practice
recommendations on corporate governance, it represents another regulatory addition
to corporate reporting requirements. The mere presentation of financial results is not
sufficient to assure stakeholders of the reliability, not just of the figures presented, but
of the processes which underlie those figures.
The adoption of International Financial Reporting Standards (IFRS) has been sold
to the Australian public as bringing improved access to global capital markets,
enabling accounting to transcend national boundaries (Perera et al., 2003, p. 29) and
reducing the cost of capital (Haswell and McKinnon, 2003, p. 8). There can be no
assurance that the adoption of IFRS will provide any advantage to the users of
financial statements in regards to the annual reports providing a true reflection of the
underlying processes. Further scrutiny of internal processes by the banks themselves
and by external regulatory bodies such as APRA and ASIC, move the focus to the
effectiveness of those regulators in the discharge of their responsibilities, rather than to
the reliability of financial statements prepared under IFRS.
Conclusions
The issue at the heart of this paper has been the inadequacy of financial reporting
disclosures to present a full and accurate portrayal of the realities that lie beneath the
words and figures of the annual report. The complexity of foreign exchange dealing
has been identified as a point of weakness for boards, accountants and auditors since
1983, when the Australian dollar was floated (Spry-Bailey, 2005, p. 58). It is perhaps
this complexity that was at the bottom of NABs failure to establish and monitor its
foreign currency traders. Whatever the reason for the losses, NABs 2003 annual report
gave no hint of trouble ahead in the area of foreign currency trading, and assurances of
sound internal procedures and risk management were proved to be incorrect in the
light of later revelations. This calls into question the reliability of such assurances in
the annual reports of other banks, as illustrated by the catalogue of unexpected
announcements by the four major Australian banks over a 14-year period. In all these
cases, annual reports gave assurances that systems were operating effectively, and
provided no hint of troubles ahead. The subjectivity of financial reports, while widely
acknowledged, threatens their usefulness and reliability across all industry sectors.
This lack of reliability can be interpreted in a number of ways: as a deficiency in the
people involved, such as the board members and bank employees; as a deficiency in the
nature of accounting standards; as a deficiency in the regulatory system, or a
combination of these. Wherever the fault lies, the question that needs to be addressed is
how such problems can be avoided in the future. Are tighter legislation and more
rigorous policing of regulations the answer? Clarke et al. (2003, p. 220) suggest that the
deficiency is in the nature of accounting standards, with conventional accounting
unable to be a reliable instrumentation system. Reforms to accounting therefore need
to address many of the commercial practices that have emerged in this last boom/bust
period (Clarke et al., 2003, p. 219), but they will not be sufficient on their own to assure

Asian Review of Accounting 2008.16:4-20.

the public that they can rely on corporate reports. Users of these reports require greater
assurance that information presented has been prepared in accordance with principles
of good corporate governance.
It is hardly surprising, in the light of recent corporate revelations, that even though
there have been numerous inquiries and regulatory reforms, the public are less inclined
to believe that regulatory systems can guarantee the protection needed to ensure the
reliable functioning of the financial system. Perhaps the publics tolerance of these
unexpected revelations is eroding. Users of financial reports, stung by corporate
collapses and crises, are now demanding greater disclosure than that which is
currently in place, greater accountability, not only on the part of corporate boards, but
on the part of the accounting standard setters and corporate regulators, and greater
reassurance that what lies beneath the annual reports truly reflects what is presented.
Notes
1. The four major Australian banks referred to in this paper are Australia and New Zealand
Banking Corporation (ANZ), Commonwealth Bank of Australia (CBA), National Australia
Banking Corporation (NAB) and Westpac Banking Corporation (WBC). The assets held by
these four banks in 2002 were estimated to represent 68 percent of total bank assets in
Australia (Hogan et al., 2004, p. 9).
2. It was suggested that the PriceWaterhouseCoopers inquiry was compromised because of a
conflict with internal audit work at NAB to the extent of more than $10 million per year
(Cornell, 2004b, p. 17). The PWC inquiry report, however, was later substantiated by APRAs
report.
3. These resignations occurred against a backdrop of publicly expressed tensions. In the
months preceding these resignations, there were calls for all the board to go, and a new set of
directors to be introduced who would instil a new set of values into NAB management
(Sykes, 2004, p. 9). In addition, the composition of the board was criticized, since it had no
bankers among its non-executive directors (Australian Financial Review, 2004b, p. 82). The
resignations occurred in spite of criticisms by the chair of the Principal Audit Committee,
who called into question the independence of the PriceWaterhouseCoopers report
(Australian Broadcasting Corporation, 2004b).
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Corresponding author
Anne Abraham can be contacted at: aabraham@uow.edu.au

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