Reference no: EM131809794

Assignment

Applying the political cost hypothesis of Positive Accounting Theory, explain the claim in the article that ‘The banks have promoted studies that find small-business is getting a better deal from the banks, perhaps in fear that the federal government might introduce legislation to improve service to the country's 1.2 million small-business operators, as has the government in the UK'.

Article is attached below in relation to this question...

Financial Accounting in the News: A step too far crucifies small business

Stewart Oldfield

The Australian Financial Review, 4 June 2004, p. 81

Alan and Wilma McMinn thought they had it made when they bought a Gold Coast child-care centre from ABC Learning's Eddie Groves in 1995.

They had a supportive commercial manager from National Australia Bank who endorsed a jointly penned business plan with a $800 000 loan to exploit one of the fastest growing population corridors in the country. They had switched from ANZ Banking Group because of their faith in the manager, who, they say, showed a keen understanding of the child-care business.

The 1996 financial year produced a net profit of $250 000, prompting plans to expand, they say. They planned to build an adjoining child-care facility and have it ready for the start of the 1997 school year.

But changes were afoot at their bank under the then general manager of Australian financial services, Frank Cicutto. Job cuts and branch closures were in full swing as each of the major banks sought to cut costs.

The McMinns say their trusted bank manager was replaced and a string of less-capable bank staff were appointed to manage their account.

Nevertheless, the McMinns say that in September 1996 they were told by a new manager that the bank remained committed to their expansion.

They say the new manager told them that head office was in a mess due to ongoing restructuring and staff changes, but the loan would be approved so they should proceed while the necessary paperwork was completed. The McMinns started building, but then in December they say they were ordered to stop work without explanation.

Four agonising months passed before approval to resume building was finally granted. The McMinns believe the delay caused by the internal restructuring crucified their plans because they missed the start of the new school year. This started them on a debt cycle that eventually led to the appointment of receivers.

They say they had 16 different commercial managers at the bank between October 1995 and July 2000 and have been left bitter about their treatment by the bank.

Their dispute with the bank is now before the courts and the bank is saying little on the matter. ‘We have a general policy of not commenting on matters of this kind,' a NAB spokesman said.

But it seems the internal restructuring in the country's most profitable small-business lending franchises continues to rub customers up the wrong way.

In its latest financial results, NAB reveals that it is losing market share at the sole-proprietor end of the business lending. ‘Every bank has got a different version of what SME relates to, but what we are clearly doing is losing market share at the sole proprietor end,' the head of NAB's Financial Services Australia unit, Ian MacDonald, says.

But it is not the $360 000 million foreign currency option scandal that is being blamed for the departure of the lucrative sole proprietors.

Instead, it is a new round of restructuring triggered by a centralisation program kicked off two years ago under Cicutto's Positioning for Growth strategy.

The initiative resulted in about 110 business bankers [being] pulled out of the field and into capital-city offices.

The idea was that NAB could centrally manage its small-business customers, sacrificing face-to-face contact in the process.

The bank now admits it went too far with the efficiency drive.

The bank has moved to have a small-business banker in each of its 110 business-banking centres around the country, MacDonald says. Further it will position a business banker in a retail branch if there is a need.

It is an embarrassing and costly turnaround that has gone largely unnoticed by investors as they focus on the impact of the currency option scandal.

The drive for efficiency has seen the market leaders in small business banking, NAB and CBA, become too willing to call receivers in on a client when there is a whiff of trouble, Evan Jones, of the economics faculty at the University of Sydney, says.

Staff turnover has contributed to the demise of an unknown number of NAB borrowers, he says, sympathising with suggestions that NAB will transfer a bank manager who gets too close to clients.

‘There is no moral or legal pressure on these banks to act in any normal principles of ethical standards or corporate governance. The imbalance of resources which they can bring and their long-standing relationship with the receivers means they can count on getting away with whatever they want to do. I would like to think that there is a link between NAB's behaviour and loss of market share,' he says.

The banks have promoted studies that find small business is getting a better deal from the banks, perhaps in fear that the federal government might introduce legislation to improve service to the country's 1.2 million small-business operators, as has the government in the UK.