INTERPRETING FINANCIAL STATEMENTS 99
The liquidators found, as is common in failed companies, that the values in the
Balance Sheet were substantially higher than what the assets could be sold for.
In particular:
žLand and buildings were sold for far less than an independent valuation had
suggested, as the property would now be vacant.
žPlant and machinery were almost worthless given their age and condition and
the excess capacity in the industry at the time.
žDebtors were collected with substantial amounts being written off as bad debts.
Customers often refuse to pay accounts giving spurious reasons and it is often
not worthwhile for the liquidator to pursue collection action through the courts.
žInventory was discovered to be largely worthless. Substantial stocks of paper
were found to have been held for long periods with little likelihood of ever
being used and other printers were unwilling to pay more than a fraction of
its cost.
As the bankers had security over most of Carrington’s assets, there were virtually
no funds remaining after repaying bank loans to pay the unsecured creditors.
This case raises some important issues about the value of audited finan-
cial statements:
1 The importance of understanding the context of the business, that is how its
market conditions and its mix of products or services are changing over time,
and how well (or in this case badly) the business is able to adapt to these changes.
2 The preparation of financial statements assumes a going concern, but the
circumstances facing a business can change quickly and the Balance Sheet can
become a meaningless document.
3 The auditors rely on information from the directors about significant risks
affecting the company. The directors did not intentionally deceive the auditors,
but genuinely believed that the business could be turned around into profit
through winning back customers. They also believed that the large inventory
would satisfy future customer orders. The directors also genuinely believed that
the property could be sold in order to eliminate debt. This was unquestioned by
the auditors.
Creative accounting and ethics
Accounting choices, according to Francis, are moral choices:
Accounting is important precisely to the extent the accountant can transform
the world, can influence the lived experience of others in ways which cause
that experience to differ from what it would be in the absence of accounting,
or in the presence of an alternative kind of accounting. (quoted in Gowthorpe
and Blake, 1998, p. 3)Creative accounting practices have been justified by managers for reasons of
income smoothing, to bring profits closer to forecasts; changing accounting policies