The Strategic Background to Corporate Accounting Scandals

The accounting scandals that rocked the corporate world have been blamed on a range of factors, including unethical behaviour among executives, incentives to manipulate financial information for personal gain and lack of independence among monitors. This paper introduces an additional cause: weaknesses in strategic management. The thesis is that the 1990s boom was associated with less attention by major companies to the fundamentals of strategic analysis. Supporting evidence is provided by case studies of 12 US and European companies involved in major accounting scandals during 2001–3. Among these companies the authors identify a misfit between the strategy pursued and either the requirements of external environment or the companies' resources and capabilities. Examples of strategic misfit included: overambitious growth targets, multiple acquisitions and excessive debt financing. Inappropriate strategies led to deteriorating performance and an increasing divorce between top management aspirations and business reality. The paper concludes by saying that as more rigorous requirements for company reporting result in board members and executives redirecting their efforts from strategy to compliance, recent regulatory measures may do little to enhance effective corporate governance.