Maxwell

1. Content
Content...............................................................................................................................1
Company Background........................................................................................................2
Issue 1 – Reporting Standard - Overstated the Profit in 1970’s.........................................3
The successful investigation carried out by Price Waterhouse showed the important of
unify accounting standards. The report was honored as an instrument in the accounting
profession deciding to confront the issue of uniform accounting standards. An
Accounting Standards Committee had been set up since then in order to unify the
accounting standards in financial reporting treatments and audits. However, in order to
keep the credibility of insisting accountants, government was invited by account
profession to impose some minimum standards for consistent financial reporting
treatments...........................................................................................................................3
Issue 2 – Improper Use of Fund in 1990’s.........................................................................4
The length of time one accountancy firm can audit the books of a particular company or
group of companies should be limited. In this case, Coopers had worked for Maxwell
since the early Seventies, by changing the firm in a regular time can avoid the impacts of
“window dress”..................................................................................................................4
Issue 3 – Independent Non-Executive Directors ...............................................................5
Issue 4 – Power and Authority...........................................................................................6
There should be a clearly accepted division of responsibilities at the head of company,
which would ensure a balance of power and authority. If the chairman is also the chief
executive, like Maxwell, it is essential that there should be a strong and independent
element on the board, with a recognized senior member...................................................6
Who is to Blame for?..........................................................................................................7
Main Recommendations.....................................................................................................8
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2. Company Background
Robert Maxwell was a British media proprietor and famous in the media industries from
the 1960s till now. The following timeline illustrates how he had expanded his business
empire since his young.
May 1951 Pergamon Press (Butterworths) is established
July 1964 Pergamon Press is floated on London Stock Exchange
1969 Maxwell is defeated in the battle for the News of the World
June 1969 A disputed takeover bid for Pergamon from Leasco
July 1971 Department of Trade and Industry (DTI) critical report
1974 Regains control of Pergamon
Feb. 1981 Gains control of British Printing Corporation (BPC)
Renamed British Printing and Communication Corporation (BPCC)
1984 Purchases Mirror Group Newspaper
1987 Bids unsuccessfully for the US publisher Harcourt Brace Jovanovich
Renamed BPCC as Maxwell Communications Corporation (MCC)
1988 Purchases US publisher Macmillan for $2.6bn
March 1991 Purchases New York Daily News newspaper
Pergamon is sold for £440m
Been brought down in scope to an English-language weekly newspaper
May Mirror Group Newspapers (MGN) is floated on London Stock Exchange
Nov. Maxwell vanishes overboard from his yacht
Suspends trading in MCC and MGN shares
Dec. Maxwell’s business empire collapses
March 2001 DTI report into MGN
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3. Issue 1 – Reporting Standard - Overstated the Profit in 1970’s
Summary
In 1969, since Maxwell wanted to grow his business empire, with Pergamon as the
basis, he made an agreement with Saul Steinberg (head of Leasco), that merge their business,
with Leasco purchasing Pergamon Press and Maxwell accepting a subordinate role in the
combined enterprise.
Leasco was a profitable company with $27m profits and $1bn total assets in 1968,
Maxwell therefore wanted the accounts of Pergamon could show a substantial profit at that
time since this would definitely support the share price and assist his negotiations with
Leasco.
Problems
Sunday Times questioned about the audit procedures used by Chalmers Impey on
Pergamon’s accounts. For instance, alleged that stocks had been overvalued. Also, Leasco’s
financial advisers find that it was difficult to extract necessary information from Pergamon, to
receive answers to their questions from Maxwell, and started to doubt about the future
profitability of Pergamon.
Results
After the independent audit of Pergamon’s 1968 financial statements carried out by
Martin Harris, he found that the profit should be $140,000 instead of $2.1m. Chalmers
Impey then resigned as an auditors and Maxwell was investigated by the Board of Trade
(renamed as Trade and Industry, DTI subsequently) in 1969. In 1971, the report published by
DTI, it stated that Maxwell was not in their opinion a person who can be relied on to exercise
proper stewardship of a publicly quoted company.
Solutions
The successful investigation carried out by Price Waterhouse showed the important of
unify accounting standards. The report was honored as an instrument in the accounting
profession deciding to confront the issue of uniform accounting standards. An
Accounting Standards Committee had been set up since then in order to unify the
accounting standards in financial reporting treatments and audits. However, in order to
keep the credibility of insisting accountants, government was invited by account
profession to impose some minimum standards for consistent financial reporting
treatments.
3

4. Issue 2 – Improper Use of Fund in 1990’s
Summary
In 1990, Maxwell Communications Corporation (MCC) had to repay part of $3 billion
borrowings; the company faced a financial crisis, so he made a decision to float 49% of
Mirror Group of Newspaper (MGN), but Maxwell pledging shares in MCC as collateral for
loans.
In 1991, Maxwell ran short of cash, sold the Dutch group Elsevier for￡440. MGN and
MCC’s shares were also pledged as collateral for further loans to Maxwell’s private
companies. Maxwell used the pension fund ($767million) to made substantial investments in
Maxwell Communication Corporation shares, this did not become known to the trustees of
the funds. The accounts were "window dressed"
Results
After the death of Robert Maxwell, his empire collapsed. His sons, Kevin Maxwell and
Ian Maxwell were arrested by London Police working with Serious Fraud Office (SFO),
Kevin Maxwell admitting debts of ￡400million, and Goldman Sachs was disciplined by
their regulatory organization.
As a result of the collapse, many pensioners suffered anxiety and loss and the employees
of Mr Robert Maxwell’s companies suffered uncertainty and redundancy because the pension
fund asserts are likely to be worthless if the company goes into liquidation.
Solutions
Maxwell should sell assets for cash if additional fund was needed, he used the pension
fund in an improper way and used the loans to support his private companies was not acting
in a good corporate governance.
On the other hand, Maxwell should increase the transparence of the use of loans.
Although the business decisions may not need to disclose, the shareholders have the right to
know how the loans were used.
The length of time one accountancy firm can audit the books of a particular company or
group of companies should be limited. In this case, Coopers had worked for Maxwell since
the early Seventies, by changing the firm in a regular time can avoid the impacts of “window
dress”
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5. Issue 3 – Independent Non-Executive Directors
Problem
MGN ran under the control of Robert Maxwell, he was an executive chairman and the
independent directors had not been effective in exercising control over the chairman. Robert
Maxwell had not reacted favorably when he had been told that non-executive directors have
to be appointed, but had eventually agreed that it was essential. Nevertheless, non-executive
directors had no function in Robert Maxwell’s world.
Solutions
Independent Non-Executive Directors (INED) should include in the board with
sufficient caliber and number for their views to carry significant weight. Also, they should
bring an independent judgment to bear on issues of strategy, performance, resources, and
standards of conduct.
Besides, the majority of INED should be independent of management and free from any
business or other relationship which could materially interfere with the exercise of their
judgment.
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6. Issue 4 – Power and Authority
Problems
Robert's death triggered a flood of revelations about his controversial business dealings
and activities. He had used hundreds of millions of pounds from his companies' pension
funds to finance his corporate debt, his frantic takeovers and his lavish lifestyle without
adequate authorization.
Result
Maxwell filled for bankruptcy protection in 1992. Robert’s sons, Kevin and Ian, were
declared bankrupt with debts of £400 million. They went on trial for fraud with two former
directors in 1995.
Solutions
There should be a clearly accepted division of responsibilities at the head of company,
which would ensure a balance of power and authority. If the chairman is also the chief
executive, like Maxwell, it is essential that there should be a strong and independent element
on the board, with a recognized senior member.
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7. Who is to Blame for?
Robert Maxwell failed to carry out all his duties that he had undertaken as a director, and
his sons Kevin and Ian Maxwell should be blamed for. Kevin gave very substantial
assistance to his father; Ian signed the documents without considering the implication. The
accountants Coopers and Lybrand Deloitte bore a major responsibility for failing to report
pension fund abuses to trustees. Goldman Sachs also bore substantial responsibility for
manipulation of the MCC.
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8. Main Recommendations
Lack of internal controls was a huge problem on Maxwell’s case. Had auditors and
regulators insisted on changes, the magnitude of the fraud would have been less devastating.
Department of Trade and Industry suggests that although many of the deficiencies in
legislation and regulation which permitted the events at Mirror Group Newspapers to occur
have been rectified, there remain some important matters which still require being addressed
or considered including:
1. Providing more assistance to and encouraging training for trustees who perform the vital
role of the stewardship and investment of Pension Schemes.
2. Providing a statement of Guidance on the role and duties of advisers on a flotation.
3. Building on the radical changes in particular by imposition of severe sanctions against
companies who do not report fraud.
4. Addressing the regulation of markets in securities to provide more effective control over
firms that operate on a transnational basis to ensure the fair, open and transparent conduct of
such markets and more effective investor protection.
5. Providing more detailed guidance on the audit of business "empires".
6. Addressing the issues relating to auditor independence with a view to maintaining public
confidence in the audit and discouraging a firm which provides audit services to a company
from acting as reporting accountants on that company.
7. Making non-executive directors more accountable, separating the offices of chairman and
chief executive, and providing extra statutory Guidance on the duties of all directors to
amplify the general principles that it is proposed be incorporated into the Companies Act.
8. Avoiding an "expectations gap" by making the public aware that regulation cannot entirely
eliminate fraud, malpractice or manipulation of the markets.
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9. Lessons Learn from the Case
The most important lesson from all the events is that high ethical and professional
standards must always be put before commercial advantage. The reputation of the financial
markets depends on it. On the other hand, the ultimate victims of major frauds are often the
employees of the defrauded companies. Careers and finances of many mid- and senior-level
employees can be destroyed for life. Big frauds are orchestrated at the top for the benefit of
the owners or senior management, not for the employees. The biggest defense may be an
educated workforce, so employees are their own watchdogs.
Furthermore, there was no clear guideline for corporate governance before cases like
Maxwell happened, and Cadbury Report (1992) is indeed the first guideline in the world that
aims to investigate the British corporate governance system and to suggest improvements
restore investor confidence in the system. Since then, many countries have finally learned the
lesson from Maxwell and set out its own Code of Practice to give recommendations on the
arrangement of company boards and accounting systems to mitigate corporate governance’s
risks and failures. The positive effect of corporate governance on different stakeholders
ultimately is a strengthened economy, and hence good corporate governance is a tool for
socio-economic development.
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10. The above table shows the code of corporate governance and key code
recommendations in relation to four core areas identified by EIRIS (Ethical Investment
Research Services).
As we can see from the graph, after all these years, UK’s corporate governance is now
well-developed and even superior among the developed countries. A detailed analysis of
several UK corporate governance reports also revealed that the UK has been able to influence
US corporate governance regulation. To conclude, corporate governance is one of the critical
issues in business today. For companies, good governance means securing access to broader-
based, cheaper capital. For investors, a commitment to good governance means enhanced
shareholder value. For both, good governance equals good business.
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11. Bibliography Information
 The Pergamon phenomenon 1951–1991 Robert Maxwell and scientific publishing
 EIRIS How Global Is Good Corporate Governance
 The DTI Report
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