Going for Broke

Insolvency is all around, but smart CIOs can spot the symptoms of failure before their companies become too sick to save

Anyone wanting to know if their business is insolvent can run a couple of tests. the first is the balance sheet test: When a company has more current liabilities than current assets it is insolvent. The second is the cash flow test: When a business cannot pay its debts as and when they fall due it is insolvent.

In an ideal world, information systems should be able to predict when a company is sailing into financial heavy weather and getting close to passing either test. Ideal worlds and IT departments, however, are rare bedfellows, which explains why so many companies still claim surprise when they find they have been trading while insolvent.

At present, Australia's insolvency specialists say business is quiet, thanks to a still strong economy. In the next breath, though, they warn that insolvency is a cyclical business and troughs are inevitably followed by peaks. But even during the quiet times there are stacks of CIOs and IT managers that learn firsthand what it is like to go to the wall. In 2004 alone, 6618 Australian companies experienced what happens when the administrators are called in, and in the first five months of 2005 another 2649 companies joined them.

Even if your business is safe, the cascade effect of insolvencies along tightly integrated supply chains can be extreme. The failure of one company in a supply chain can affect many other businesses. Early warning systems could at least help businesses plan for the pain.

Under the Corporations Act, although CIOs do not have any specific responsibilities regarding provision of information to directors, the Act does impose certain duties, especially where the CIO can be described as an "officer" of the company. For small businesses, or family-run operations, this is often the case with CIOs and directors being one and the same person. Two high-profile insolvencies just this year involved CIOs who were related to directors of the business. Lincraft, which called in administrators in early 2005 owing $10 million, had as its CIO Michael Sacher, brother of director Earle Sacher. And Collins Booksellers, which had been founded by the Slamen family in 1922, had Fred Slamen as its IT manager.

Sacher, who is now working as a consultant, declined to be interviewed for this piece, and attempts to contact Slamen were unsuccessful. Slamen was, however, already feeling the pressure of running IT for Collins back in 2001 when he told CIO's sister publication Computerworld: "The pressure in this position is often so intense it feels like I'm stuck in a small room with four walls closing in on me."

Do Diligence

The pressure that CIOs face will only increase as the compliance burden rises. As it stands currently, according to Sparke Helmore partner Susan Bennett, under the Corporations Act when CIOs are regarded as an officer of the company they are obliged to:

• exercise their power and discharge their duties with care and diligence

• exercise their power and discharge their duties in good faith, in the best interests of the company and for a proper purpose

• not improperly use their position or information gained as a result of their position to gain an advantage for themselves or someone else, or cause detriment to the company.

In addition, Bennett says, "CIOs, company employees, will be guilty of an offence if they engage in conduct that results in concealment, destruction, mutilation or falsification of any books relating to the affairs of the company or knowingly provide false or misleading information to various persons including a director or auditor of the company".

All well and good, but on occasion it seems management of financially troubled companies does not want to know how things are performing. Nor does it want anyone else to know.

During a committal hearing in July 2005 of Jim Selim, former Pan Pharmaceuticals executive, the company's former computer manager Karl Brooks said that he had been asked to wipe computer disks clean in order to stop anyone being able to recover information from them. Brooks told the court: "Mr Selim said, 'If a computer expert was to access the computer, would they be able to retrieve the data?' To which I replied, 'Yes, if a forensic team was to have access, yes they would be able to retrieve the data'.

Join the CIO Australia group on LinkedIn. The group is open to CIOs, IT Directors, COOs, CTOs and senior IT managers.

• Bookmark this page
• Share this article
  •  
  • facebook
  • slashdot
  • digg
  • Reddit
  • stumbleupon
  • linkedin
  • twitter
• Got more on this story? Email CIO
• Follow CIO on twitter

• Share
  Share this article

  •  google+
  • facebookfacebook
  • slashdotslashdot
  • diggdigg
  • RedditReddit
  • stumbleuponstumbleupon
  • linkedinlinkedin
  • twittertwitter
• print
• email
• Bookmark