The Role Of Accounting In The Collapse Of Game Group


The Game Group plc is a UK based Investment Company. It is specialised in the retail of video games and personal computers through retail outlets and eCommerce sites (Google Finance, 2013). On the 21st of March 2012, the company officially filed for administration as it became evident that it could no longer continue as a going concern (Robinson, 2012; BBC, 2012). Past experience suggests that accounting has contributed to many cases of corporate failure. This was the case with the failures of Enron, WorldCom and many other companies. The objective of this paper is to discuss how accounting contributed to the failure of The Game Group plc. The paper begins by presenting theoretical and empirical evidence on how accounting can contribute to corporate collapse in section 2; section 3 discusses how accounting contributed to the collapse of the Game Group by making reference to the evidence presented in section 2; section 4 provides a summary and conclusion of the paper.

Accounting and Corporate Collapse

Creative accounting has been cited as one of the principal causes of corporate collapse. Companies like Enron, WorldCom and Tyco International filed for Bankruptcy under Chapter 7 as a result of poor accounting. The managers of these companies were involved in lies, deceit, cover-up and above all shoddy accounting, which could not be sustained for long. As a result, the share prices of the companies were bound to fall and thus the companies themselves were bound to file for bankruptcy under chapter 7 of the US Bankruptcy Code.

Creative accounting involves the use of accounting techniques that may or may not be in compliance with generally accepted accounting principles (GAAPs) but that certainly deviate significantly ethical standards (Ghosh, 2010). When involved in creative accounting, managers often make use of novel approaches to reporting income so as to influence the outcome of contractual agreements that are determined by financial reports (Ghosh, 2010). Creative accounting involves systematically misrepresenting the true earnings and asset values of companies. Creative accounting has been responsible for a number of high profile cases of corporate failures such as Enron, WorldCom, Adelphia and Tyco International.

One of the most commonly used forms of creative accounting is earnings management. Earnings management occurs when management employ judgment in financial reporting and transaction structuring with the intent of altering financial information either to influence the outcome of contractual agreements that depend on financial reports or to mislead interested parties about the performance, changes in financial position and financial position of the company (Healy and Wahlen, 1999). Earnings management represents “a purposeful intervention in the external financial reporting process, with the intent of obtaining some private gain” (Schipper, 1989). Most of the figures in the balance sheet and income statement are based on accrual accounting which arises because not all transactions are settled in cash at the time they are entered into. Therefore, accrual accounting must be used to record assets and liabilities that arise as a result of the time difference between the inception of the transaction and the time the transaction is settled. This has resulted in the use of discretionary accounting. Managers employ discretionary accrual accounting to satisfy their selfish desires (Heemskerk and Va der Tas, 2006). The use of discretionary accruals is considered earnings management when managers employ it to influence the share price of their company or to obtain some other benefit that is of a personal nature.

Earnings management has been an important subject of debate in the accounting literature with most studies focusing on understanding the factors that motivate managements to manae earnings. A bonus-maximisation theory has thus been suggested which states that managers manager earnings to maximise bonuses. For example, evidence suggests discretionary accruals are employed by managers to maximise short-term bonuses (Healy, 1985). Similar evidence is suggested in Gaver et al. (1995) and Hotlthausen et al. (1995) who observe that managers make use of accrual accounting to reduce earnings when earnings are above their maximum bonus level. However, such accruals are not employed when the minimum bonus level has not been attained (Holthausen et al., 1995; Gaver et al. (1995).

An income smoothing theory has also been suggested which argues that managers like to observe a smooth pattern in earnings. Consequently a number of accounting techniques are employed to ensure that earnings are smooth over time. Gaver et al. (1995) provide evidence that is consistent with the smoothing theory. In addition, Guidry et al. (1999) and Tao (2007) observe that earnings management is carried out because managers do not want significant differences to occur between actual and predicted earnings.

It has also been argued that managers hate reporting a decline in earnings. Consequently, accounting techniques are employed to ensure that the change in earnings over time is positive. Burgstahler and Dichev (1997) provide evidence that is consistent with this incentive by observing that managers tend to emphasise an increase in earnings in the Annual Report Section titled: “Management Discussion”. In Tenneco’s 1994 Annual Report for example, the CEO Dana Mead stated as follows: “I must emphasise that all our strategic actions are guided and measured against this goal of delivering consistently high increases in earnings over the long term” (Burgstahler and Dichev, 1997: 99). In addition Eli Lilly laid so much emphasis which lasted for a period of 33 years before being broken. Some firms emphasise the importance of increasing earnings during press releases or the announcement of earnings. The CEO of Bank of America for example, Richard Rosenberg in 1994 stressed the importance of increasing earnings in a press release by stating that “Increasing earnings per share was our most important objective for the year” (Burgstahler and Dichev, 1997: 100).

The foregoing indicates that managers are more inclined to reporting an increase in earnings rather than a decrease. Barth et al. (1995) for example suggests that firms tend to maintain an upward trend in earnings so as to improve valuation ratios such as the price-to-earnings (P/E) ratio, the price-to-book (P/B) ratio, etc. P/E and P/B ratios are important in determining how the market will value the price of the equity of a firm (Penman, 2007). Therefore, managers will be motivated to maintain high P/E and P/B ratios through earnings management so as to benefit from a high market valuation of their firms’ equity. Similar evidence is provided in DeAngelo et al. (1996) who observe that a distortion in a firm’s upward trend in earnings results in significant declines in the stock price.

Accounting and the Collapse of the Game Group

Section 2 above focused on understanding how accounting can lead to corporate collapse. The evidence shows that managers tend to make use of creative accounting techniques which results in an inflation of earnings and thus the share price. Given that the share price does not reflect its intrinsic value, the long-run effect is a significant decline in the share price with the ultimate effect being the collapse of the company. This section is concerned with whether there was any use of creative accounting in the Game group which led to its collapse. So far, the evidence shows that accounting had nothing to do with the collapse of the group. Rather, the company’s collapse can be attributed to a variety of other factors including poor strategic planning, declining video game industry, and the cyclical nature of the video games industry .

3.1 Poor Strategic Planning

It was rather, poor strategic planning on the part of the company that resulted in its collapse. The company failed to anticipate and plan for changes in its external environment. The company continued using strategies that were no longer relevant in the context of its external environment. In addition, the Game group had a poor pricing strategy. Prices of Game Group’s games were too high compared to prices of competitors such as Amazon and Play. Many customers are migrating from store shopping to online shopping. According to Administrators at Price Water House Coopers, Game Group’s collapse can be attributed to its ambitious overseas expansion and the closure of proximity stores. Game Group’s strategy was characterised by two fundamental problems. Firstly, the company expanded massively into different countries (Yin-Poole, 2012). This means that the company had significantly high levels of fixed costs which could not be sustained. When fixed costs are significantly high, the business risk of the firm increases significantly. Secondly, Game and Gamestation stores were in close proximity. This resulted in the cannibalisation of sales of one store by other stores (Yin-Poole, 2012). Therefore, many stores were simply incurring fixed costs which could not be covered by sales revenue.

3.2 Declining Video Games Industry

The company suffered significantly because of poor developments in its external environment. Wallop (2012) observes comments by the CEO of the company Mr Shepherd who claims that in 2012, the size of the video game market had declined by 40% from its 2012 figure. This contributed negatively to the performance of the company. The company’s share fell by 2.44 to 4.31p and resulting in a decline to less than ?15million. Customers made significant changes in their consumption of video games. Most customers were interested in buying only new releases such as Fifa 2012 and Modern Warfare. Lesser known titles could not perform well because of declining demand Wallop (2012). The Game Group could not survive because it had a lot of games in stock that did not meet the current tastes and preferences of consumers of video games.

3.2 Cyclical nature of the Video Games Industry

Despite making a profit of ?90million in 2009, the Game Group recorded a loss of ?15million in 2011 (Wallop, 2011). The main reason for this loss was the intense cyclical nature of the video games industry (Wallop, 2011). The market lacks exciting new hardware. In addition, the industry has been suffering from piracy. Lack of new hardware and an increase piracy has resulted in declining demands which has eroded industry profits. As a result the Game Group could no longer survive in the industry.

The Game Group was also affected by the introduction of digital games, which can be regarded as a perfect substitute for video games. For example, in 2010, sales of digital games totalled ?411m representing an increase by 23 percent from the 2009 figure. On the contrary, the video game industry witnessed a decline in sales by 17 percent to ?1.53billion between 2009 and 2010 (Wallop, 2011).

In addition, the development of smart phones and the IPAD has affected the video games industry. These devices come with free digital games. This resulted in the decline in video games sales and thus contributed to the collapse of the Game Group (Wallop, 2011).

Summary and Conclusions

The objective of this paper was to analyse the impact of accounting on the failure of Game Group. The above analyses show that Game Group’s collapse was in no way related to accounting failure. There was no evidence to suggest that managers at Game Group were involved in creative accounting. Unlike the case of Enron, and other major corporate failures, the Game Group had no special purpose entities which enabled it to high liabilities off the books. Game group’s failure can be attributed to poor strategic planning rather than to accounting failure.

Based on the analysis, there is no evidence suggesting that Game Group was involved in inappropriate accounting. Rather, the evidence shows that Game Group simply did not plan properly. Game Group did not put in place strategies that would enable it respond adequately to changes in its external environment. The company failed to analyse the threat of substitute products, new entrants, bargaining power of suppliers and customers as well as industry rivalry.


Healy, P.M., Wahlen, J.M., 1999. A review of the earnings management literature and its implications for standard setters. Accounting Horizons, 13, pp. 365-383.

Hayn, C., 1995. The Information Content of Losses, Journal of Accounting and Economics, 20, pp. 125-153

Heemskerk, M., and L. van der Tas. 2006. Veranderingen in resultaatsturing als gevolg van de invoering van IFRS. Maandblad voor Accountancy en Bedrijfseconomie: 571-579.

Holthausen, R. W., Larcker, D. F., Sloan, R., 1995. Annual Bonus Schemes and the Manipulation of Earnings, Journal of Accounting and Economics, 19 (1) pp. 85-100

Epstein, B. J., Jermakowicz, E. K., 2007. Interpretation and Application of International Financial Reporting Standards, Wiley and Sons Inc.

Penman, S. H. (2007) Financial Statement Analysis and Security Valuation, 3rd ed. Irwin: McGraw-Hill.

Schipper, K. 1989. Earnings Management. Accounting Horizons, pp. 91-102

Robinson, A. (2012) GAME officially files for administration Retailer fails to find “a realistic prospect for a solvent solution for the business”, available online at: [accessed: 29th March 2013].

BBC (2012) Game Group to file for administration, available online at: [accessed: 29th March 2013].

Wallop, H. (2012) Game shares slump on profits warning, loan breach fears, available online at: [accessed: 29th March 2013].

Wallop, H. (2011) Can Game Group survive?, available online at: [accessed: 29th March 2013].

Yin-Poole, W. (2012) Why Game Collapsed: PwC cites “unfortunate” proximity of stores and “ambitious” overseas expansion, available online at: [accessed: 29th March 2013].

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