ACC701 Accounting Financial

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Question

In recent years a number of companies have gone into liquidation (been ‘wound up) because they have not been able to meet their liabilities when they fell due. In Australia, there are some well-publicised examples such as ABC Learning, HIH Insurance amd One. Tel phone company.

Required

Use the companies above and find (via electronic journals) the events that led up to the liquidation. Discuss the ethics and governance in explaining the company’s financial stress . Was liabilities a major factor contributing to the liquidation of the company?

Answer

Reasons For Liquidation Of Abc Learning, HIH Insurance And One Tel Phone Company

ABC Learning Centre

Introduction

ABC Learning Centre was a child care company formed in the year 1988 with its headquarters in Brisbane, Australia. It was recognized as one of the leading child Care Company across the world. The company expanded its business drastically which is clear from the fact that there were around 18 centres in the year1997 which rose to 800 centres in 2006 (Rush, 2006). With Eddy Groves and Le Neve as owners, the company made net gain of more than $50 million in the fiscal year 2004-05 and was considered as a profitable and successful company in Australia. In the year 2001, the company issued its shares in the Australian Stock Exchange. Its share prices increased tremendously through the years of company’s operation which is evident from rise in its share price by over 300%  from the year 2001 till the year 2006.The said business was also supported by the government through subsidies. The company extended globally by acquiring numerous companies. Acquirement of competitor Peppermint in the year 2004 is considered as the largest amongst company’s acquisitions (Thomson, 2008). Conversely, the company collapsed significantly in the year 2008 following worldwide monetary predicament. Its profits plummeted more than 40% from the previous year. This came as a shock to its shareholders who never anticipated the company to go down. With the resignation of both the owners, the company went into deliberate receivership.

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Reasons For Its Failure

There are innumerable reasons for the collapse of ABC Learning Centre. Financial discrepancies over huge acquisitions, lack of clear vision for operating business, questioning accounting practices, pitiable corporate governance model, absence of concentration on company’s working policies, misstatement of financial reports, overvaluation of share price, faulty auditor practices and unethical practices followed by the management are the major reasons for its failure. However, lack of proper corporate governance plan and unethical issues are few of the major causes. The ethical issue faced by the company was low remuneration paid to its workers. This was a cost effective strategy followed by the company which would help it in increasing its profits by reducing its overall cost. Unethical practices were also ensued by its auditors in not performing his duties and providing inefficient reports and misstatement of fiscal reports which provided overvaluation of its assets and presented fake picture of profitability of the company which was otherwise into losses. In the year 2004, the company was found culpable in paying low remuneration of $611 to its workers which was estimated to be extremely less as compared to other companies. Good corporate governance provides lucid set of laws to its shareholders, directors and workers which were missing in case of ABC Learning Centre. The auditor of the company was not able access the potential risk. Incompetence on the part of auditor is apparent from the actuality that he lacked experienced view and disparaged in auditing fiscal report of the year 2007. The asset side of the financial statement issued comprised of operating licences which were reported to have no value and liabilities of approximately $1.1 billion were reclassified as long term monetary debt. Existence of related party transactions was also one of the reasons for its failure. As per one of the ASIC litigant, the practices adopted by the company in preparing fiscal report displayed inflated value of shares based on future funds of the company which were not sure to be actualized. Thereby, deceiving company’s projected users (Kruger, 2009). Due to such practices, the ex- auditor of the company, Simon Green was debarred from performing his duties as an auditor for five years (Kruger, 2012).

HIH Insurance

Introduction

HIH Insurance was considered as the second biggest insurance company and employer in Australia before its failure in the year 2001. It was recognized as M W Payne Underwriting Agency Pty Ltd, at the time of its establishment in the year 1968 with Ray Williams and Michael Payne as the founders of the company. In the year 1971, the company was taken over by British company CE Health PLC with Ray Williams as the member of the board. However, the company’s name was amended to HIH Winterthur in the year 1996. The company became successful and expanded its business not only in Australia but throughout the world by taking over numerous companies in different countries such as Solart in Argentina, Great States Insurance Company in the United States etc. The company’s name was further modified and was known as HIH Insurance Ltd after majority of its shares were sold to public by Winterthur Swiss. One of its major acquisitions was FAI General Insurance Company Limited (FAI). However, on 15th March 2011, company’s shareholders and the general public were astounded by the news of company’s interim insolvency with financial loss of $800 million (Kehl, 2001). The company comprised of over 240 companies during the time of its collapse. Huge losses were sustained by its shareholders.

Reasons For Company’s Collapse

Hasty growth of the company by acquiring other companies globally, misstatements of financial report, irresponsible administration, scam, insatiability, unsubstantiated allocation of power, lower pricing of shares, intricate reinsurance actions and funds issues were reported as some of the reasons behind the company’s collapse. However, the accounting practice followed by the company is one of the major causes for its failure. HIH Royal Commission was formed by the government to scrutinize the reasons which led to its failure. The company failed in providing clear picture to its intended users about the financial condition of the company. Several actions have been taken against company’s directors for their immoral and unlawful deeds. The company’s higher executives including its Board of Directors were incompetent in performing their responsibilities and failed in evaluating efficiency of the company’s corporate governance plan (Rega, 2012). Its higher executives behaved unethically by not notifying significant matters to its Board concerning the working of the business which resulted in objectionable business ethnicity. The company’s CEO, Ray Williams has always been governing position from the very beginning and the company was operating in the interests of its higher managers instead of its shareholders. Also, the company’s Board slacked in making calculated investment judgement and assessing the threat that the company faced in relation to investment which is obvious from the truth that the company failed miserably in making some of its major investment decisions. Although its CEO had a plan but there was lack of its records. Hence, the rest of management couldn’t follow them. There was fallacy about the earnings of the company and also lack of proper evaluation, examination and revelation of the liabilities of the company. Moreover, incompetence in the assessment of risk and huge exceedingly priced takeovers led to its collapse which was predicted a year before. Also the information provided by the auditors was questionable. Inadequate adherence of corporate governance plan and unethical practices adopted by its senior staff were the major causes of its failure. Its collapse is considered as one of the worst in the history of insurance company failures.

One. Tel Phone Company

Introduction

One. Tel Company was considered as one of the major telecommunications company formed in the year 1995 in Australia. Kalara Investment possessed major share in the company with Jodee Rich and Brad Keeling as its owners and Optus had a share of 28.5% in the company. The company expanded its customer base by providing numerous telecommunication services and revenue increased manifold which is comprehensible from the information that in the year 1996-97, company earned income of $148 million with net profit of $3.7 million. The company was listed on the Australian stock exchange in the year 1997. The company expanded worldwide in the year 1998 with its divisions in London, Los Angeles, Paris, Hong Kong, Frankfurt, Zurich and Amsterdam by adopting a global strategy. Year 1999 was one of the prominent in company’s record as Lucent Technologies reported that it would be funding a European mobile network for One. Tel and the company became of the biggest listed company in Australia. However, company’s downfall began in the year 2000 with a proclaimed loss of $291 million for the financial year 1999-2000 and its share prices dropped under $1.The year 2001 turned out to be disastrous for the company as its funds plummeted drastically and Merril Lynch prediction about the exhaustion of company’s funds came true and it collapsed miserably in the same year and creditors opted to end up the business.

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Reasons For Its Failure

There were several reasons for company’s failure. However, there was major issue in company’s composition. Jody held a dominant position in the organisation and there was lack of delegation of authority and decision making power to its managers. He encouraged those who supported him as a result of which there were inadequate staff in the company most of the times, which further resulted in customer dissatisfaction. Advertising was the basis for gaining new customers and a lot of time and money was spent on the same. Also, employees were highly unsatisfied as their responsibilities were not properly defined and were not properly trained with more focus in employment of young staff. The company lacked in its corporate governance model. There was no balance amongst its directors. It lacked proper delegation of accountability and the deteriorated value of information was provided to the Board. Company’s reports should be truthful and comprehensible as per good governance plan which was lacking in company’s case. There was weakness in internal control as Jody was a totalitarian who imparted few powers to other members of the organization. It also failed in delivering apparent and recognized actions for selection of new directors. Reduced communication to the Board and amongst employees and flaws in compensation to employees further aggravated company’s problems. It is evident that poor governance inflamed events that led to the company’s collapse (Reza, 2011). The financial reports the company were fallibly presented and there were disparities in accounts and papers. There was inaccurate information about the debts of the company. This was result of incompetence of higher management. Also, the company had low quality earning. There were changes in accounting policies of the company. In the last year of company’s performance, its CEO’s compensation was high when the company was actually under loss. Moreover, company’s audit was also recognized as of poor quality. Hence, it is clear from above discussion that unethical practices followed by company’s CEO and poor governance issue led to its sudden collapse. At the time of its failure, the company was ranked fourth amongst Australia’s biggest telecommunication companies.

Conclusion

At the end, we conclude that there are several companies that have collapsed in the current years. In the above report, we have discussed in detail three companies ABC Learning Centre, HIH Insurance and One. Tel Phone Company in Australia .The events that caused their failure is also discussed. All three companies were successful and popular in their respective fields. It is clearly concluded that ethical issues and poor corporate governance had been major issues affecting all three companies and one of the major reason behind their failure. Also, continuous increasing liabilities and non disclosure of them led to overvaluation of company’s share price which in turn led to create artificial picture of company’s profitability and affected its shareholders drastically. This led to sudden collapse of all three companies. Also, unethical practices followed by higher management and the auditors were also one of the major reason in all three cases.

References:

Kehl, D., (2001), HIH Insurance Group Collapse Available at https https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/Publications_Archive/archive/hihinsurance (Accessed 19th September 2017)

Rega, J., (2012), The Demise of HIH Available at https://www.academia.edu/1231656/HIH_Collapse (Accessed 19th September 2017 )

Reza, M., (2011), The One .Tel Collapse: Lessons for Corporate Governance Available at https://research-repository.griffith.edu.au/bitstream/handle/10072/42673/74746_1.pdf (Accessed 20th September 2017)

Rush, E., (2006), ABC Learning Centres A case study of Australia’s largest child care corporation  Available at https://www.tai.org.au/sites/defualt/files/DP87_8.pdf (Accessed 20th September 2017)

Thomson, J., (2008), Five lessons from the spectacular fall of Eddy Groves Available at https://www.smartcompany.com.au/finance/five-lessons-from-the-spectacular-fall-of-eddy-groves/ (Accessed 20th September 2017)

Kruger, C., (2009), Lessons to be learnt from ABC Learning’s collapse Available at https://www.smh.com.au/business/lessons-to-be-learnt-from-abc-learnings-collapse-20090101-78f8.html (Accessed 20th September 2017)

Kruger, C., (2012), Five- year suspension for former ABC Learning auditor Available at https://www.smh.com.au/business/fiveyear-suspension-for-former-abc-learning-auditor-20120808-23uj8.html (Accessed 20th September 2017)

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