Introduction of the companies
When any business organisation is shut down, it is termed as the process of liquidation. In this process, it is necessary for the organisations to follow a series of steps for closing their business operations permanently. Moreover, the role of the liquidator is significant in this process, as the individual would be accountable to identify the business rights and liabilities for settling the claims of various stakeholders that take into consideration lenders, creditors and others. It is observed that because of certain reasons, there has been downfall or liquidation of the business organisations. The most inherent reasons constitute of unsuitable business policies, deficiencies in corporate governance and internal control and others. This report is concerned with critical evaluation of the various dimensions of the downfalls of three significant Australian organisations, which include HIH Insurance, ABC Learning and One Tel.
ABC Learning was deemed to be the leader in the education sector of children in Australia. The organisation got listed in ASX having market capitalisation of $2.5 billion. However, due to the mortgage crisis, there had been managerial receivership in the organisation and significant debt burden has contributed to the destruction of the organisation. It was developed in the year 1988 and soon, it had diversified its business operations in Australia by establishing 900 centres. Additionally, diversification of the organisation could be seen in UK and US in 2006, after which the acquisition of Busy Bee Group was made for $330 million (Adams, 2016).
One Tel was deemed to be one of the leading telecommunications service providers in Australia established in the year 1995. The organisation had formulated one business philosophy, which was to fulfil the requirements and wants of the customers by ensuring that higher quality products and services are provided to them. Before it went into liquidation, One Tel managed to reach the fourth position in the Australian telecommunications sector. The organisation had targeted the young customers by providing internet and mobile phone services at cheaper prices for creating a youth-oriented image in the eyes of its customers (Carnegie and O’Connell, 2014).
It was the biggest insurance firm having diversified operations in the Australian market. The organisation had made considerable progress between 1997 and 1998 due to its success in expanding business operations internationally, due to which it was listed in ASX (Tricker and Tricker, 2015). However, in 1995, it changed its name by selling a significant portion of shares to an organisation of Switzerland, The organisation had to bear a loss of $5.3 billion before the liquidation process. Some of the HIH board members were imprisoned, as they were engaged in manipulating the financial earnings of the organisation. Thus, in Australia, the decline of HIH Insurance was deemed to be one of the biggest downfalls in the nation’s history (Crockett and Ali, 2015).
- Due to the considerable downfall in profit, it had negative impact on the stock price of the organisation. This is because the stock price fell by 43% to $2.15 after coming from a small trading of $1.15. As the financial condition of the organisation had declined, the proprietor was compelled to sell a portion of its shares valued $20 million and another stake of $6 million for $2.7 million. As a result, there had been trading halt for the organisation. Along with this, the management of the organisation filed in disclosing its earnings for 2007 and 2008 (Dagwell, Wines and Lambert, 2015).
- During the second half of 2007, ABC Learning had experienced decline in profit by 42% amounting to $37.10 million. During that period, there was considerable debt burden of $1.80 billion for the organisation. As a result, these two causes have contributed jointly to the downfall of ABC Learning (Di Pietr, et al., 2014).
- The auditors of the organisation had not been able to investigate the financial reports of the business accurately and as a result, business receivership took place.
- Finally, ABC Learning had adopted incorrect valuation for intangible assets. The management of the organisation stated that the goodwill of the business was $2.4 billion and impairment change was $8.4 million. Hence, the future cash flows of the organisation are valued wrongly leading to decline in profit by 42%. These reasons had contributed enormously to the decline in ABC Learning (Du Plessis, Hargovan and Harris, 2018).
- The board members of the organisation followed the strategy of overstated profit by deferring the key business expenditures for three years. This strategy was considered to be illegal in terms of accounting policy for the organisation, since compliance was not made with the prevailing accounting policies and standards.
- As the organisation had adopted this unlawful policy, it had to suffer a loss of $291 million in 2000 and as a result, the impact was severe on the stock price of the organisation, since it fell below $1 (Hay, Stewart and Botica Redmayne, 2017).
- Another significant issue was the availability of lack of funds in order to carry out the daily business operations in 2001. For dealing with this issue, the management of the organisation was compelled to sell five million shares for $2.5 million. This turned to be a massive blow for the organisation and 1,400 staffs were terminated from their posts due to insolvency position.
- As One Tel had not adopted diligence and due care, the organisation had to incur compensation amounting to $92 million (Henderson, et al., 2015).’
- The board members of the organisation had to incur significant amount for the acquisition of FAI Insurance, which was deemed to be risky for the insurance business and this decision later turned out to be wrong for the management of HIH Insurance (Hossari, 2014).
- After this, the management of the organisation has taken an incorrect step by funding the film industry. This is because it had incurred a loss of hundreds of millions of dollars due to such investments.
- The natural disaster that took place in Canada had contributed further to the decline of HIH Insurance. Due to this reason, the organisation had to spend huge amount adding further to the debt burden of the organisation and as a result, significant loss was encountered. This was considered to be of the major causes of the collapse of HIH Insurance.
- There was sudden change in the payment-related accounting rules for the Californian staffs, which had added further to the liquidation of the organisation.
- As per the anticipations of the liquidator, a loss of $800 million was incurred within one-half of a year because of different reasons such as unexpected policies of accounting, rapid diversification and others (Jones and Beattie, 2015).
This is adjudged as a crucial document for the accounting experts, since it provides necessary guidelines with the needed ethical codes of conduct. In this standard, five ethical codes are laid out, which are necessary for the professional accountants to comply and these are demonstrated briefly as follows:
Reasons for liquidation
Integrity is the first ethical code and according to this code, it is necessary for the accountants to remain straightforward and honest in all business and professional relations. Objectivity is the second ethical code and the accounting professionals could not exercise any bias, effect for overriding business and professional judgement and conflict of interest. Professional competence and due care is the third code, which obliges the accounting experts to maintain professional knowledge and skills for assuring the delivery of effective professional services depending on current accounting profession developments. Confidentiality is the fourth ethical code, which obliges the accounting professionals to pay respect to the confidentiality aspect of information acquired during delivering the professional services. Professional behaviour is the fifth ethical code, which mandates the obligation on the accounting experts in making adherence to the pertinent laws and regulations in order to avoid incorrect action in the accounting profession (APESB, 2018).
In compliance with ASIC, corporate governance is deemed to be significant driving forces for evaluating the overall business performance and therefore, ASIC has reviewed the various corporate governance aspects. In this method, ASIC has given all the organisations with certain listing rules, in which they need to take into consideration the laws for developing sound mechanisms related to corporate governance. The first rule is associated with managing the conflicts of the organisation. The second listing rule is associated with the involvement of the shareholders. The third listing rule involves director oversight in financial aspects coupled with audit. The fourth listing rule is associated with the risk management framework. The fifth listing rule is associated with management of corporate information. The sixth listing rule confronts executive remuneration. The seventh listing rule is associated with the culture of the organisation. The eight listing rule is associated with corporate actions pertaining to share capital. The ninth listing rule is associated with the directors’ role in the form of gatekeepers. The final listing rule includes procedural and introductory guidance (ASIC, 2018).
The increased amount of business liabilities could be considered as another cause behind the downfalls of ABC Learning, One Tel and HIH Insurance. These are discussed briefly as follows:
For ABC Learning, the organisation had a stable liability amount at the start of 2007; however, the procedure of refinancing in the second half of 2007 had resulted in reclassifying the term loans from current and non-current liabilities valued non-current liabilities valued $1.1 billion. Such additional rise liability between 2007 and 2008 had resulted in decline in profit margin of the organisation by 42%. Along with this, ABC Learning had to incur $1.2 billion, since they have breached the debt agreement (Miglani, Ahmed and Henry, 2015).
For HIH Insurance, the situation is almost identical like that of ABC Learning, since the leverage position of the organisation was high due to term loans from banks and financial institutions. As a result, this had contributed significantly to the degradation of the organisation. Moreover, due to the acquisition of FAI Insurance for $300 million, the debt burden of HIH Insurance had increased considerably due to the fact that the actual acquisition price based on the then market value would be $100 million (Ratnatunga, 2016).
Ethics and governance
For One Tel, it could be observed that the management of the organisation had adopted an unsuitable strategy of hiding business liabilities. The reason is that the debt burden of the organisation has increased considerably. Moreover, the organisation had not cleared its various payments to the other debtors as well. Due to this, it had to incur a compensation amounting to $92 million. By taking into account all these reasons, the collapse of One Tel was obvious and justified (Safari, Cooper and Dellaportas, 2016).
Conclusion:
Based on the above discussion, it is evident that there were numerous reasons, due to which none of the organisations, namely, One Tel, HIH Insurance and ABC Learning were not able to sustain their business operations in the Australian market. However, there were certain common factors behind the collapse of the three organisations, which was incorrect decision making from the management in certain areas such as investment decisions, business diversification, adoption of wrong accounting strategies, financial account manipulations and others. Moreover, the availability of increased amount of debt could be considered as a reason behind the liquidation of the three organisations. Most significantly, all three companies had absence of significant ethical guidelines. Along with this, the presence of inadequate mechanisms of corporate governance was evident as well. These two aspects had been accountable for the downfall of One Tel, HIH Insurance and ABC Learning. Finally, the board members of the organisation followed the strategy of overstated profit by deferring the key business expenditures for three years. This strategy was considered to be illegal in terms of accounting policy for the organisation, since compliance was not made with the prevailing accounting policies and standards. Moreover, the increased amount of business liabilities could be considered as another cause behind the downfalls of ABC Learning, One Tel and HIH Insurance.
References:
Adams, M.A., 2016. Contemporary case studies in corporate governance failures. Governance Directions, 68(6), p.335.
APESB., 2018. APES 110 Code Of Ethics For Professional Accountants. [online] Available at: <https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf> [Accessed 29 August 2018].
ASIC., 2018. Corporate Governance | ASIC – Australian Securities And Investments Commission. [online] Available at: <https://asic.gov.au/regulatory-resources/corporate-governance/> [Accessed 29 August 2018].
Carnegie, G.D. and O’Connell, B.T., 2014. A longitudinal study of the interplay of corporate collapse, accounting failure and governance change in Australia: Early 1890s to early 2000s. Critical Perspectives on Accounting, 25(6), pp.446-468.
Crockett, M. and Ali, M.J., 2015. Auditor independence and accounting conservatism: Evidence from Australia following the corporate law economic reform program. International Journal of Accounting & Information Management, 23(1), pp.80-104.
Dagwell, R., Wines, G. and Lambert, C., 2015. Corporate accounting in Australia. Pearson Higher Education AU.
Di Pietr, A., Ay, M., Art, S. and Ronen, J., 2014. Accounting and regulation. Springer,.
Du Plessis, J.J., Hargovan, A. and Harris, J., 2018. Principles of contemporary corporate governance. Cambridge University Press.
Hay, D., Stewart, J. and Botica Redmayne, N., 2017. The Role of Auditing in Corporate Governance in Australia and New Zealand: A Research Synthesis. Australian Accounting Review, 27(4), pp.457-479.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.
Hossari, G., 2014. Multiple classification schemes for signalling corporate collapse. International Journal of Accounting and Information Management, 22(2), pp.146-156.
Jones, G. and Beattie, C., 2015. Local government internal audit compliance. Australasian Accounting, Business and Finance Journal, 9(3), pp.59-71.
Miglani, S., Ahmed, K. and Henry, D., 2015. Voluntary corporate governance structure and financial distress: evidence from Australia. Journal of Contemporary Accounting & Economics, 11(1), pp.18-30.
Ratnatunga, J., 2016. The Accounting Delusion: Faith and Trust in IFRS Reports. Journal of Applied Management Accounting Research, 14(1), p.1.
Safari, M., Cooper, B.J. and Dellaportas, S., 2016. The influence of remuneration structures on financial reporting quality: evidence from Australia. Australian Accounting Review, 26(1), pp.66-75.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
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