Events of Liquidation
The management of every business run the show with the promise and assurance to the owner groups that the operation will continue for an indefinite period of time. In accounting parlance, the same is construed to be “Going Concern” concept. However, f the business, for whatsoever reason may get into the liquidation process, the basic assumption of accounting and financial statements cum corporate reporting gets adversely affected and vitiated (Harris, Omer and Wong, 2015). In other words, the liquidation upsets the basic corporate goals and long-term objectives. The reasons for such liquidation may be manifold and the process is also cumbersome and time-consuming. In addition, it is also asserted that the impact of liquidation on the business is self-explanatory as the business itself comes to an end and hence, the expectations of stakeholders may remain unfulfilled (Insolvency Experts, 2018). Therefore, liquidation is considered to be the last resort or corporate restructuring. The instant report briefly discusses the liquidation of three Australian companies and related aspects herein.
At the very beginning of the study, the researcher provides a brief overview as to the general causes of the liquidation of the companies namely ABC Learning, HIH Insurance and OneTel Phone Company. The next part of the report focuses on APES 110 Code of Ethics for Professional Accountants specifying 5 codes of ethics, followed by the 8 different Listing Rules as specified by ASX. Finally, the researcher concludes the analysis through ending note with recommendations.
The liquidation by the three companies as mentioned herein may be analysed to identify the exact causes an event that led up to the event of liquidation. The section below briefly describes such events for three companies.
The company used to be the country’s one of the largest childcare service providers. In the tear of 2007 and 2008, during the period of the global financial crisis, the company’s financial position was worst hit due to the subprime mortgage issue (Barbeler, 2018). As a result, the assets values had to be written down and the company did not have any assets to liquidate in order to pay off its payment obligations to the creditors and other parties (Trotman, 2009). Moreover, the higher debt proportion in the capital structure of the firm made the financial health of the company more critical and the management did not have any choice to reduce the payables but to sell off the entire business (SBS News, 2018).
APES 110 Code of Ethics for Professional Accountants
HIH Insurance, on the other hand, was one of the largest general insurance companies in the nation before its liquidation. The primary issue with the company was under provisioning of expenses which resulted in an inflated profit. On the other hand, the management abused the re-insurance and charged back to the profit which ultimately reduced the actual profit of the business in later years (Aph.gov.au, 2018). Such issues jointly contributed towards the reduced bottom line and almost negative net assets position of the business. Finally, it was also noted that the company used to value its assets and investment at a higher value than their actual value. As a result, the artificially overstated reserves and surplus were not sufficient enough to pay off the real payment obligations of the operations (Restructuring Insolvency: Australia, 2018).
OneTel was one of the largest telecommunication service providers in Australia before the management of the business filed for liquidation of the business in the year 2013. The operation was not being run by the management with an efficiency which resulted in a huge cash crunch for the business. After a few years from the inception in the year 1995, the company accumulated a huge debt burden for the owner groups. There were instances where the creditors and vendors were filing complaints against OneTel for non-payment of their dues. Moreover, the management started to charge more call rates from its customers than other service providers in the markets (Enroll My Experience, 2018). As a result, the business continued to suffer considerably in terms of both top line and bottom line.
Accounting Professional & Ethics Standards Board (APESB) is a body which is responsible for maintaining the code of conduct for accounting professionals in Australia. APES 110 codes of ethics suggest 5 sets of ethics that the accounting professionals must need to be followed while performing their professional duties and responsibilities (Murphy, 2016). These 5 ethics are briefly mentioned below.
An accounting professional must be honest in the execution of his or her professional duties and responsibilities. The person should be straightforward enough to assert own opinion and should not fear for anything but the truthfulness of the financial statements (APESB Standards, 2018).
The professional should not allow any biases to creep up and affect own opinion about the truth and fairness of the financial statements (APESB Standards, 2018). In other words, the person should be objective so that no external undue influence may override his or her professional decisions or judgements.
Listing Rules
The professional accountant should be experienced and qualified enough to hold own judgements in all situations. He or she should be able to form own unbiased opinion about the quality of the financial statements which requires technical knowledge (Sonnerfeldt and Loft, 2018). While forming such opinion, he or she should exercise due diligence and proper care in considering all relevant accounting and technical guidelines and regulations (APESB Standards, 2018).
He or she should maintain the client confidentiality in discharging professional roles. The process of accounting, finalisation and auditing may involve dealing with clients’ confidential data that must be protected by the professional. This is because the business relationship between the client and the professional may remain intact. Moreover the same adds value to the profession as well (Edgar and Pattison, 2011).
Finally, it may be concluded that the accounting professional must show the professionalism in own behaviour, either in terms of experience or knowledge, o in terms of client dealings and related commitment (APESB Standards, 2018).
ASX has time to time issued various guidance notes and listing rules which very listed company therein may need to follow strictly in order to avoid any non-compliance and maintain transparent picture about the financial health of the business, especially in the eyes of the stockholders (ASX – Rules, 2018). The section below briefly discusses 8 such rules.
Rule 3.1 requires the business to disclose all the material information that is relevant for the stockholders for the purpose of their investment decisions. In this context, it may be noted that a piece of information should be considered as material if the non-disclosure of the same significantly affects the buying or selling decisions of the stockholders. For example, a big contract acquisition or a disposal of a large part of the asset base of the business (Humphery-Jenner and Suchard, 2014).
The business entity should periodically disclose the financial progress of the activities of the business. Such periodicity may be prescribed by the ASX which, as of now, stands to be quarterly. However, the requirement of half-yearly disclosure has been abolished now and the listed companies may need to file their quarterly accounts with the ASX so that the shareholders may, on a near real-time basis, get to know the state of financial affairs of the firm (ASX – Rules, 2018).
The rule 7 requires the new issue of security in excess of the prescribed limit (15%) must be pre-approved by the existing ordinary shareholders. This rule has been enacted in order to protect the interest of the present stockholders in the business (ASX – Rules, 2018). Such pre-approval must be in accordance with the prescribed notice format as mentioned in the given rule and sub-rule thereof.
Such transactions must be appropriately and adequately disclosed in the financial statements of the business. In this context, it is to be noted that the person holding more than 5% of the stock in the business may exert significant influence on the operations and hence may be treated as a related party (ASX – Rules, 2018).
This rule is critical to the interest of the stakeholders in the sense that any significant transactions that may cause the considerable change in the scale of operations or the structure of the capital should be appropriately communicated to the ASX (ASX – Rules, 2018). Such change may involve the sale of major business undertaking units or even suspension of activities.
An entity must ensure that the financial condition of the business is sound so that the quoted securities may be transacted at the market. Additionally, the business should maintain a specified proportion of cash every time for the purpose of ensuring sufficient liquidity (ASX – Rules, 2018). Moreover, there should be a person formally appointed to communicate with ASX for the listing rules related matters.
The rule requires every entity listed with ASX needs to submit certain documents with ASX before finalising the issue of securities. Such documents may consist of the proposed amended constitution, meeting notice resolution for issue of securities etc (ASX – Rules, 2018).
This rule allows the entity to request ASX for “trading halt” of its securities. However, such request should be entertained if only certain pre-conditions are fulfilled and the length of such halts should not exceed the time frame as prescribed in the ASX rules. On the other hand, such halt may lead to suspension of securities and even removal in the case of non-compliance of those listing rules as laid down in the given rules (ASX – Rules, 2018).
As explained in the preceding sections of the report, it may be asserted that those three companies had the issue of liability issues in the sense that all the companies were unable to pay off their debts and loan liabilities (ASX – Rules, 2018). To put it in this way, the businesses did not have sufficient liquidity so that they could have used the same to mitigate even the short-term obligations. Therefore, it may be considered that the liabilities position of the companies were critical to the business which ultimately led to the liquidation.
Conclusion
Based on the discussion and analysis performed in the previous parts of the report, the researcher may be able to construe the fact that the liquidation of big companies like ABC Learning or HIH Insurance or One.Tel Phone Company etc. may primarily be attributable to the fact that the management of these companies was not functioning in the best interests of the owner groups. In other words, the business should have been conducted by the management in the capacity of an agent of the stockholders so that the corporate goals and broad objectives may be met along with the need and expectations of all the stakeholders. However, the management used to act in their vested interest and as a result, the businesses suffered winding up (Staheli, 2012). Finally, it may be concluded that the Government should also play an active and significant role in supervising and overseeing the corporate conduct of the industries so that any corruption or unethical practices that may adversely impact the larger society including the external stakeholders of the business, may be avoided or accordingly checked and controlled (Styhre, 2016). A well-structured and well-monitored governance may contribute significantly towards the long-term sustainability of the companies in the market.
References
Apesb.org.au. 2018. APESB Standards. [online] Available at: <https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf> [Accessed 7 September 2018].
Aph.gov.au. (2018). HIH Insurance Group collapse – Parliament of Australia. [online] Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/Publications_Archive/archive/hihinsurance [Accessed 7 Sep. 2018].
Asx.com.au. 2018. ASX – Rules. [online] Available at: <https://www.asx.com.au/regulation/rules/asx-listing-rules.htm> [Accessed 7 September 2018].
Barbeler, D., 2018. ABC Learning Creditors To Decide Wind Up. [online] Brisbane Times. Available at: <https://www.brisbanetimes.com.au/national/queensland/abc-learning-creditors-to-decide-wind-up-20100319-qiu2.html> [Accessed 7 September 2018].
Edgar, A. and Pattison, S., 2011. Integrity and the moral complexity of professional practice. Nursing Philosophy, 12(2), pp.94-106.
Enroll My Experience. (2018). Liquidation in Australia, How HIH Insurance, One – Tel Inc. traps liquidation. [online] Available at: https://enrollmyexperience.com/liquidation-momentum-issues-faced-and-resultants/ [Accessed 7 Sep. 2018].
Gettingthedealthrough.com. 2018. Restructuring Insolvency: Australia. [online] Available at: <https://gettingthedealthrough.com/area/35/jurisdiction/5/restructuring-insolvency-australia> [Accessed 7 September 2018].
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Humphery-Jenner, M. and Suchard, J., 2014. Should Exchanges Allow Larger and More Discounted Placements? An Analysis of Changes to ASX Listing Rules. SSRN Electronic Journal,
Insolvency Experts. (2018). How to liquidate a company in Australia – Insolvency Experts. [online] Available at: https://insolvencyexperts.com.au/how-to-liquidate-a-company-in-australia/ [Accessed 7 Sep. 2018].
Murphy, B., 2016. Professional competence and continuing professional development in accounting: professional practice vs. non-practice. Accounting Education, 26(5-6), pp.482-500.
SBS News. (2018). ABC Learning creditors to decide wind up. [online] Available at: https://www.sbs.com.au/news/abc-learning-creditors-to-decide-wind-up [Accessed 7 Sep. 2018].
Sonnerfeldt, A. and Loft, A., 2018. The changing face of ethics – Developing a Code of Ethics for Professional Accountants from 1977 to 2006. Accounting History, p.103237321775121.
Staheli, N., 2012. Return and Report: A Social Theory of Agency Relating To Performance Measurement Systems and Employee Engagement. SSRN Electronic Journal,.
Styhre, A., 2016. Trust versus contracts in corporate governance: agency theory, contractual theory and the fortification of shareholder welfare governance. Management & Organizational History, 11(3), pp.276-297.
Trotman, K., 2009. TAKEOVER DEFENCES BY AUSTRALIAN COMPANIES. Accounting & Finance, 21(2), pp.63-85.
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