Reasons behind the collapse of ABC Learning
The winding up of the companies can also be considered as the liquidation process. In this process of liquidation or winding up, the companies are required to face different steps or procedures for close down the business operations on a permanent manner. In this process, the liquidator, responsible for conducting the liquidation process, has the responsibility for the identification of the liabilities and rights of the businesses so that the claims of the creditors, lenders and other stakeholders can be settled down. Behind the liquidation of every business organizations, the presence of some specific reasons can be seen that contribute towards the downfall of the business; some examples of these reasons can be the adoption of inappropriate business policies, loopholes in internal control and corporate governance and many others. This report takes an honest attempt for the analysis and evaluation of different dimensions of the collapses of three major Australian companies; they are ABC Learning, One Tel Phone and HIH Insurance.
ABC Learning: ABC Learning was a leading business entity operated in the childcare educational sector of Australia. It was listed in the Australian Securities Exchange (ASX) and the amount of market capitalization of the company was AUD$2.5 billion. The presence of massive mortgage crisis contributed to the managerial receivership of ABC Learning and a large amount of debt an also be held accountable for the destruction of the company. ABC Learning was established in the year of 1988 and the company expanded all over the Australian through more than 900 centers. ABC Learning made their expansion in the market of United States (US) and United Kingdom (UK) in the year 2006. After that, the company acquired the Busy Bee Group for an amount of US$330 million (Carnegie and O’Connell, 2014).
One Tel Phone: One Tel Phone used to be considered as one of the leading telecommunication company having operation in the regions of Australia and the company was situated in 1995. The central business philosophy of One Tel Phone was to cater to the demands and demands of the customers with the help of delivering superior quality of products and services. Before the period of liquidation, One Tel Phone acquired the position of fourth largest telecommunication company in Australia. One major target of One Tel Phone was to deliver their youth consumers with mobile phone and internet services in order to develop youth oriented image of their business (Abid and Ahmed, 2014).
HIH Insurance: HIH Insurance was the largest insurance company having operations in the regions of Australia. Major progress of the business of HIH Insurance can be seen between the years of 1997 to 1998 as the company succeeded to expand their business globally. HIH Insurance had their name listed in ASX. The company changed their name in the year 1995 by selling majority portion of their stakes to a company of Switzerland. HIH Insurance had to incur a loss of $5.3 billion before the process of liquidation. Some of the board members of HIH Insurance were convicted to imprisonment due to their involvement in the financial manipulation of the entity. In Australia, the liquidation of HIH Insurance is considered as the largest liquidations in the history (Clarke and Dean, 2014).
Reasons behind the collapse of One Tel Phone
ABC Learning: Followings are the reasons of collapse of ABC Learning:
- There was a 42% fall in the profit of ABC Learning in the second half of the year 2017 and the amount was $37.1 million. At that time, one major debt of the company was of $1.8 billion. These two can be considered as the greatest reason for the collapse of ABC Learning (Coad, 2014).
- The massive fall in profit affected the share price of ABC Learning as it was dropped by 43% to $2.15; and it came after a small trading of $1.15. Due to these financial turmoil, the proprietor of ABC Learning was enforced for selling stake of their business worth $20 million and $6 million at a value of $2.7 million. This aspect earned the company a trading halt. Moreover, the management of ABC Learning filed in releasing their earnings for the years 2007 and 2008 (Marchini, Mazza and Medioli, 2018).
- It needs to be mentioned that the auditors of ABC Learning failed to correctly inspect the financial accounts of the business that lead to the receivership of the business of ABC Learning.
- The adoption of inappropriate method for intangible asset valuation can be considered as another major reason. According to ABC Learning, the total value of their business goodwill was $2.4 billion where the company only charged $8.4 million as impairment. It contributed towards the incorrect valuation of the future cash flow of the entity and profit dropped by 42%. These are the crucial reasons for the liquidation of ABC Learning (Marchini, Mazza and Medioli, 2018).
One Tel Phone: Followings are the reasons of collapse of One Tel Phone:
- The board members of One Tel Phone adopted the strategy for showing large profit margin with the help of deferring the major business expenditures for three years. The adoption of this accounting strategy was an illegal accounting policy for One Tel Phone as it did not comply with the accounting standards as well as policies.
- As a result of the adoption of the unlawful accounting policy, One Tel Phone registered a loss of $291 million in the year of 2000. The share prices of One Tel Phone got affected by this as it was dropped below $1 (Barnes, 2013).
- One Tel Phone faced major issue related to the lack of capital for running the daily operations of business in the year 2001. Thus, in order to overcome this issue, the management of One Tel Phone did sell their 5 million shares for $2.5 million. This was a massive blow for the company. Moreover, One Tel Phone did lay off more than 1400 employees due to insolvency.
- Due to not exercising the responsibility of due care and diligence, One Tel Phone had to pay compensation worth $92 million (Barnes, 2013).
HIH Insurance: Followings are the reasons of collapse of HIH Insurance:
- The board members of HIH Insurance had to made large amount of investment in order to acquie FAI Insurance that was risky for the businesses of insurance companies; and it was a wrong decision from the management of HIH Insurance (Lessambo, 2014).
- After that, the management of HIH Insurance took another wrong step by entering into the business to finance films that led to the loss of more than hundred million dollars for the company.
- The natural calamity in Florida was an added reason for the fall down of HIH Insurance. For this reason, HIH Insurance had to incur large debt and this debt contributed towards the loss of the company. This was a big cause for the collapse of HIH Insurance.
- The management of HIH Insurance brought unexpected change in the payment related accounting rule for the employees of California and this change led to the liquidation of the company.
- It was seen from the estimation of the liquidator that HIH Insurance had to incur loss worth $800 million within a period of six months due to various reasons like quick expansion, unexpected accounting policies and others (Adams and Borsellino, 2015).
APES 110: ‘APES 110 Code of Ethics for Professional Accountants’ is regarded as an important document for the accounting professionals as it provides the accounting professionals with the required ethical code of conducts. APES 110 has mentioned about five codes of ethics that all the accounting professionals are required to comply with and they are discussed below:
The first ethical code of conduct is Integrity and this code states that the accounting professionals are needed to be straightforward as well as honest in all professional and business relationships. The second ethical code is Objectivity and it restricts the accounting professionals in allowing any bias, conflict of interest and influence for overriding professional and business judgment. The third code is Professional Competence and Due Care and this code puts the obligation on the accounting professionals for maintaining skill and professional knowledge in order to ensure the delivery of competent professional services based on the recent developments in the accounting profession. The fourth code of ethics is Confidentiality and this code puts the obligation on the accounting professionals for respecting the confidentiality aspect of information acquired at the time of delivering the professional services. The fifth code of ethics is Professional Behavior and this code puts the obligation on the accounting professionals to make compliance with the relevant regulations and laws for avoiding any wrong action in the profession (APES 110 Code of Ethics for Professional Accountants, 2018).
ASIC Listing Rules: According to ASIC, corporate governance is a major driving force for the performance of the companies and thus, ASIC has reviewed different aspects of corporate governance. In this process, ASIC has provided the companies with some listing rules where the companies are needed to consider all these rules for the establishment of effective corporate governance mechanism. The first rule is the management of organizational conflicts. The second listing rule is related to the engagement of the shareholders. The third listing rule is the oversight of the director in financial aspects along with audit. The fourth listing rule is related to the risk management framework. The next listing rule is related to the handling of corporate information. Executive remuneration is the topic of the next listing rule. The next rule is related to the organizational culture. The next listing rule is related to the corporate actions related to share capital. The next lasing rule is related to the roles of the directors as gatekeeper. Introductory and procedural guidance is the last listing rule (Corporate governance | ASIC – Australian Securities and Investments Commission, 2018).
Growing amount of liabilities in the business can be taken as another cause for the liquidation of ABC Learning, HIH Insurance and One Tel Phone and they are discussed below:
In ABC Learning, stable amount of liability was there in the beginning of 2007; but the process of refinancing in the second half of 2007 in ABC Learning contributed towards the reclassification of the term loans from the current and non-current liabilities worth AUD$1.1 billion. This excessive increase in the liability from 2007 to 2008 contributed towards the 42% fall in the profit of the company. Moreover, ABC Learning had to make the payment of AUD$1.2 billion for violating the debt agreement (Newberry and Brennan, 2013).
Reasons behind the collapse of HIH Insurance
The management of HIH Insurance faced almost same kind of situation as the company was highly leveraged with the term loans from the banks and other financial institutes and it contributed towards the liquidation of the company. HIH Insurance had to face high amount of debt when they acquired FAI Insurance for $300 million that had an actual prices of $100 million (Adams, 2015).
It can be noticed in the case of One Tel Phone that the management of the company adopted the ill strategy to hide the business liabilities due to the excessive increase in the debts for the business. Due to the non-payment of different debts, One Tel Phone had to make a payment of $92 million as compensation. All these reasons together led to the collapse of the company (Lessambo, 2014).
Conclusion
It can be observed from the above discussion that many reasons were there for the liquidation of the businesses of ABC Learning, HIH Insurance and One Tel Phone. One common factors responsible for the collapse of all these three companies is the presence of wrong decision making from their management in the areas like business expansion, decisions related to investment, adoption of the correct accounting policies, manipulation in the financial accounts and others. In addition, the presence of excessive amount of debt can be shown as a reason for the liquidations of these three companies. Most importantly, all the three companies had major lack in ethics. At the same time, the presence of ineffective corporate governance mechanism was also evident. These two aspects were also majorly responsible for the collapse of the business of One Tel Phone, ABC Learning and HIH Insurance.
References
Abid, G. and Ahmed, A., 2014. Failing in corporate governance and warning signs of a corporate collapse.
Adams, M. and Borsellino, G., 2015. Is there a positive link between corporate governance and board diversity? Lessons from Asia. Journal of Business Systems, Governance & Ethics, 10(1).
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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].
Barnes, L.R., 2013. The Albatross Around the Neck of Company Directors: A Journey Through Case Law, Legislation and Corporate Governance.
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.
Clarke, F. and Dean, G., 2014. Corporate Collapse: Regulatory, Accounting and Ethical Failure. In Accounting and Regulation (pp. 9-29). Springer, New York, NY.
Coad, A., 2014. Death is not a success: Reflections on business exit. International Small Business Journal, 32(7), pp.721-732.
Lessambo, F.I., 2014. Corporate Governance, Accounting and Auditing Scandals. In The International Corporate Governance System (pp. 244-263). Palgrave Macmillan, London.
Marchini, P.L., Mazza, T. and Medioli, A., 2018. Related party transactions, corporate governance and earnings management. Corporate Governance: The International Journal of Business in Society.
Newberry, S. and Brennan, D., 2013. The marketisation of early childhood education and care (ECEC) in Australia: A structured response. Financial Accountability & Management, 29(3), pp.227-245.
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