Discuss about the Case studies on Liquidation of The Companies.
Liquidation is a procedure or process in which company has to close down all its operation and sell off its assets and properties to pay off all its liabilities and debts. The amount realised from sale of assets and property is given out to creditors in order of priority. The liquidation can either be voluntary liquidation which is recommended by shareholders and director, or compulsory liquidation which is ordered by court (Belton, 2017). The whole procedure of liquidation is managed by independent practitioner or the official liquidator who have sole and whole right to sell off all the assets and investment to pay off creditors and to distribute the remaining amount to shareholders. It is an end of the going concern assumption of the company and ultimately affects all the stakeholders who are connected with company (Bromwich & Scapens, 2016). Hence, the company must try to avoid this situation in the interest of company and stakeholders. It is just an alternative of formal winding up after that company is incapable to file annual return or annual accounts and the name of company strike off from the register of company.
Sometime company not able to fullfill its objective and making loss continuously, then the shareholders and director pass resolution the end of the company and can call for the liquidation process to begin. In case of compulsory liquidation a petition may be lodged with the court by the company itself, creditors, official receiver, secretary of state and contributories. There are various reason because of which company might get liquidated (Alexander, 2016). Some of these are the objective for which company got incorporated might have been fulfilled, the company not getting certificate of incorporation within 12 month of incorporation, unable to pay its debts with the time limit, inappropriate geographical location, the company may be making the losses year on year or the company may be involved in the illegal business or the working capital for continuation of the business might not be adequate, etc. the company may also be wound up because of fraudulent financial practices or not following the ethical accounting practices or for non compliance of rules and regulations. All the above mentioned reasons have been explained with the help of the three major Australian companies which went into liquidation for a number of reasons (Bizfluent, 2017).
ABC Learning Company
ABC learning has been a renowned company in Australia in the past known for providing child education services. It had a number of primary and secondary child education centres spread across Australia. The margins as well as the profit for the company was high in the year 2000. The new auditors came for the company in the year 2000 and the company was also listed on the stock exchange in 2006 with a massive market value of $ 2.5 billion (Chron, 2017). The company was going high but all of a sudden it was found to be involved in a number of malpractices including unethical accounting and window dressing of the financial statements. The company had a large reserves of debt which it was never able to pay and as a result the company went into liquidation. As a result of this, a number of investors were affected and employees of the company were rendered umeployed. The downfall of the company can also be attributed to the deeds of the auditors as well as they were not able to identify the issues before during detective control and did not highlight the same to the management, thereby bringing up the official end to the identity of the company. In the year 2009, this company was being taken up by another renowned company in Australia named Goodyear Early Learning, which has more than 600 centres in total (Choy, 2018).
Types of Liquidation
The liquidation of ABC learing happened as the company was unable to pay off its hue pile of debts which have accumulated over time and thus there was no option to exist but liquidate. The auditors of the company also did not agree to sign the audit report as the accounts were materially misstated as per them and the management was asked by them to reinstate or re-prepare the financial statement to which the company’s management did not pay attention and the result was liquidation (Defond & Lennox, 2017). The company was doing exceeding well in the early 2000 era when the company was expanding and it had more than 2300 centres in Australia and it also succeded in gaining more than 1% market share in United States. The company was also doing some of the major acquisitions during that period and was giving a boost to ist profits in the form of non organic growth with margin ranging from 15-20% during the next few years. But along with all this, the company also had its debt balances increasing constantly and due to inability to pay so, the share prices fell by more than 40% in 2007. The company was wound up amidst all this and it was also delisted from the stock exchange (Dichev, 2017).
It was not only for the above mentioned reason that the company had to liquidate but many other reasons like the unethical business means, non compliance of corporate governance, incorrect and reckless valuation of the acquisitions without any study and analysis (Werner, 2017). The company also suffered from poor internal control and incomeptitive management which wasnot concerned to do the proper due diligence of the companies and new entities being acquired. It also came to notice that the difference of actual valuation and the consideration actually paid were to the tune of million dollars. These numbers proved the fact that the acquisitions were never being assessed on the basis of the future economic benefit arising from the acquistions but it was just a stereotype rubber and stamping activity in which the management was involved. For example, one of the acquisitions which was valued $ 70 Mn had a future economic benefit of only $ 30 Mn, thereby giving excessive payments and increasing liability on the balance sheet (Vieira, et al., 2017).
One of the another examples which can be considered here is the One tel phone company which again was a renowned brand in Australia known for its telecommunication and network services. It was involved in constructing and maintaining networks, internet and mobile services, new information system and marketing as well. Due to its products, the company had as many as 2 million customers in 8 countries (Visinescu, et al., 2017). The main reason for the liquidation of this company was again unethical accounting practices, weak internal controls and non competent management which hardly bothered to look into the giving correct, true and fair view of the business to the stakeholders. The company was involved in flowing wrong information in the market and expected revenues and profits based on past year trends which later on proved to be too much for the company (Saeidi, 2012). The company made tremendous profist in the year 1997 to 2000 with sales growth ranging from 127%, 40%, 57% to 100% respoectivey for the 4 years. In the wake of emerging business, the company gave an estimation of 10 times increase in sales which was never achieved. The company’s balance of liabilities and the debts kept on increasing in the balance sheet and was additionally hit when the company decided to take the spectrum licenses for huge consideration even though the same were not required then. In the year 2000, the company suffered one of the biggest losses in Australia amounting to $ 293 Mn and as a result the share prices fell to $ 1. Inspite of having the losses, the company pursued giving its directors Rich and Keeling handsome pay in the form of million dollars in bonus (Sithole, et al., 2017). All this added to the misery of the company, the debts multiplied and the cash flow became negative, the company wasn’t able to pay and it had to sell off its properties and assets and thereby undergo liquidation in 2001. The other reasons can be said to be non adherence to the corporate governance standards, incorrect reporting in the financial statements, inflated figures for the sales and receivables and also the profits,. Even the auditors missed noting the same during testing the detection controls and therefore they can also be said to be responsible for the same.
Reasons for Liquidation
The third company which has been considered here for discussion on liquidation is HIH insurance company which was known in Australia as the 2nd largest insurer. However, the compay suffered huge losses amounting to $ 5.3 Bn due to which the company had to liquidate. It was one of the major collapse of business in Australia. Again the main reason for liquidation here was the overvaluation of the acquired company FAI along with aggressive accounting techniques being implemented by the company (Kangarluie & Aalizadeh, 2017). Bedies suffering a huge loss, the company also paid the huge severance package to the tehn chief executive office of the company who left the company one year ago before the liquidation. The downfall of HIH insurance company also impact the housing and the construction industry as a whole big time. The company mainly dealt in the perperty insurance and the underwriting services but the aggressive accounting techniques led to wrong disclosure of the assets and liabilities in the balance sheet (Raiborn, et al., 2016). One of such wrongly reported information was with respect to CE health international where the liabilities and the reserves were under reported. As with the other two companies, proper due diligence was also not being done in the case of acquisitions in the case of HIH insurance as well and all the above mentioned factors cumulatively led to winding up of the company. The losses were to the tune of $ 100 Mn to $ 300 Mn and the same was not reported in the financials and therefore again the auditors are also to be blamed for the liquidation and false reporting.
Conclusion
From the above discussion on the three major companies, we have found multiple factors which can lead to liquidation of the company. Its not only the inability of the company to pay the debt but many other factors which cumulatively lead to the liquidation or winding up of the company. Some of them are ineffective, ineffiencient and incompetent management who are not being able to highlight the accounting issues and risks of inability to oay off debts to the major stakeholders, fraudulent means of accounting, unethical ways of valuation, lack of due diligence while making acquisitions, weak internal controls and many more. Not onl the management, but the auditors of the respective companies are also to be held accountable for the same as they were the one who should have assumed the responsibility of finding out these accounting frauds and inefficiencies and should have discussed the same with the management. It is for all these reasons that the government has framed laws that are strict with respect to liquidation of the companies and they need to be handled by an independent liquidator.
Impact of Liquidation
There are many recommendations and learnings which can be pulled out of above obsrvations and discussion. Firstly, the companies and its management should understand the impact of liquidation. It not only hurts the individual investors and employees, rendering them unemployed but also affects the respective industry and economy as a whole. The investors take the decision on the basis of the financial reports being published by the company, therefore the same should be correctly reported so that the decision making can be enabled. Furthermore, in order to make the system more reliable and stringent, the government has come out with several rules and regulations on liquidation and that the same shouldbe done by appointing an official liquidator. The analysis also helps us to understand the relevanvce of corporate governance, reporting, laws and regulations. Finally, the auditor as well as the management of the company should be true and fai in its approach so that it not only leads in development of the profession but also the economy as well.
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.
Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online] Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html[Accessed 07 december 2017].
Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management Accounting Research, Volume 31, pp. 1-9.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis. Ecological Economics, p. 145.
Chron, 2017. five-common-features-internal-control-system-business. [Online] Available at: https://smallbusiness.chron.com/five-common-features-internal-control-system-business-430.html[Accessed 07 december 2017].
Defond, M. & Lennox, C., 2017. Do PCAOB Inspections Improve the Quality of Internal Control Audits?. Journal of Accounting Research, 55(3), pp. 591-627.
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp. 617-632.
Kangarluie, S. & Aalizadeh, A., 2017. ‘The expectation gap in auditing. Accounting, 3(1), pp. 19-22.
Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.
Saeidi, F., 2012. Audit expectations gap and corporate fraud: Empirical evidence from Iran. African Journal of Business Management, 6(23), pp. 7031-41.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems. SAGE Journals, 30(1).
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.
Werner, M., 2017. Financial process mining – Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.
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