Introduction and reasons for the collapse of HIH
Discuss about the Collapse Case Study And Risk Management.
Onetel limited, HIH insurance and ABC learning are some of the companies which have observed Twinkle cream use your face because of the ineffective management Strategies and the risk management approaches which have related to incurring use loss.es. The practices of this from have let them increase their obligations of liability and Debt and thus they are unable to control their operations. It has been clearly stated in the company would have to use the risk management Strategies and proper manaa gement skills then they will not be suffering from losses and the situation they are present in now. This also States that the firm needs to keep up with the debts and also collect the payments in time so that there will be no problems faced by it in future. The companies were said to have a proper safeguarding skill but because of the inefficient management, the difficulties increased.
HIH Insurance was founded by Ray Williams in the year 1968. The company expanded in no less time and within 10 years owned a minimum of 200 subsidiaries. Owing to the adoption of aggressive business strategies, the company soon started facing many difficulties that began piling up one on another which later accounted for the company’s failure. The managers did not bother to make provisions for meeting future obligations and despite the reserve problems considered under pricing so as to garner more consumers. The company also got engulfed in few bribery cases (Westfield, 2003). The reports of the auditors were also put into question because of the reports related party transactions with the external auditors. The reasons pertaining to the downfall of the company are-
- Failure in risk management- HIH being an insurance company, the occurrence of risks are high and it is why there is a higher involvement of risk management in the company. The company suffered three serious failures in investment owing to the slow and feeble risk management. The Directors too ignored the need for decision-making in order to overcome the failures in investment. The management ignored the need for formulating required and legitimate company policies which could have helped the company in adjusting to market fluctuations (Westfield, 2003). Also, the company made investments in markets without pre-planning and market research that accounted for investments failure.
- The dominance of Ray Williams- The dominance of Ray Williams who was the CEO of HIH Insurance overruled the Board which also accounted for the company’s failure. He was of the opinion that the company was his personal belonging and the shareholders have no right over the same. As the authority of CEO and his limits were not mentioned, the Board of Directors had to give into his dominance. The stakeholders to lose their interest from the company as the dominance of Ray’s impacted the functioning of the corporate governance model badly (Westfield, 2003).
- Rise in Liabilities- HIH’s operations were also disturbed by the rise in liabilities. The company suffered a serious setback because of the extreme madness and undying obsession for expanding that called for a rise in liabilities. The company suffered a sudden breakdown owing to its large takeovers and acquisitions. The company neglected to make adjustments to the market fluctuations (Parker et. al, 2011). The company assumed the ratio of its takeover to liabilities was close to insignificant which did not hold true in reality. The company lacked adequate management and strategy making that further called for it to collapse.
OneTel Ltd had its business operations in about seven countries and had annual sales of around AU$653 million during the time it collapsed. The actual practice of corporate governance in the company was full of flaws and very disappointing. The Chairman had no control over the state of affairs of the company as the Board of Directors were very much under the influence of the CEO’s dominance. The company also ignored its non-executive directors. The company’s audit reports were also unauthentic. The immoral approach of the company and misrepresentation of financial statements were also the primary factors due to which the company failed. It can be further elaborated below-
- Immoral conduct and approaches- It is quite clear and evident that OneTel Ltd management of business operations lacked ethics and proper code of conduct. This encouraged the company to work in its self-interest to an extent that it even put the requirements of the entire workforce at risk (Mock et. al, 2013). Also, the takeover policies designed by the company were not followed legitimately which also called for its untimely demise. OneTel Ltd performed unethically that called for its liabilities to further growth over its assets. Instead of opting for the effective measures and authorized strategies to overcome the losses the company opted for unethical standards and fraudulent measures to upgrade its image in the market. The actual practice of corporate governance in the company was very poor and inadequate (Vause, 2009). The company could have survived the setbacks if it had adhered to the legitimate practice of corporate governance timely and rectified its business operations. The financial statements were misleading as well (Kruger, 2009). The financial reporting too did not reflect the true and fair view of company’s performance. The company adopted immoral strategies and unethical standards so as to adjust to the ever-changing and highly competitive market scenarios with the goal to sustain itself in the industry which however did not turn out to be the way as expected and later call for the company to collapse (Hoffelder, 2012).
- Misrepresentation of financial statements- OneTel Ltd mishandled its financial statements. The company missed out on making trial balance report, debtors aging statements and some other necessary financial statements that further dug a hole for the company to fall. The company also manipulated its financial statements by providing misleading and fabricated financial information (Manoharan, 2011). The financial reporting also failed to portray the true and fair view of company’s financial performance. Lack of proper disclosure of financials to the investors also accounted for its significant failure as the investors slowly started losing interest from the company and drifted apart. The company made 2 important alterations in its policies related to its financials. The significant alteration in the deferred expenditure policy of the company in every 2 years is the first one while the second one was related to the intangibles of the company that were not accounted for by the company. The involvement of the management of the company in fabricating financial information and manipulating financial statements for their self-interest is quite evident. It comes as a big shock to see the auditor’s report failed to recognize and report a single fraud even after such numerous fraudulent activities were taking place in the company (English et. al, 2010). This further highlight the involvement of the auditor in concealing such frauds in his report and therefore is liable to legal punishment. Therefore, the company on the account of all these problems finally collapsed.
Introduction and reasons for the collapse of OneTel Ltd
ABC Learning came into existence in the year 1988 and by the year 2000, it had not less than 30 branches. It grew from a seedling to a huge tree after its enlistment in the year 2001. It had around 2238 centers in all over the United Kingdom, United States, and Australia while 660 centers in Australia. The company’s failure was major because of its craziness for extension and accession. There were accounting issues and the opinions of the auditors also coincided with one other. The company suffered a setback when it encountered insolvency in the year 2007 and after which suffered huge losses (CPA, 2012). The losses incurred surpassed the figures that were expected. This later accounted for the liabilities to grow over assets. The auditors motivated costs that too of $1.68 billion and an enormous loss that was close to $364 million in the financial statements of the company for the year 2008 that further attributed in the company’s failure. Huge debts and heavy losses further allowed the resources to shrink. The net assets dropped from $2.22 billion to $284.5 million (CPA, 2012). The actual practice of corporate governance in the company was full of flaws and very disappointing. Related party transactions were also practiced in order to benefit Mr. Grooves. The increment in liabilities and immoral activities were the primary reasons for the company to fail which is further elaborated below-
- Rise in Liabilities- ABC Learning owing to its unnecessary extensions and accessions trapped itself into rising in liabilities. In 2007, the company suffered a huge setback when it encountered insolvency that further accounted for its losses to grow enormously. The incurred losses crossed the expected numbers because of which the liabilities grow enormously and the assets of the company fell short for meeting nearing contingencies. The auditor’s motivated loss that was around $364 million and costs that amounted to $1.68 billion for the company in the year 2008 that further called for company’s untimely disintegration (Teen, 2012). There was a collapse in the net assets of the company which lowered to $284.5 million from a whopping $2.22 billion. The creditors and administrators were shocked and disappointed at the same time when they came to know that the company had only 40 cents and 30 cents each of its current assets for each dollar of its current liabilities. It became a huge problem for the company to act upon. The company became incapable of meeting its debt obligations owing to the rise in debts (Teen, 2012). However, the company could have easily come out of this fatal scenario and would not have disintegrated if the management undertook appropriate and effective corporate governance measures in due time.
- Immoral conduct and practices- It is quite evident that the management of the company encouraged immoral conduct and unethical standards so as to smoothen its business operations which in return worked opposite and call for the company to untimely disintegrate. The current ratio of the company was less than one which also depicts that the company’s ability to cater future debt obligations is in danger. The quick ratios also fell drastically that signifies the company faced troubles in encountering its liquidity issues. The actual practice of corporate governance in the company was very disappointing and full of flaws as well. It was also seen that the company also accepted related party transactions so as to benefit Mr. Grooves. His brother-in-law who apparently was the director of Queensland Maintenance Services was paid a lump sum amount for maintaining ABC Centres. ABC also paid Brisbane Basketball Team that belonged to Mr. Grooves. The company did not disintegrate in a day. It could have survived from its initial failures provided if there were legitimate actions and implementation of required strategies in due time.
Conclusion
After all the above statement it has been made clear that the involvement of the corporate governance and risk management strategies are very crucial for the company to survive in the market. If the company doesn’t take measures to remove the problems then they will become very corrosive for the firm and thus the corrective actions are needed to be taken by the firm at the earliest. Companies should start applying penalties on the illegal and incorrect actions of the management. Also, the company should keep in mind that it should not demoralize the principal and risk management approaches while applying the corporate governance and risk management strategies.
References
CPA. 2012. ABC learning collapse case study, [online]. Available at: https://www.cpaaustralia.com.au/professional-resources/education/abc-learning-collapse-case-study [Accessed 16 May 2018]
English, L., Guthrie, J., Broadbent, J. and Laughlin, R. 2010. Performance audit of the operational stage of long term partnerships for the private sector provision of public services. Australian Accounting Review , [e-journal]. 20(1), pp. 64-75. DOI: 10.1111/j.1835-2561.2010.00075.x
Hoffelder, K., 2012. New Audit Standard Encourages More Talking. Harvard Press.
Kruger, C. 2009. Lessons to be learnt from ABC collapse, [online]. Available at: https://www.smh.com.au/business/lessons-to-be-learnt-from-abc-learnings-collapse-20090101-78f8.html [Accessed 16 May 2018]
Manoharan, T.N., 2011. Financial Statement Fraud and Corporate Governance. The George Washington University.
Mock, T. J., Bedard, J., Coram, P., Davis, S., Espahbodi, R. and Warne, R. 2013. The audit reporting model: Current research synthesis and implications. Auditing: A Journal of Practice and Theory, [e-journal]. 32, pp. 323-351. https://doi.org/10.2308/ajpt-50294
Parker, L., Guthrie, J. and Linacre, S. 2011. The relationship between academic accounting research and professional practice. Accounting, Auditing & Accountability Journal, [e-journal]. 24(1), pp. 5-14. https://media.accountingeducation.com/1304/Parkeraaaj24(1).pdf
Teen, M.Y. 2012. The ABC of a corporate collapse, [online]. Available at: https://governanceforstakeholders.com/2012/12/28/the-abc-of-a-corporate-collapse/ [Accessed 16 May 2018]
Vause, B., 2009. Guide to Analysing Companies. Bloomberg Press
Westfield, M., 2003. HIH : The Inside Story Of Australia’s Biggest Corporate Collapse, [online] Available at: https://www.smh.com.au/articles/2003/03/14/1047583693489.html [Accessed 16 May 2018]
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