Introduction of the Companies
Dsicuss about the Corporate Governance And Securities Class Actions.
The procedure to wind up a business is widely known as the procedure of liquidation. The main aim of liquidation is to close down the business operations in permanent basis. The liquidator, responsible to carry on the liquidation process, recognizes all the rights as well as liabilities of the business and does the settlement of the claims on permanent or partial basis (Coad, 2014). Some specific reasons or events have major contributions behind every corporate collapses and the main aim of this report lies in the analysis of the major reasons for the collapse of three of the major Australian business entities; they are HIH Insurance, One Tel Phone and ABC Learning.
HIH Insurance commenced their business operation in the year 1968; and made many global as well as Australian acquisitions in the year 1997 to 1998. It used to be the largest insurance company in Australia. HIH Insurance became enlisted under Australian Stock Exchange (ASX) in 1992 and changed their name to HIH Insurance in 1995. As per the liquidator, $5.3 billion was the total amount of loss of the company at the time of liquidation. Many members of the higher level management received conviction due to the collapse of the company and thus, it is considered as the largest corporate failure in Australia (French, Vital and Minot, 2015).
Established in the year of 1995, One Tel Phone was a telecommunication service provider in Australia. To satisfy the needs of the customer by providing superior telecommunication products and services was the main business strategy of One Tel Phone. With the help of effective and efficient business strategy, One Tel Phone obtained the position of the fourth largest telecommunication company in Australia. The establishment of a youth oriented business image with the sales of mobile phones and internet services was the motto of One Tel Phone (Comino, 2015).
ABC Learning was established in the year 1988 in Queensland, Australia. ABC Learning was one of the major educational service providers in Australia with a market capitalisation of almost $2.5 billion. The company had its name listed in the ASX. The effects of world mortgage crisis led to ABC Learning to go for managerial receivership. In addition, another major reason for the collapse of ABC Learning was large amount of debts. Before liquidation, the successful business of ABC Learning contributed towards the establishment of more than 900 education centres all over the Australia. The company acquired the Busy Bee Group in the year 2006 for $330 million and made their expansion in the US and UK market (Newberry and Brennan, 2013).
- HIH Insurance had to make huge amount of investment for the acquisition of FAI Insurance and it is considered as a wrong move for the company as this type of huge investment was too risky for the insurance business. This acquisition led to major loss for the company (French, Vital and Minot, 2015).
- Entering into the business to finance the films is considered as another major reason for the collapse of HIH Insurance as it contributed towards a loss more than hundred millions (Gabbioneta, 2014).
- Due to the effects of natural disaster in Florida, HIH Insurance had to face huge financial damage. The company became largely doubtful due to this event that contributed to business loss. Hence, it is also considered as a major contributor to the collapse of HIH Insurance (French, Vital and Minot, 2015).
- HIH Insurance made sudden change in the accounting policy of for making the compensation payment of the employees of California. The adoption of this aggressive accounting policy is also considered as a major contributor to the collapse of HIH Insurance (Gabbioneta, 2014).
- As a result of quick expansion, unsupervised delegation of business authorities and adoption of complex business structure, HIH Insurance had to face a loss of $800 million in a period of six months (French, Vital and Minot, 2015).
- One Tel Phone adopted the strategy of deferring the major business expenses for the period three years so that higher amount of profit can be shown. It was clearly an illegal accounting policy adopted by One Tel Phone that led to the violation of accounting standards (Carnegie and O’Connell, 2014).
- As a result of the adoption of illegal and aggressive accounting standards and policies, One Tel Phone had to face a loss of $291 million in the year 2000. It has negative effect on the share prices of One Tel Phone as the share price fall below $1 (Goedeke, Mueller and Pankratz 2017).
- During the year 2001, the director of One Tel Phone sold 5 million shares for a price of $2.5 million as the company was running out of sufficient fund to carry on the business operations. This selling of shares in the low price made the company insolvent and the company took the decision to lay off 1400 of their employees (Carnegie and O’Connell, 2014).
- The process of liquidation held the company responsible to pay $92 million as compensation due to the fact that the company failed in exercising their power of due care and diligence (Goedeke, Mueller and Pankratz 2017).
Reasons for Liquidation
- ABC Learning registered a huge fall in the profit margin by 42% amounted to $37.1 million during the second half of the year 2007. In addition, ABC Learning has a debt of $1.8 billion at the same time. These two are the major contributors of the fall of ABC Learning (Hessian, 2014).
- After a low trading of $1.15, there was a fall in the share price of ABC Learning by 43% that is $2.15. This particular event created a pressure on the management of ABC Learning and they were forced to sell $20 million and $6 million stake at a price of $2.7 million. Moreover, for the year 2007 and 2008, ABC Learning failed in releasing their earnings report and had to face a trade suspension (Brown and Davis, 2015).
- The large increase in debt in the year of 2008 forced ABC Learning to go into managerial receivership. At the same time, there was a failure of the auditors to sign of the accounts of the company (Hessian, 2014).
- The adoption of incorrect accounting method for intangible assets was another mistake of ABC Learning. In the presence of the goodwill value of licence and other intangible assets of $2.4 billion, ABC Learning only made the impairment of $8.4 million. This particular aspect ended up in the wrong valuation of future cash flow of the company and 42% dip in the profit margin. Thus, this aspect is regarded as a major reason for the corporate failure of ABC Learning (Brown and Davis, 2015).
The main concern of ethics in the business organizations is related to the judgment for right and wrong. The internal culture of the organizations has major impact on the business decision taken by the company’s management. In order to decide the right course of action, the requirement is to take the most ethical decision by the managements of the entities. Sometime, businesses are required to reject the easiest route for the biggest short-term success in order to be ethical. For this reason, the managements of the companies can control their ethical decision with the help of the introduction of effective corporate governance strategies (Crane and Matten, 2016).
Ethical behaviour and effective corporate governance can make the business entities majorly beneficial. With the help of ethical business strategies, the business entities can attract and retain more customers towards their products and services that can lead to the increases revenue and profitability. Employee turnover can be controlled with the assistance of ethical behaviour and it helps in increased productivity. On the overall basis, it increases the goodwill of the companies (Weiss, 2014).
The ethical and corporate governance issues contributed towards the collapse of these three companies are shown below:
- There was not any approval from the Board of Directors in the HIH Insurance’s acquisition of FAI Insurance. There was abrupt resignation of directors after the disposal of the shares. Thus, lack of ethics and poor corporate governance is evident in this scenario.
- Another evidence of poor business decision was the entering of HIH Insurance in the film business due to be highly risky in nature. Ineffective corporate governance can be held responsible for it (Tricker and Tricker, 2015).
- Not paying attention to the due care and diligence in the business operations shows the lack of ethics in the management practice of HIH Insurance. This aspect also indicates towards the poor corporate governance of the company.
- There was major material omission in the issued prospectus of HIH Insurance. In addition, during the years 1998-1999, the company was responsible for overstating their profits that is an unethical business practice (Tricker and Tricker, 2015).
- The breach of accounting principles and standards by One Tel Phone provides clear indication towards the violation of ethical code of conduct of business (Clarke and Dean, 2014).
- The administration team of One Tel Phone was largely failed to monitor the financial performance of the business entity and for this reason, the management of One Tel Phone did not pay attention to the major risky areas of investment. This scenario indicates towards the presence of poor corporate governance in the company.
- Failure from One Tel Phone can be seen in the adoption of strong pricing strategy and it led to the liquidation of One Tel Phone due to the occurrence of major loss. It indicates that the directors of One Tel Phone were not ethical at the time to discharge their duties (Clarke and Dean, 2014).
- One of the major reasons for the liquidation of the business of ABC Learning was the incorrect adoption of accounting standards and policies that contributed towards the fraud business activities in the accounting operations of the company. Moreover, unethical business practice can be seen in the bookkeeping process of ABC Learning.
- ABC Learning failed in correct rendering of the services to the government and the customers and it can be considered as a major ethical concern for the company (Chapple, Clout and Tan, 2014).
In the corporate collapse of the above-mentioned companies, liabilities played a significant role. For ABC Learning, there was stability in the amount of liability in the year 2007. However, a reclassification of the borrowings from both the current and non-current liabilities for $1.1 billion contributed to a refinancing. During the financial year 2007 to 2008, a major violation of debt agreement contributed towards the payment of $1.2 billion by ABC Learning and it affected the profit margin as it fell by 42% (Brown and Davis, 2015).
On the other hand, the internal report of HIH Insurance stated that the company was highly leveraged by debt and the development of insurance liability contributed towards the insolvency of the company. It needs to be mentioned that the company made a wrong acquisition of $300 million while the actual value of the deal was $100 million. Thus, HIH Insurance got involved in high debt due to this acquisition (Gabbioneta, 2014).
In case of One Tel Phone, the management of the company was involved in hiding the liabilities of the business. According to the earlier discussion, it was required for One Tel Phone to make the payment of $92 million as a compensation amount that contributed towards the increase in the liability of the company. This huge liability was a major reason for the collapse of the company. Thus, the above discussion shows how the huge amount of liabilities in three companies contributed towards the fall of their business empire (Goedeke, Mueller and Pankratz 2017).
Conclusion
From the above discussion, it can be observed that there were different kinds of events and factors responsible for the collapses of One Tel Phone, HIH Insurance and ABC Learning. Some of the major reasons are huge amount of liabilities, large amount of debts, wrong decision of acquisition, adoption of unethical accounting policies along with the adoption of aggressive accounting policies. Apart from this, lack of ethical business practice and poor corporate governance can also be held responsible as the prime reasons for the collapse of these businesses. For this reason, it is required for the business entities to carry on their business operations by complying with all the required business, accounting and ethical pimples.
References
Brown, C.A. and Davis, K.T., 2015. The sub-prime crisis down under.
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.
Chapple, L., Clout, V.J. and Tan, D., 2014. Corporate governance and securities class actions. Australian Journal of Management, 39(4), pp.525-547.
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.
Comino, V., 2015. Australia’s’ Company Law Watchdog’: ASIC and Corporate Regulation.
Crane, A. and Matten, D., 2016. Business ethics: Managing corporate citizenship and sustainability in the age of globalization. Oxford University Press.
French, A., Vital, M. and Minot, D., 2015. Insurance and financial stability.
French, A., Vital, M. and Minot, D., 2015. Insurance and financial stability.
Gabbioneta, C., 2014. The Failure of Professional Networks to Detect and Expose Corporate Corruption. In Academy of Management Proceedings (Vol. 2014, No. 1, p. 10389). Briarcliff Manor, NY 10510: Academy of Management.
Goedeke, J., Mueller, M. and Pankratz, O., 2017. Uncovering the Causes of Information System Project Failure.
Hessian, K., 2014. Rise of the new corporates. Rattler (Sydney), (110), p.10.
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.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
Weiss, J.W., 2014. Business ethics: A stakeholder and issues management approach. Berrett-Koehler Publishers.
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