HIH failure
Discuss About The Current Research Synthesis And Implications.
There have been many complications in the businesses of companies performing in Australia and few such organizations are HIH Insurance, ABC Learning, and OneTel. The major similarities betwixt these companies are that they faced the issue of liquidation and this can be attributed to their effective corporate governance and management strategies. Besides, this played a role in overburdening their debt structure in a way that made them helpless while repaying the same. Thus, it can be said that debt obligations came out to be the major factor behind the disintegration of these companies (Vause, 2009). Through this report, major emphasis will be the debt obligations that resulted in the downfall.
The company encountered a situation of downfall in 2001 despite the fact that it was regarded as one of the largest companies of Australia pursuing a huge base of assets. Had the company implemented proper research and knowledge before entering the market, it would have protected itself from such grave scenario. In simple words, if proper interpretation and knowledge had been undertaken by the company, risks would not have posed a threat to its affairs. Some other primary reasons behind the failure of the company are as follows:
The main aim of the HIH company was to expand its parameters as it was a large company and this would also enable the company to get even more funds than usual. But due to the following of this path, the company saw a drastic change with increase in its liability which was much more than its assets which made the matter worse for the company. Calculation of the company showed them that the growth of the liability was negligible in front of the rate of the parametric growth of the company’s empire which was the not the practical reality (Westfield, 2003). This factor can be considered the base of all the happenings which led to the downfall of the company. The company did nothing to adapt itself to the changing trends and systematic working of the market. Though the company has enough time to cater with the same, they did nothing to introduce and additional changes or programs for the welfare of the company. The management can be fully blamed for such consequences because they were unable to discharge their duty fruitfully (English et. al, 2010). Weak management and low moral code was prevalent in the whole system of the HIH Company.
OneTel’s downfall
Another reason for the downfall of the HIH can be seen to be the improper handling of the future claims which are necessary for future functions and existence. This improper handling cost the company in a way so as to increase the negative trend in the company to 1.7% which wrapped up the whole company towards downfall. The management of the company can be blamed for no introduction or neglected attention paid to the company policies which was seen as no changes made to the company terms in order to cope up with the changing market. As mentioned earlier, this was the main reason and the base for the drastic increase of the liability with no limiting operations and this unchecked situation kept on getting worse till the company suffered the downfall. It is well known that will market will keep on changing which would ruin the business of the insurance companies but one thing they can do to reduce the impacts is they can make changes to their own policies to stay intact with their position but the HIH Company failed to do the same (Mock et. al, 2013). Summing up all points, it would be correct to say that dominating character and the hunger to expand its parameters was the main cause of risk development in the company and the unchecked behavior led to its downfall.
The non-audit services were provided by Andersen and $2.824 million were raised which was against the ethical code of conduct. In addition, it was against the shareholder interest. When the management decided not to increase the audit fee, the work pressure was reduced by Andersen indicating that the auditor has a link with the management which is against the principles of corporate governance. When an auditor has a relationship with the management, it affects the independent decision making. Moreover, the linkage between Andersen and HIH set the stage for a strong accounting policy. The views and opinion provided by Andersen was false and the statement failed to provide an authentic view. The financial statements were fabricated in nature that led to the ultimate downfall.
Financial statements like debtors’ aging report, trial balance, etc were some of the report which was not given attention to by the management which led to the collapse of the OnTel. Least priority and attention was paid in these cases which became a major threat for the whole company. Faith and aggression is necessary to thrive in the market which was missing in case of OnTel. The company was seen to make two changes in its foundation policy and they were that no accounts were decide to be put up against the company’s intangibles and the deferred expenditure policy of the company was changed every two years.
ABC Learning’s bankruptcy
Mismanagement of the policies and decisions to write-off few subscriber acquisitions cost the company in a hard way. Manipulation prevailed everywhere in the company as the management opted for illegal method and the auditor also represented fake report on behalf of the company. All these means opted by the auditor comes under chargeable laws (Parker et. al, 2011). These small situations summoned up to become a large case of liquidation for the company which cost it company heavily. Low moral code existed in the company with no control over the company with manipulation made by the management was seen. Terms set up by the company for the process of take over and continuing its dominating character was not done adequately which led to the company’s downfall. The company had the problem of increased liability from the start of the process and no changes to the company’s policies as per the alterations in the market was prevailing in the company and after that also the company stepped in foot in the market without any strategic plans and professional character and behavior to cater with the same. Summoning up all, it shows that the company management did nothing to reduce the impacts of the changing market and when the circumstances got worse, they made manipulations in the financial statements to hide the true position of the company.
Therefore, in relation to this, it is notable that financial reporting must be undertaken in such a way that it enhances the truthfulness and fairness of financial information prevalent in the statements. Moreover, if such statements are not able to allow users in their decision-making processes, then there is no moral reason to undertake financial reporting procedures (Manoharan, 2011). If OneTel would have made attempts in adopting accrual system of accounting in a modern way instead of a traditional sense, the company would have safeguarded itself from such grave situation. In other words, as the accounting strategy adopted by the company was purely outdated in nature, it resulted in exerting a significant influence upon the company and its affairs.
It was in the year 2007 that ABC became bankrupt and so heavy losses were report for the succeeding year that was 2008. It was seen that the auditors had include an amount of $1.68 billion catering to injury elated expenses and $364 million on the majority disposal of the risk. These entire amounts were far beyond the meter that the company thought and this led to its downfall. Asset of the company was seen to decrease from $2.22 billion to only $284.5 million because of the above suffered losses which had to be countered in any way and so the liquidity was seen to decrease a lot. To pay 1 dollar liability, the company only had 30c or 40c but not more and this made the circumstances even deeper for the company to rise from (Teen, 2012). All these facts and figures are enough to define the downfall of the ABC (Kruger, 2009). The current ration of the company was calculated to be 0.3 or 0.4 and it is obvious that the company suffered from serious liquidity troubles because the current ration was marching below one. Also the quick ratio of the company was embarked in the danger zone. Problems were high, solutions were low and ABC was unable to survive the pressure.
Financial reporting issues
The previous cases can be seen to form the foundation for the setting up of the ABC Learning. But it is seen that the ABC also had the problem of a disrupted management which led to the company’s collapse within a small time period. It was note that the moral codes were low and the maintenance of the company was paid no attention to which made the matters worse. Huge achievements were made by the company in growth and development sector but this was overrun as the company couldn’t maintain it with zero continuous future plans. The points raised up in the previous cases can also be seen to be the common ones in this case which led to collapse of a once dominating and largest company in the whole of Australia. ABC was leading the field from the front with top of the list performance but yet poor moral conduct and management misstatements led to the collapse of such a big company (Hoffelder, 2012).
In light of the previously mentioned scenario, it is recommended that companies must follow proper corporate governance measures and risk management approaches within their framework so that they can easily encounter major risks and sustain in the industry. Besides, taking into consideration the complexities prevalent in the corporate environment, it is also recommended that capital structure of companies must not comprise more of debts and less of assets. This is because increment in debt obligations can pose a major threat to a company’s smooth flow of operations, thereby creating its downfall at the end. Therefore, companies are duly responsible to follow proper management strategies and corporate governance principles to avoid emergence of significant risks.
Conclusion
From the aforesaid evaluation, it can be seen that all three companies faced liquidation at the end due to ineffective management strategies and corporate governance principles within their framework. Furthermore, the management had the advantage to get rid of such drastic situation by being ethical in nature, but they chose to adopt illegal means to enhance the image of the company, thereby resulting in their disintegration respectively. This sheds light on the fact that the management of companies can easily safeguard a drastic scenario. Moreover, if proper risk management approaches had been adopted by these companies, the situation might have been something different.
References
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 3 April 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 4 April 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 3 April 2018]
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