Events that Result in Liquidation of Companies
Disucss about the Empirical Evidence From Australian Financial.
An organization has a primary objective of making profit or in other terms maximizing the value of the company to increase shareholder’s wealth. An organization is a concern with perpetual existence except certain factors which can shut its operations and the primary reason for the same is liquidation. It is situation when a company does not have sufficient cash or assets to pay for its obligations (Abdullah and Malik 2017). Irrespective of the business operations or the size of an organization, if it gets liquidated then it is wiped out of existence. There are various reasons for a company to get liquidated which includes lack of management as well as corporate governance, negligence or misuse of resources etc. The main motive of this paper is to highlight the fall of a few Australian organizations due to lack of governance and ethics.
The three companies which will be highlighted in this paper are those which enjoyed the privilege of being highly valued companies of their times but due to their insolvency has to liquidate their assets on poor governance and ethical grounds (Ahmed and Ndayisaba 2016). These three companies are ABC Learnings, HIH Insurance, and One-Tel Phone Company which paid the costs of taking a wrong path for value maximization.
ABC Learning operated throughout Australia as well as other parts of the globe with a service of early childhood education. Eddy Groves was the founder of the organization who started it with a few centers but went on erratic acquisition quest as he believed in aggressive growth strategy as well as wiping out competition in the market (Anderson 2016). Hence, his prior motive was to acquire most of the rival organizations which posed threat to ABC Learnings. During the quest to acquire majorly, the company used huge funds through investors as well as took loans. With so much on plate, the company started registering decline in profits from mid-2017 and eventually it was clear that the company was in no position to comply with its liabilities and went into receivership.
The company’s management was dragged top court where it was alleged into management of earnings by showing its positive image while hiding the true value. The management was claimed to have overstated their profitability to reflect the bright side of the company to the investor in order to keep them investing. Mr. Groves, the mastermind behind the company’s fall has been the suspect who is claimed to have misguide the shareholders by not presenting the actual financial position of the company (Lane 2016). Moreover, the finance team also warned Mr. Groves of the consequences which he neglected. The debt of the company was on rise with the constant acquisition process and financial statement also included the government subsidy which is considered within the future profit. This was the factor which overstated their profits in eyes of the stakeholders. Moreover, he used to implement his own ideas in significant business decisions which not only liquidated the company but also effected the shareholder’s confidence.
ABC Learning
Ray Williams and Michael Payne are considered the founders of this organization in 1968 but at the time was named as M W Payne Underwriting Agency Pty Ltd. However, the organization was acquired by another company named CE Health PLC with Ray Williams got appointed as the member of the board and the company’s name was changed to HIH Winterthur (Pearson 2016). Similar to the previous organization, this company also believed in growth through aggressive acquisition and had acquired several rivals throughout Australia and various parts of the globe. The biggest rival of HIH was FAI Insurance which is acquired in 1999. Another partner of the company Winterthur Swiss, sold their majority of shares to public which gave the company its name HIH Insurance.
Though considered as one of the most reliable company, HIH Insurance collapsed in Mar 2011. The company had a huge asset base but a further investigation revealed that its liabilities were exceeding its assets largely resulting in its insolvency. The HIH Insurance is said to have acquired various troublesome businesses at prices higher than their actual worth. Moreover, it is also said that it served its customers at cheaper prices than other which finally concluded that it entered a market which it did not fully understood. It was very much clear that HIH Insurance compromised its ethics and governance in order to grow and hid its deficits by managing its earnings. It used to overstate its asses and understate its liabilities and other debts which deceived the stakeholders of the company.
OneTel was again a company of high value which started its operation in 1995 in Australia by signing an agreement with Optus. According to this agreement, OneTel could use the network service of Optus to serve its customers. However, in order to increase its customer base, OneTel started offering service at cheap rates (Doyle 2017). This act of OneTel has created its dispute with its service provider Optus. With its end of agreement with Optus, OneTel signed another agreement with Global One and resumed its spree on growth and launched Global Strategy to expand its wings outside Australian and make a global presence. In order to keep pace with its competitors, OneTel purchased several spectrums in Australia so as to improve its network. Following this, OneTel raised fund from some of the investors as they expect to get benefitted from the same.
In this as well, it can be witnessed that OneTel spend a huge amount on making acquisition as well as making agreement, while it offered service at low cost to maintain high customer base. It is even said that OneTel paid ten times for its license and went into several other agreements. As the consequence of the same, it started witnessing losses from the year 2000 and even reported low cash availability (Jayasekera 2017). Eventually in 1991, the shareholders and the creditors voted in favor to liquidate the company.
HIH Insurance
One of the most important elements of the organization is its business ethics which focuses on the norms as well as the guidelines that an entity needs to follow. It is actually the code of conduct that a company needs to follow while dealing with its stakeholders. It is considered as one of the main support of the governance system of a company which also ensured its stability in long run. It mainly encourages the transparency within the system and also monitoring of the financial movement (French, Vital and Minot 2015).
The personal view of the of a person could be considered as that individuals ethics but the ethics of a corporation is guided by the views of people who holds importance in a corporation and every member of that organizations bounds to the same. Though ethics varies from one culture to another but a sound governance system is important for every profession. A poor ethical background could be very much detrimental to the organization as it might lead to unprofessionalism within the corporation resulting in fraudulent (Kumar 2017). The board members and other important people to the organization may also indulge in some illegal practices if the corporate governance is weak.
The ethical morals of an accountant are of utmost importance when it comes to financial reporting as they are expected to reveal the fair value of the company to its stakeholders. The financial position of the company is the factor on basis of which the investors make their important decision and hence it needs to be reliable and so the accountant who prepared it. Realistic financial figures are expected from the accountant who need to prepare it on an unbiased and efficient basis. In other words, if an accountant lacks ethics, then the financial reports prepared by that individual can present an unrealistic picture of the organization and could harm the stakeholders both financially as well as mentally. The accounting standards provide a guideline for the accountant to follow but that individual’s ethics issue could lead him to manipulate the financial information and even may use the loopholes in the standard to manage earnings. The accountant might do the same for personal profit or even might get influenced by the management which are both against ethics but is commonly practiced worldwide. The accountant can provide a quality report only if the person’s ethical values incorporates with the characteristics which the person possesses.
OneTel Phone Company
The financial report prepared is not only important to the management or investor but also others as it contributes to the country’s economy. The accountants are hence advised to follow the ethical accounting standards which might be useful to them to create a better quality of report while keeping the person aware of the material misstatement. With ethics given so much important, when is implemented on a corporation creates a corporate governance which sets rules for every member of the organization to follow (Tricker and Tricker 2015). A weak corporate governance can lead to collapse of an organization. It is foundation which provides the accountant a responsibility to protect the shareholder’s interest and keeping the investors from unnecessary risk.
However, when the companies mentioned in the paper are referred, then none of the business maintained their integrity as they were into ill practice of hiding their dark side and manage their earnings. This practice eventually led to their downfall through the process of liquidation.
An organization’s most imperative elements are its assets and its liabilities. Both of these elements determine the financial position of a particular organization. However, in case of these three companies, their liabilities were higher than that of their assets (Damiani, Bourne and Foo 2015).
ABC Learning’s primary strategy to grow was aggressive acquisition and in the process of the same, the organization invested a huge amount on acquiring its competitors as well as getting new centers. In its spree to growth, it has not only acquired several companies in Australia but also across the globe (Omar 2014). The liabilities of the company started escalating with increasing credits and loans. However, to keep the shareholder’s confidence in itself, the company manipulated the financial statements through managing its earnings. In first instance, the company reflected asset of $4.5bn of worth and liabilities if $1.8bn of worth but on detailed investigation it was found that the company’s net liability was $800mn above its net assets. Moreover, it was also revealed that the company has shown most of its assets which were intangible while its tangible assets were hardly worth $1bn in the market (Choi et al. 2017).
It is a company with a bright past but as its hunger to grow rapidly took over, the company collapsed with huge debt outstanding. The market to which this company belonged to was highly competitive and in such a situation it was not only spending huge amount to acquire other firms but also provided its service as low cost. With its high rate of acquisition, the company had more than 200 subsidiaries within a decade of its establishment. The company also gambled when it bought FAI Insurance for $300mn while its actual worth in the market was $100mn. During the end of the year 2000, the company liquidated with a loss of more nearly $5bn (Bhadily and Hosie 2016).
Ethics and Governance in Explaining Financial Stress
This company also followed a similar strategy of growth and finally met its consequences. Even with an annual revenue of $653mn, the company failed to meet its obligations as its profit was lower than expected (Betta 2016). The return for the company was constantly going down and the company witnessed a cash crunch owing its aggressive acquisition strategy. It is claimed that the company during its buying spree purchased various firms at a price way above their market values. Hence, with such a situation, the company became insolvent and the shareholders voted for its liquidation (Sheaff 2017).
Conclusion
A lack of ethical values and corporate governance resulted in failure of these companies. The responsibility of the same totally lies with the management which kept the investors in dark and revealed he positive side of financials which were manipulated. These companies followed a strategy of aggressive growth which might be good for short-term but did not sustain for long. The accountant of these companies could also be termed responsible as they were biased towards the management and did not provide a true and fair value to the stakeholders of the company. These three companies provide to be very good example of ethics and governance in an organization and their importance.
References
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Kumar, R., 2017. A hundred years of corporate responsibility. Something to Believe In: Creating Trust and Hope in Organisations: Stories of Transparency, Accountability and Governance.
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Omar, P.J., 2014. The revenue rule and cooperation under the model law: an Australian perspective. ICR, 11, pp.17-24.
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Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
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