ABC Learning, HIH Insurance and One.Tel Phone Company
In recent years a number of companies have gone into liquidation (been ‘wound up’) because they have not been able to meet their liabilities when they fell due. In Australia, there are some well-publicised examples such as ABC Learning, HIH Insurance and One.Tel phone company.
Use the companies above and find (via electronic journals) the events that led up to the liquidation. Discuss the ethics and governance in explaining the company’s financial stress. Were liabilities a major factor contributing to the liquidation of the company?
From past few years, there are many companies who have gone into liquidation because these companies were not able to meet their liabilities when they fell due. In Australia, this has been observed that many companies been through the winding up of business. The aim of the report is to through light on companies who wounded up their business such as ABC Learning, HIH Insurance and One. Tel Phone Company. The report includes the ethics and governance that explain the company’s financial stress. Along with this, it includes the details that were the liabilities major factors that lead to the liquidation of the company or any other factor is also involved in the liquidation of the company.
ABC learning
The company was a well-known Australian company that was world’s largest provider of the early childhood education services. ABC learning was one of the listed companies on the Australian Securities Exchange with the market capitalization reaching A$2.5 billion in March 2006.
HIH insurance
The company was known as the second largest insurance company in Australia. The company was established by Ray Williams and Michael Payne in the year 1968. The company was placed into the provisional liquidation in the year 2011 March 15th. In the history of Australia, the demise of the company was considered as the largest corporate collapse.
One.Tel Phone Company
The company was a group of Australian based telecommunication companies which came into existence in the year 1955 soon after the deregulations of the Australian telecommunication industry. The company was founded by Jodee Rich and Brad keeling along with the high profile backers.
Ethics and governance play a vital role in the all the above companies. Ethics and Governance help in explaining the financial stress of the company. Considering the CPA Australia Ethics and governance is a core element of the skills and knowledge of today’s business accountants (Gitman, Juchau, and Flanagan, 2015). The accountant of the companies must know about the regulatory regimes and the mechanism of governance in the market of Australia. These regulatory regimes support the accountants to perform the work considering the code of ethics and laws in the market. The ethical activity in the organization helps the company to achieve the effective position and customer loyalty in the market (Henderson, et.al, 2015). Though, on the other side, the unethical behavior of the accounts in finance might help the company to build the reputation and earn loyalty but through unethical ways which don’t lead to the betterment of the company in the near future. ABC Learning, HIH Insurance and One. Tel Phone Companies were not able to maintain the ethical code of conducts for the ethics in the finance due to which they were not able to manage their obligations towards the creditors. The unethical practices of the company lead to the financial stress for the company as they worry about their unethical behavior (Kathy Rao, Tilt and Lester, 2012).
Events Leading up to Liquidation
There is a stronger link between the ethics and governance in finance. Ethical governance is considered as the system of shared and transparent governance which pursues to form general framework and guidelines for the managers of the large companies like HIH insurance, ABC learning and One. Tel Phone Company. If these companies are not able to follow these positive actions of ethics and governance then it will be stress for the companies. These companies followed the negative actions related to the ethics and governance due to which the knowledge of the rules on the governance was unable to safeguard the operational and managerial malpractices which will lead to the tension for the company related to the financial aspects (Logan, Sumsion and Press, 2015). The liquidation of these companies took place because company’s accountant did follow the ethical governance in which they reflect the false positioning of the companies. The accountant of the company did reflect the actual position and at the end when the company got aware about the position they were not able to pay its obligations due to which entered into the liquidation of business (Carnegie and O’Connell, 2014).
The reason behind the liquidation of the Australia companies like HIH insurance, ABC learning and One. Tel Phone Company is discussed below: –
ABC learning
The creditors of the company voted for winding up of the company as they believed that it was failed childcare group in the history of Australia. According to the financial report of the company for the year 2007 and 2008, the company was able to make just 30% of current assets and approx. 40% of the current liabilities. This reflects that before the winding up of the business the company was going through with a potential liquidity crisis (Barbeler, 2010).
The company was not able to maintain Debt equity ratio as the debt of the company was high which they are not able to pay back. ABC learning found that their liabilities remain constant from the month of June and December 2007. Moreover, in the month of Decembers 2007 around A$1.1 billion of borrowings was reclassified from the current to the non-current liabilities because of the refinancing (Hurst, 2010). Further, in the financial year 2007-2008, the company found that profit fell to 42% due to one-off charges and covenants for the debt accounting to A$1.2 billion were breached. When the company was in trouble they did get the support from the bank and other financial institutions.
Ethics and Governance in Explaining Financial Stress of Companies
The company was not able to meet its legal compliance which includes the set rules and procedure that affect the business and their compliances (Teen, 2012). ABC learning did find the proper way to come out from the debt due to which the creditors of the company took the decision of winding up the business.
HIH Insurance
Australian company HIH insurance has placed itself in the provisional liquidation after getting failed in obtaining the sufficient funds that are essential to continue the operations. On 25th May 2001, the provisional liquidator of the company suggested the federal government that the previous estimates for the total deficiency of the HIH insurance company were between the $2.7 billion and $4 billion. The reason behind the insolvency of the company was that they were not able to pay their obligations. In other words, the reports demonstrated that the company’s debt leverage and insurance liabilities were so high that there was a real risk of insolvency. The reason behind the debt was the aggressive expanded business strategies of the company. The selection of the market was not appropriate due to business faced numerous legal risks (Carnegie and O’Connell, 2011).
According to the report, the major reason behind the failure of the company was that the group did not have adequate reserves against the future claims of the company. The failure of the company was not because of the debt of the company but also because of the unethical practices in the accounting and failure of the corporate governance. Considering the report, it was found that the company gave the bribe for the sharing the false information related to the business and finance. According to the report on the HIH corporate governance, it was found that company was facing the issues such as: –
- Lack of independence of a non-executive director
- Lack of independent information resources
- Inadequate management of risk
- A dominance of the CEO of the company
All these issues state that the corporate governance of the company was only good on the papers but in reality, the practices for the corporate governance was not good (Logan, Press and Sumsion, 2012).
One.Tel Phone Company
Australian telecommunication company One. Tel backed by scions of the Murdoch and Packer families got liquidated and all its assets got sold to fulfill the obligations. One. Tel Company faced numerous issues due to which creditors took the step to wound up the company. The company operations were very open and due to which the issues remain unhide. Though, the company put in efforts to hide the issues like problems related to the billing team, call, and the cash flow problems. These issues were increasing and got uncovered in front of Packer and Murdoch in late May 2001 (Sharwood, 2017).
Factors Contributing to Financial Stress of Companies
The two major reasons behind the collapse of the company include the investment by the company of $1 billion for building their own mobile network. Another reason was the state of the billing and debt-collection system due to which the company quickly fall on debt and leads to the liquidation of the company (Sharwood, 2017). Moreover, the company got failed in terms of the ethics as well because they were not capable of meeting the inability of an information system to fulfill due to the organizational culture. The failure in the billing system was not able to fulfill the regulatory and business requirement which were never formally stated due to the company ethos. According to the report, the major failure faced by the company includes correspondence failure, process failure, interaction failure, and the expectation failure (Monem, 2011). The company faces some of the problems in the business due to which creditors took a step to winding up the business. Some of the issues were: –
- A long-term dependence upon an inadequate design
- Lack of prioritization and forward planning
- A lack of balances and checks
These were the major issues due to which the company was not able to manage the cash in the company and leads to the debt due to which the company took the step wound up the business.
Were liabilities a major factor contributing to the liquidation of companies?
This can be said that liabilities are one of the major issues which lead to the liquidation of the companies. Along with this, the liquidation of the company took place because of the other issues like ethical issues, failure of corporate governance and issues in the financial practices of the companies. All these issues contributed to generate the situation for the company in which they were not able to meet its obligations (Tricker and Tricker, 2015). Therefore, it can be said that liabilities taken by the company was a major factor that leads to the liquidation of the companies.
It is recommended to the company to manage the ethical and corporate governance in finance. These companies should always reflect a true picture on the papers as this is the only way through which they can know the actual positioning of their company. Along with this, it is suggested to the company to make effective growth strategies of the business because aggressive strategies might affect the financial practice of business due to which they have to bear the debt of the company. In addition, the non-fulfillment of the liabilities leads to the liquidation of the business. The company should have developed an effective system so that they can produce the correct invoices in a timely manner that helps the company in collecting the payment within the acceptable business practice
Liabilities as a Major Factor in Liquidation of Companies
Conclusion
In the end, it can be concluded that most of the Australian companies are involved in the unethical code of conducts and they are not following the corporate governance in finance due to which they are not able to meet their liabilities when they fell due. This not fulfillment of the liability affect the company and leads to the liquidation of ABC learning, HIH insurance and One. Tel Phone Company. The report includes the ethical and corporate governance failure by all companies. In the end, the details related to the reason behind the liquidation of all the companies are discussed.
References
Barbeler, D., 2010, ABC Learning creditors to decide wind up [Online]. Available from: <https://www.brisbanetimes.com.au/national/queensland/abc-learning-creditors-to-decide-wind-up-20100319-qiu2.html> [Accessed on 14th May 2018]
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.
Carnegie, G.D. and O’Connell, B.T., 2011, Accounting scandals in Australia since the late 1980s. Creative accounting, fraud and international accounting scandals, pp.135-161.
Carnegie, G.D. and O’Connell, B.T., 2011, Accounting scandals in Australia since the late 1980s. Creative accounting, fraud and international accounting scandals, pp.135-161.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015, Principles of managerial finance. Pearson Higher Education AU.
Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015, Issues in financial accounting. Pearson Higher Education AU.
Hurst, D., 2010, Creditors wind up ABC Learning [Online]. Available from: <https://www.smh.com.au/business/creditors-wind-up-abc-learning-20100602-wxfd.html> [Accessed on 14th May 2018]
Kathy Rao, K., Tilt, C.A. and Lester, L.H., 2012, Corporate governance and environmental reporting: an Australian study. Corporate Governance: The international journal of business in society, 12(2), pp.143-163.
Logan, H., Press, F. and Sumsion, J., 2012, The quality imperative: Tracing the rise of’quality’in Australian early childhood education and care policy. Australasian Journal of Early Childhood, 37(3), p.4.
Logan, H., Sumsion, J. and Press, F., 2015, The Council of Australian Government Reforms [2007–2013]: a critical juncture in Australian early childhood education and care (ECEC) policy?. International Journal of Child Care and Education Policy, 9(1), p.8.
Monem, R., 2011, The One. Tel collapse: lessons for corporate governance. Australian Accounting Review, 21(4), pp.340-351.
Sharwood, S., 2017, One. Tel to finally die in November, 16 years after collapse [Online]. Available from: <https://www.theregister.co.uk/2017/08/01/onetel_liquidation_ending_after_16_years/> [Accessed on 14th May 2018]
Sumsion, J., 2012, ABC Learning and Australian early education and care: a retrospective ethical audit of a radical experiment. Childcare markets local and global: can they deliver an equitable service, pp.209-225.
Teen, M.Y., 2012, The ABC of a corporate collapse [Online]. Available from: <https://governanceforstakeholders.com/2012/12/28/the-abc-of-a-corporate-collapse/> [Accessed on 14th May 2018]
Tricker, R.B., and Tricker, R.I., 2015, Corporate governance: Principles, policies, and practices. Oxford University Press, USA
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