Events that Result in Liquidation of Companies
Discuss About The Explaining Financial Stress Of Companies.
The fundamental objective of an organization is profit-making or maximization of shareholder’s wealth. An organization, being a going on concern has perpetual existence but with a grave threat which is liquidation. This is considered most imperative as it may wipe the company from existence irrespective of its size or nature of business. This situation has been witnessed in various countries and numbers of firms got liquidated.[1] However, as studies have been conducted to learn the reason behind the same, mismanagement of resources and lack of corporate governance contributed the most towards the failure of an organization. Hence, this paper will shed light on a few Australian companies which got liquidated as a result of poor governance and low ethical values.
ABC Learnings, HIH Insurance, and One.Tel Phone Company, which has enjoyed the privilege of being one of the most valued companies in Australia had to face liquidation on poor ethical grounds, wherein the management of the companies chose wrong path of value maximization and suffered the consequences.[2]
ABC Learning Ltd was into a business of providing early childhood education services. Eddy Groves was the mind behind the business which has a few centers but started aggressively acquiring rivals and started opening new centers in view of growing faster. In the process of same, the organization spend a huge amount of money which were generally funded by investors as well as by banks. However, declining profit in second half of 2017 has reflected that the company was not in a position to meet its obligations and eventually the company went into receivership.[3]
The management of the concerned corporation has been alleged to maintain a poor governance as the financial position of the organization was misinterpreted and led the shareholders believe in the false positive image created. Mr. Groves, the founder and CEO of ABC Learning misguided the shareholders by keeping them from the actual financial position of the company and even neglecting the warnings from the team who were employed to measure the position of the company. He is said to be very much keen to expand his business by acquiring new branches, increasing his debt. It is also claimed that he was dependent on the government subsidy and reflected them as future profit in his financials.[4] This could be considered as the deceiving factor for the investors. He is alleged to follow his own ethics while taking business decision. The person has not only charged responsible for liquidation of business but also slowing down the confidence of the investors.
ABC Learning
Founded in 1968 by Ray Williams and Michael Payne and named as M W Payne Underwriting Agency Pty Ltd, the organization got acquired by CE Health PLC and the former partner was appointed to the boards and in 1996 its name was changed to HIH Winterthur. The company had an aggressive approach towards growth and it acquired several organizations in Australia and throughout the globe. However, in 1999 it acquired its biggest rival FAI Insurance and with Winterthur Swiss selling majority of its share to public, the company got the name HIH Insurance Ltd.
In March 2001, the company collapsed being perceived as one of the most reliable organizations. The estimated asset base of the company was huge but on further investigation of its internal reports, it has been seen that its high liabilities dragged it to insolvency. This came as a huge blow to the stakeholders who were left stuck with unpaid claims. There are various claims that HIH Insurance, in thirst of growth have acquired troublesome business at higher prices. Moreover, it is also referred that the company entered into an overcrowded market by offering services at lower prices than other while some say that it stepped into a sector which it did not understand as such. In case of HIH Insurance, ethics was again compromised to gain stakeholder’s confidence by reflecting false financial statement.[5] In this case, the assets were over-exaggerated while the liabilities were under-exaggerated to create a positive picture of the organization. It had fundamental issues and is even charged with negligence as its actuarial adviser had warned the management of the same before the collapse.
OneTel was launched in 1995 which signed an agreement with the second largest telecom company in Australia, Optus, for using Optus’s network services to serves its own customers. However, the company further decided to offer cheap rates for calls in order to increase its customer base. This step by OneTel has raised a dispute with its service provider Optus. Then in 1997, it signed another agreement with Global One in order to resume the growth it has dreamt of. It stepped further when it launched ‘Global Strategy’ to expand its network worldwide. Moreover, in 1998, OneTel purchased spectrums in various regions of Australia in order to enhance their services. Further, some of the investors injected money in their system hoping to gain out of it.[6]
Hence, it was seen that the company has invested a huge amount of money in agreement and acquisitions while offering service at low cost. Moreover, in 1999 it went into agreement with Lucent Technologies and even got its license at ten times higher cost than that of its rivals. Eventually, in the year 2000, the company started reporting operating losses and was witnessed supply crunch of cash. As predicted by Merrill Lynch, its cash reserves fell. And finally, the creditors of the company voted to liquidate it the year 2001.[7]
HIH Insurance
Business ethics is of utmost importance as it defines the principles as well as the norms that guides the activity of an organizations while maintaining its conduct with all of its stakeholders, be internal or external. Hence, ethics could be considered as the primary pillar of corporate governance in an organization while ensuring its sustainability.[8] Generally, the theory of corporate governance demands transparency within the system which even includes the financial movements within the corporation.[9]
Ethics is generally considered as the personal point of view which incorporates certain rules as well as code of conduct and any organization which is bound by it has its members bound within the same. However, differentiating between the ethical or unethical is difficult as it varies from one culture, society or organization to another. Therefore, a sound ethical base is the mandatory criteria for every industry in professional realm.[10] A weakness in corporate governance in an organization is a sign of poor ethics which might lead to fraudulent, selfishness, as members might start ill practices. This may also corrupt the board members, management as well as the staff of the organization.
When the financial reporting is taken into consideration, then the accountants are obliged to disclose true and fair value to the stakeholders as their ethics demands. Generally, the decision by any stakeholder of a particular firm is based on the financial position of that firm which is totally dependent on how the accountants provide it.[11] Therefore, any financial information that is provided by the accountant needs to be realistic, unbiased as well as efficient, so that the user of the same can rely on it. It can be further said that any lackluster of ethics while conducting calculation for financial report could draw an unrealistic picture of the company which might be deceiving and result in losses. Though the accounting standard and rules bind the accountants but lack of professional ethics could lead him to manipulate the figures. Hence, a professional ethics incorporated within the qualitative characteristics could provide a quality report.
The economic decision by the stakeholders are generally dependent financial reporting which is supposed to contain the fundamental qualities. The concept of ethical accounting standard is also a term which is being widely used. This notion is considered to be necessary for the accountants in order to guide them to create reports without material misstatement.[12]
While narrowing the same, the corporate governance is another imperative impression as organization with weak governance are witnessed to have collapsed. However, in contrast to the same, a strong governance is a base of long-term sustainability. Corporate governance laid the foundation of integrity as it imposes the responsibility of keeping the interest of stakeholders away from risk.
OneTel Phone Company
However, in the case of the abovementioned companies, none of them reflected integrity and their greed clouded their judgement. The management of those companies were liable for the collapse, as they manipulated their financial statement to show it positive and this resulted not only in liquidation but also tarnished their image. Moreover, the stakeholders were at bigger lose both materially as well as emotionally. [13]
Liabilities are undoubtedly the most important factor which results in liquidation of a company. In case of the companies concerned in this article, liabilities were higher than the organization’s ability to pay.[14]
Being on a spree of acquisition, ABC Learning invested a huge amount on opening new centers and acquiring other firms in same business. It started to expand its wings outside Australia and became an international brand. In process of doing the same, ABC learning took huge credits and loans from banks. The organization also manipulated its financials and presented it in such a way that it reflected the positive nature of the company. It had a net asset of $4.5bn with obligation of $1.8bn, but on further investigation, the liquidators found that the net liability exceed the company’s assets by $800mn. It has been identified that the company had most of its assets which were intangible in nature, while its tangible assets were hardly making $1bn.
Starting as a small company, HIH Insurance witnessed huge growth in its early period. This company started investing huge amounts in the highly competitive market and also were providing service at low cost. In a decade, it had more than 200 subsidiaries all over the world and also purchased troubled businesses. The organization also acquired its biggest rival FAI Insurance paying $300mn while the actual value of the business was $100mn. By the end of 2000, the compony almost had an asset base of approximately $8.1bn but with high leverage debt as well as insurance liabilities, the company collapsed with an estimate of $5bn in losses.[15]
The company’s aggressive acquisition strategy turned out to be a bad decision. It had a culture of growth-at-all cost which had its own consequences. Though during the collapse, the company had an annual sale of $653mn but was low on profit as it had huge expenses to meet. It had witnessed constant decrease in its return on assets and so its profits. The cashflow of the organization was also positive in the beginning but while aggressively acquiring other businesses and entering into agreements had created a cash crunch. Moreover, it also acquired the telecommunication license with ten times higher than its rivals. Hence, with such huge liabilities and lowering income, the company was also predicted to be insolvent which later happen on shareholder’s votes.[16]
Ethics and Governance in Explaining Financial Stress
Conclusion
The collapse of these huge companies turned out to the outcome of lack of governance and corrupted ethics. In all the cases, the senior management of the company were responsible for not keeping themselves transparent. Aggressive growth strategy that can also be termed as greed, overtook the ethical values and the management did not allocate their resources tactfully rather spend it on acquisition. Accounts manipulation is also seen to be one of the core reasons for the fall of these organization. Hence, a strong ethics and corporate governance are the most important element and is needed to be maintained within an organization.
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