ABC Learning
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?
OneTel, HIH Insurance, and ABC Learning encountered a major downfall and the reason behind this can be attributed to their ineffective management strategies and risk approaches. Due to such practices, these companies became overburdened with an enormous amount of debt that facilitated in creating massive issues in relation to continuance of operations. Moreover, this means that if these companies had offered due focus upon risk management and other governance strategies, they would have protected themselves from this situation. Nevertheless, this also highlights the fact that debt sources of finance must not be highly relied upon as it creates huge complications for the borrowers in relation to repayment (Manoharan, 2011). Overall, these companies had the advantage of safeguarding themselves from downfall but their ineffective management approaches increased the difficulties.
The company was established in the year 1968 and it was initially a smaller company pursuing small operations. However, it enhanced on a larger scale in a very less amount of time and the reason behind this can be attributed to its management strategies. However, it is notable that such strategies came out to be too aggressive in nature that paved a path for the company’s downfall. The major causes behind the company’s downfall are as follows:
Ineffective management of risks
Since HIH was an insurance company, risk management is pivotal to facilitate smooth flow of operations. Furthermore, when it comes to HIH, it failed to manage its risks in an effective way that resulted in its downfall at the end. Moreover, in relation to investment, the company failed to enter the market with prior planning and professionalism that resulted in an investment failure on its part (Kruger, 2009). Furthermore, the management is to be blamed for not introducing proper company policies that could have assisted it in aligning with the fluctuations in market. This came out to be the biggest flaw for the company that ultimately enhanced its liabilities in a way that it failed to repay the same. Besides, since this situation remains unchecked by the management, the level of risk increased to a stage that was impossible to be prevented, thereby resulting in the company’s downfall (English et. al, 2010). Nevertheless, since the company is an insurance company and the market is vulnerable to significant fluctuations, it could have framed or designed such risk management policies that allowed it to align with such fluctuations.
HIH Insurance
Rise in liabilities
HIH was also faced with the situation of enhancement in its liabilities that resulted in its downfall. The reason behind this can be attributed to its inappropriate corporate governance measures that forced it to enter the market without planning and as a result, invited more debt obligations (Westfield, 2003). Moreover, a large takeover attempt had been undertaken by the company owing to its opinion that the ratio of such takeover was not so relevant. However, in contrast to this, the company’s opinion was opposite in nature (Parker et. al, 2011). This is because it remained ignorant in relation to alignment with market fluctuations. Furthermore, adoption of proper corporate governance measures could have assisted it to rectify the loopholes and frame a better provision for balancing its capital structure. Since, these efficacies were failed to be accounted for the by the company, it resulted in an increment of liabilities that further enhanced its difficulties as repayment of the same became impossible. Moreover, the company had the opportunity to safeguard itself from such scenario, yet it failed to do so. Overall, the company failed to account for such increment in liabilities as it was regarded negligible for it, which was not the actual reality (Westfield, 2003). It also failed to adapt itself to the changing business environment even though it had ample amount of time to undertake the same. Therefore, accounting for all these inefficacies, it can be said that the management is entirely at fault in relation to the downfall of the company (Vause, 2009).
In relation to OneTel, the company also failed to account for proper corporate governance practices that ultimately resulted in its downfall. Even though the company had huge majority of resources, yet it encountered the problem because of its improper management strategies. The primary reasons behind the liquidation of the company are as follows:
Improper consideration of financial statements
It can be witnessed that the company failed to account for significant financial statements like trial balance report, debtors aging statements, etc that paved a path for its downfall. If it had exerted due focus and attention towards the management and disclosure of proper financials to the public, it could have safeguarded itself from this situation. Besides, aggression and faith were clearly missing in the case of OneTel that is a negative indicator of its performance. In relation to financials, it can be observed that the company made two significant variations in its foundation policies. The first one was that the deferred expenditure policy was significantly altered by the company for every two years and the second variation was that no accounts were put up in contrast to the intangibles of the company. This clearly sheds light on the fact that the management was involved in manipulating such financials for their own interest by compromising the requirements of general public. In addition, it is also observable that even though the company adopted illegal means to manipulate its accounts, yet there was no detection of frauds in the auditor’s report that is also a major concern. Thus, this means that the auditor was also involved in such manipulation on the direction of the management, which is a punishable offence on their part. All these problems collectively caused a huge risk for the company that was difficult to be mitigated and as a result, disintegrated the company.
One.Tel
Immoral approaches
It can be seen from the business environment of the company there was no proper code of conduct for management of business operations. In other words, low ethical code prevailed in the company’s framework that allowed it to focus on self-interest even by compromising or risking the requirements of the entire workforce. Moreover, the terms framed by OneTel for the takeover attempts were not undertaken properly that ultimately enhanced the possibilities of its disintegration. Further, the company also had the issue of enhanced liabilities from the very starting and since unethical ways were adopted to facilitate business operations, the business policies could not be changed by the management. Nonetheless, it can be seen that the management of the company made no effective steps and measures to safeguard itself from such a grave scenario and instead, they adopted unethical and illegal measures to enhance their reputation and goodwill in the industry. If it had adopted proper corporate governance measures and business management approaches, it would have not encountered the situation of downfall (Manoharan, 2011). Precisely, in order to deal with the constantly changing business environment, manipulation of financials and immoral strategies were adopted by the company to sustain in the industry. In relation to this, since the company had concealed material facts from many of its financials, it had the motive to hide its true financial position from others. Thus, if financial reporting has been undertaken in a way that it fails to adhere to truthfulness and fairness of the company’s performance, it shall stand unethical and immoral (Wood, 2011).
Therefore, these are the key reasons that played a major role in liquidating the company and moreover, these issues could have been easily avoided if the management had focused upon efficient strategies instead of immoral approaches.
ABC Learning was also one of few companies that developed from a smaller company to a giant in a very minimal amount of time. However, owing to the company’s madness for accession and extension, it had to witness downfall in the upcoming years. Moreover, like OneTel and HIH, this company also had the opportunity to safeguard itself from such grave situation but it prioritized ineffective management strategies that resulted in enhancing its liabilities in a way that it surpassed even the company’s assets (CPA, 2012). The following reasons are behind the company’s downfall:
Increment in liabilities
It can be seen from the company’s financials that for 2008, there was motivation offered by the auditors that amounted to $1.68 billion for the company in addition to a major loss of $364 million that resulted in termination of the stake. Moreover, the incurred losses surpassed the expected amounts that further resulted in the increment of liabilities in a way that it surpassed the company’s assets. Nevertheless, the company’s net assets declined from $2.22 billion to $284.5 million (CPA, 2012). This came out as a shock to the creditors and investors of the company and they were unhappy with the performance. Besides, the company had 30 cents and 40 cents each for its net current assets for every dollar of its net current liabilities. In relation to this, it is notable that if appropriate corporate governance measures were undertaken in due time, the company could easily have safeguarded itself from this situation. Hence, increment in debts paved a path for the company’s downfall as it became incapable in addressing all its debt obligations (Hoffelder, 2012).
Importance of Ethics and Governance in Explaining Financial Stress
Moral issues
It is visible from the business environment of the company that there were immoral approaches undertaken to facilitate smooth flow of operations that resulted in the downfall procedure. Further, there are various reasons that can be considered to prove why the company’s current ratio was lesser than one in most of the years. Besides, current ratio being less than one signifies that catering to debt obligations is problematic in the future. Hence, this facilitated in hampering the smooth flow of operations of ABC Learning. In addition to this, the quick ratios also witnessed a drastic decline owing to interruption in smooth flow of affairs (Mock et. al, 2013). These problems shed light upon the liquidity issues encountered by the company. However, the company did not witness failure overnight and it had full chances to implement corrective actions for addressing these issues but it remained negligent and as a result, witnessed downfall at the last. In addition to this, the company also failed to comply with rules associated with the framework of corporate governance (CPA, 2012). This is evident from the fact that related party transactions were allowable by the company so that it can offer benefits to Mr Grooves.
In other words, the company offered huge amounts to Queensland Maintenance Services wherein Mr Grooves’ brother-in-law was the primary director. In addition to this, the company also paid the Brisbane Basketball Team that worked under the authority of Grooves. These highlight immoral approaches undertaken by the company that resulted in its downfall (Teen, 2012
Conclusion
From the above-mentioned analysis, it can be stated that compliance with proper corporate governance practices and risk management measures are crucial for companies to survive in the environment. Besides, non-fulfilment of these requirements can generate major risks for the company that may become problematic to be avoided if corrective actions are not implemented at the earliest. The case of OneTel, HIH Insurance, and ABC Learning shed light on the fact that ethical measures are the need of the hour and non-compliance with the same can result in legal penalties and actions. Overall, companies must not disregard any opportunity that can allow them adhere to moral principles and approaches
References
CPA. 2012. ABC learning collapse case study, [online]. Available at: https://www.cpaaustralia.com.au/professional-resources/education/abc-learning-collapse-case-study [Accessed 3 April 2018]
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 9 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 3 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]
Wood, D A. 2011. The Effect of Using the Internal Audit Function as a Management Training Ground on the External Auditor’s Reliance Decision. The Accounting Review, [e-journal].86(6), pp. 34-56. https://doi.org/10.2308/accr-10136
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