Introduction of the Organisations
Discuss about the Liquidation Of Business Organisations In Australia.
Liquidation primarily refers to the procedure of selling the inventory of an organisation at a large discount for the generation of cash. The liabilities and rights are realised during the liquidation stage and the claims of the creditors are met either fully or partially (Abid and Ahmed, 2014). It is noteworthy to mention that various reasons are inherent for contributing towards the liquidation of the business organisations. The major reasons comprise of the implementation of aggressive policies of accounting, loopholes in corporate governance, unscrupulous practices and others. This report intends to assess the various reasons resulting in the liquidation of three major business organisations in Australia, which include HIH Insurance, ABC Learning and One Tel.
ABC Learning:
ABC Learning was one of the leading institutions, which used to operate in the educational sector of Australia. It was listed in the “Australian Stock Exchange (ASX)” having market capitalisation of nearly $2.5 billion. However, the mortgage crisis has direct impact on the institution, since it obtained large amount of debt coupled with shift towards managerial receivership. The institution was established in 1988 in Queensland and it had above 900 centres all over the nation. The institution had diversified its business operations in UK and US by acquiring Busy Bees Group for $330 million in 2006 (Carnegie and O’Connell, 2014).
HIH Insurance:
HIH Insurance was known to be the biggest insurance organisation in Australia. In 1997 and 1998, the organisation had acquired various firms in Australia as well as in other global nations. Due to such rapid progress, it got listed in ASX in 1992. Moreover, 1995, the organisation had decided to sell its stakes to a Swiss firm and the name had been changed accordingly. When HIH Insurance was liquidated, it had suffered a loss of $5.3 billion. Due to such liquidation, many board members of the organisation were found guilty and they were imprisoned. For this particular reason, the downfall of HIH Insurance is still called as one of the biggest corporate collapses that took place in Australia till date (Du Plessis, Hargovan and Harris, 2018).
One Tel:
One Tel was one of the popular telecommunication firms formed in Australia in 1995. The primary focus of the organisation was to provide superior quality products and services to the customers in order to meet their requirements and desires. Moreover, before it was liquidated, it was ranked the fourth biggest telecommunication firm operating in Australia. The intention of the organisation was to develop a youth-focused image by selling One Net services and mobile phones in the province of Australia (Alfaro, et al., 2017).
Reasons for Liquidation
There are certain reasons or particular events that eventually lead to the downfall of the three above-stated organisations, which are discussed briefly as follows:
ABC Learning:
In the third quarter of 2007, ABC Learning had encountered a decline of 42% in its profit margin, which was $37.1 million. In addition, the institution had obtained debt amounting to $1.8 million in the same year that eventually resulted in its collapse in the Australian market. However, other reasons include fall in stock prices, auditors’ inability and incorrect accounting treatment. Decline in the stock prices of the organisation could be observed by 43% to $2.15 after the stocks were traded at the lowest price of $1.15. Due to such poor stock condition, the proprietor of the organisation was compelled to sell the shares of $6 million and $20 million for $2.7 million. As a result, it had to face trade suspension due to its inability of releasing its earnings for the years 2007 and 2008 (Al-Azzam, Al-Mohameed and Al-Qura’an, 2015).
In 2008, receivership situation was faced because the debt burden had increased heavily and its auditors were not capable of signing off the accounts. Finally, it has been found that the accounting treatment related to intangible assets of the institution was incorrect. According to the annual report of the organisation, the goodwill value related to licences as well as other intangible assets was $2.4 billion; however, the impairment charge was only $8.4 million. Such recognition had resulted in inaccurate valuation of its future cash flows and as a result, 42% decline in profit margin could be observed. All these factors had contributed significantly to the downfall of ABC Learning.
HIH Insurance:
It has been found out that HIH Insurance had acquired FAI Insurance, which was not considered as a sound move. This is because since the amount of investment is large, it could be harmful for the insurance business and as a result, significant damage was caused to the organisation due to this event (Davies, 2016). The organisation had undertaken another incorrect decision by entering into business funding, which had lead to loss of hundreds of millions of dollars. The natural disaster that occurred in Florida had added further to the loss of HIH Insurance. This is because this event had forced the organisation to obtain heavy debt that eventually resulted in loss for the organisation. This could be identified as a significant cause for liquidation.
ABC Learning
The organisation had made an unexpected change suddenly in its accounting policy for paying staff compensation in California. This is considered as another significant event leading to the collapse of HIH Insurance (Goel and Ramanathan, 2014). According to the liquidator forecast, there was loss of nearly $800 million over half of the year because of the reasons of rapid diversification, reinsurance, complicated structure and the unsupervised authority allocation.
One Tel:
One Tel had intended to reveal greater amount of profit by deferring the significant business expenditures over three years. This policy of accounting that One Tel had adopted was not legal, since it had breached the accounting policies and standards (Hamilton and Micklethwait, 2016). A loss of $291 million was reported in One Tel because of the enforcement of illicit policies and standards of accounting, which had influenced the stock price of the organisation that fell below $1. In 2001, there was scarcity of funds in running the business operations due to which Rodney Adler, the director of One Tel, sold 5 million shares for $2.5 million. According to the administrator’s report, One Tel had become insolvent due to which 1,400 employees lost their jobs (Markham, 2015). Due to the liquidation procedure, One Tel was accountable to compensate $92 million, since there was no exercise of due diligence and due care.
From the perspective of the business organisations, ethics relate to the judgement of the business regarding its policies and practices. The organisational culture has direct impact on the business decisions that are undertaken on the part of the management. It is necessary to maintain ethical integrity while undertaking the business decisions and thus, it is expected from the management of the organisation to select the right course of action (Mostafa, et al., 2015). However, maintaining ethical integrity implies the avoidance of the path of generating larger short-term profits. Along with this, the enforcement of effective policies related to corporate governance results in directing and controlling the ethical business actions. The corporate organisations could be highly benefitted, if they ensure sound corporate governance and ethical behaviour. This is because more customers would be attracted towards purchasing their products and services, which could raise their overall profit level and revenue base. Moreover, the attrition rate of the employees could be minimised with the help of ethical behaviour and thus, increased productivity in the organisations could be ensured. Moreover, positive brand image is developed that enables in drawing additional employees for the corporate organisations (Orazalin, Mahmood and Jung Lee, 2016).
HIH Insurance
The below-stated discussion would reveal failure in ethics and corporate governance that eventually led to the decline of the three organisations in Australia:
ABC Learning:
As ABC Learning has enforced wrong accounting policies, it is adjudged as the sole reason for liquidation of the business. In addition, it had made direct contributions towards fraudulent operations in the accounting practices of the organisation. Furthermore, unscrupulous bookkeeping practices were identified in ABC Learning as well. The inappropriate provision of services to the government and the customers was identified as another unethical issue, which eventually winded up the business operations of the concerned organisation (Pirson and Turnbull, 2015).
HIH Insurance:
There was no approval from the board of directors of HIH Insurance regarding the acquisition of FAI Insurance. Surprisingly, the director had resigned from his post after the disposal of his shares. This situation clearly indicates the absence of sound corporate governance within the organisation. Moreover, the management of HIH Insurance undertook a wrong decision by deciding to invest in the film business, as it contains huge amount of risk. Ineffective decision-making and poor corporate governance could be evaluated from this move as well. Along with this, due diligence was not exercised properly in the organisation; instead, unethical business practices were adopted that represent absence of ethics in the business operations of the organisation. Mr. Williams had conducted inappropriate management activities by issuing prospectus having material omission and by overstating the income in 1998 (Reeves, Levin and Ueda, 2016).
One Tel:
In case of One Tel, there were clear indications regarding the non-compliance with ethical code of conduct, as it had breached the principles and standards of accounting. Significant failure could be witnessed from the management team of the organisation in monitoring its overall financial performance. Moreover, adequate attention was not provided to those areas of investment containing high risk and hence, sound corporate governance was not present in the organisation. The significantly lower pricing strategy had been another reason behind its liquidation and thus, the directors were lacking in ethics while discharging their obligations towards the organisation.
The above evaluation highlights the primary reasons that led to the collapse of the three organisations coupled with corporate governance and ethical issues. However, it needs to be considered that liabilities had an important role in the downfall of three organisations (Thomsen, 2016).
ABC Learning:
Even though the liability amount was stable in 2007, borrowing amount of $1.1 billion was reclassified from both current and non-current liabilities due to refunding. In 2007, profit fell down by 42%, as there were increase in liabilities and the organisation had to incur $1.2 billion due to the violation in debt covenant.
One Tel
HIH Insurance:
The situation of HIH Insurance is somewhat identical to that of ABC Learning. With reference to the internal report, the organisation had huge insurance liability and debt leverage ultimately resulting in insolvency (Tricker and Tricker, 2015). In addition, it needs to be borne in mind that FAI Insurance was acquired for $300 million; however, the actual worth of the acquisition during that time was $100 million. As a result, it led to huge debt for the organisation.
One Tel:
For One Tel, the management of the organisation was primarily accountable for paying $92 million as compensation, which raised the liability of the organisation leading to its downfall. From the above discussion, it represents the role of the liabilities to the downfall of these organisations.
Hence, it could be observed for all the three organisations, incorrect business decisions resulted in increased liability amounts and the presence of such liabilities had been the significant reasons behind their collapses (Zeidan and Müllner, 2015).
Conclusion:
From the above discussion, it could be found that there are various events that made direct contributions to the downfall of ABC Learning, HIH Insurance and One Tel. One common reason identified behind the collapses of the three different organisations was the inability of the management to undertake appropriate decisions. These inaccurate decisions constitute of incorrect accounting policies, manipulation of the financial statements and others. Moreover, it could be found that lack of ethics and poor corporate governance were highly responsible resulting in the liquidation of these organisations. Besides, the rise in liability bases of all the three organisations has been a significant cause for such liquidation. By combining all these reasons together, the downfall of the three organisations is inherent.
References:
Abid, G. and Ahmed, A., 2014. Failing in corporate governance and warning signs of a corporate collapse.
Al-Azzam, Z.F., Al-Mohameed, H. and Al-Qura’an, A.B., 2015. How The Corporate Governance Affects Organizational Strategy: Lessons From Jordan Environment.
Alfaro, L., Asis, G., Chari, A. and Panizza, U., 2017. Lessons unlearned? Corporate debt in emerging markets (No. w23407). National Bureau of Economic Research.
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.
Davies, A., 2016. The globalisation of corporate governance: The challenge of clashing cultures. Routledge.
Du Plessis, J.J., Hargovan, A. and Harris, J., 2018. Principles of contemporary corporate governance. Cambridge University Press.
Goel, M. and Ramanathan, M.P.E., 2014. Business ethics and corporate social responsibility–is there a dividing line?. Procedia Economics and Finance, 11, pp.49-59.
Hamilton, S. and Micklethwait, A., 2016. Greed and corporate failure: The lessons from recent disasters. Springer.
Markham, J.W., 2015. A financial history of modern US corporate scandals: From Enron to reform. Routledge.
Mostafa, R.B., Lages, C.R., Shabbir, H.A. and Thwaites, D., 2015. Corporate image: A service recovery perspective. Journal of Service Research, 18(4), pp.468-483.
Orazalin, N., Mahmood, M. and Jung Lee, K., 2016. Corporate governance, financial crises and bank performance: lessons from top Russian banks. Corporate Governance: The International Journal of Business in Society, 16(5), pp.798-814.
Pirson, M. and Turnbull, S., 2015. The future of corporate governance: Network governance-a lesson from the financial crisis. Human Systems Management, 34(1), pp.81-89.
Reeves, M., Levin, S. and Ueda, D., 2016. The biology of corporate survival. Harvard Business Review, 94(1), p.2.
Thomsen, S., 2016. The Nordic corporate governance model. Management and Organization Review, 12(1), pp.189-204.
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
Zeidan, R. and Müllner, J., 2015. Firm, market and top management antecedents of speculation: Lessons for corporate governance. Journal of Multinational Financial Management, 32, pp.42-58.
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