ABC Learning’s Collapse: A Case of Inappropriate Accounting Practices and Corporate Governance

Running Head: Corporate Accounting Scandals
ABC Learning’s Collapse

Corporate Accounting Scandals 1
ABC Learning was an Australian entity which was engaged in provision of day care services
to the children in large numbers. The company started its business operations in 1988 and
was based in Queensland. It was Australia’s largest provider of early childhood educational
facilities operating through multiple centres across the world. The company was founded by
Eddy Groves and was enlisted to Australian Securities exchange in 2003. Before 2008, ABC
Learning was operating its business efficiently and successfully as a leading international
organisation. However, since 2008, the company had to experience an unexpected decline in
its profitability state and it was unable to pay-off its debt obligations. The economic and
financial problems that were faced by ABC Learning were due to global financial crisis that
took place in 2008. The company had experienced an exponential growth till its initial 20
years but the major accounting discrepancies and various other factors had led to massive fall
in its growth and status of ABC Learning.
Since its commencement ABC Learning has achieved the huge growth in terms of market
capitalisation and profitability position and the growth of the company was reflected in its
share prices in the market. The market price of the shares of company was raised to 300% in
the five years since 2001. However, there came a time when the concerns were raised against
the quality of the profits reported by the company (Sumsion, 2012). Due to licensing and
other strict regulatory requirements the firms in the day-care industry were facing operational
difficulties. This has resulted in the loss of the market share of ABC Learning in the market.
However, besides the concern of loss of market share, there was some quality issues reported
on part of ABC’s educational services. It was difficult for the company to make large profits
in the highly regulated environment. The degradation of quality of the facilities provided by
the educational centres of ABC Learning had led to the sheer decline in the profitability of
the company in the last quarters of the financial year 2007. The company had not also taken

Corporate Accounting Scandals 2
an adequate analysis of the risk involved in the international market expansions and this made
ABC Learning a strongly levered company (Teen, 2012). The company had undergone
various mergers and acquisition transactions to reach the global boundaries for its business.
These transactions required investment of huge sums of monies and on account of it the
company has raised funds from the market through various debt financing approaches. But,
the declining profitability of the company did not allow it to service its debts amounting $ 1.8
billion in the market and hence it had to sell its subsidiaries in the market (Teen, 2012). All
these reasons contributed to the significant decline in the market of the company’s market
share price. However, in order to avoid disclosing about the poor financial position of the
business the management of ABC Learning had adopted the manipulative and fraudulent
accounting practices where profits of the company were inflated to project the positive image
of company’s future financial position.
The corporate governance structure of the company was quite inadequate and this had also
contributed significantly to the fall of the ABC Learning. The top management of the
company was largely involved in formulating and implementing the strategies of
international expansion of the business and hence they were less concerned about maintaining
the quality of the services provided by the company (Walsh, 2015). Further, majority of the
board members of ABC Learning were the political parties who neither had the relevant
expertise and knowledge, nor the experience in the day-care industry of Australia. Also, ABC
Learning had also entered into related party transactions which were under the legal
proceedings as the company did not make the appropriate disclosures of such interparty
transactions. The disclosure of such information was worthy to be shared with the
stakeholders of the company and hence non-disclosure of such information impeded the
reputation of the company in the market and the shareholders of the company had lost the
trust and confidence in the company. Further, the investigations on the related party