Audit & Corporate Collapse Analysis

This assignment requires an in-depth analysis of several case studies involving corporate collapses. The focus is on examining the role of audit failures in these collapses and understanding their consequences for various stakeholders. Students are expected to draw upon provided academic sources to support their arguments and demonstrate a critical understanding of audit best practices.

ABC, OneTel, and HIH
Executive summary
The current situation of companies has raised many questions owing to the emergence of
several issues. Further, various companies have also faced liquidation and dissolution
processes as a result of increment in their liabilities and decline in assets. This is the reason
why ABC, OneTel, and HIH Insurance have been selected as these companies highlight the
context wherein companies encountered liquidation because of major issues prevailing within
them. Moreover, the major reason behind their liquidation can be attributed to their increment
in liabilities in comparison to assets that interrupted their smooth flow of operations.
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ABC, OneTel, and HIH
Contents
Introduction...........................................................................................................................................2
Assessment............................................................................................................................................3
Complications in reporting procedures.................................................................................................4
i. HIH downfall..................................................................................................................................5
ii. Downfall of OneTel........................................................................................................................6
iii. Downfall of ABC Learning..............................................................................................................7
Conclusion.............................................................................................................................................9
References...........................................................................................................................................10
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ABC, OneTel, and HIH
Introduction
In Australia, many companies encountered issues that resulted into their liquidation
processes. Few major companies in such scenario are ABC Learning, HIH Insurance, and
OneTel Ltd. The reason behind liquidation of all these companies can be attributable to the
fact that they faced crunch of financial resources after being overburdened by debt
obligations. As a result, they failed to continue smooth flow of operations and besides, these
companies also lacked proper corporate governance practices that resulted in their downfall.
Overall, the increment in liabilities of the company was the prime reason why these
companies failed to persist in the market and had to witness downfall (Manoharan, 2011).
Hence, it is notable that heavy reliance on debt obligations must be strictly avoided by
companies as it often results in creation of a heavy financial crunch that is difficult to be
avoided. With the help of this report, prime importance will be exerted upon the liabilities
that resulted in liquidation of all three companies.
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ABC, OneTel, and HIH
Assessment
OneTel Ltd is considered as the biggest telecommunication organization throughout Australia
but because of improper corporate governance practices and heavy reliance on debt, the
company encountered liquidation processes. Such improper strategies and measures
implemented by the company played a key role in its downfall. For example, the audit
procedures undertaken were inappropriate in nature, internal control mechanisms were
incomplete too, etc. Besides, when it comes to HIH Insurance Ltd, the company also
witnessed a same scenario in the year 2001. Before such situation, HIH was also considered
the biggest organization in its industry as it possessed a huge base of assets. However, in
2001, the company exerted mass reliance upon debt capital structure to finance its smooth
flow of operations that resulted in its downfall, as the company became overburdened with
debt obligations and such massive asset base also became insufficient to repay those.
Moreover, it was also notable that inappropriate knowledge and interpretation of risks
associated to businesses also played a role in the company’s liquidation (English et. al, 2013).
Therefore, it can be observed that both such companies faced issues of liquidation as a result
of high reliance on debt structure and improper corporate governance approaches. With this
report, the exact complications will be accounted for a better understanding.
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ABC, OneTel, and HIH
Complications in reporting procedures
It must be notable that financial reporting measures must highlight the significance of true
and fair view of a company’s performance. However, when it comes to OneTel Ltd, it can be
seen that such reporting needs were failed to be accounted for by the company, as financial
reports like trial balances and debtors’ reports were not scrutinized in a professional way.
Further, the company’s finance director was adjudged incapable of evaluating such financial
reports for the effectiveness of the entire organization. This sheds light upon the fact that the
management was not properly concerned about the goodwill of the company that, in turn
resulted in the emergence of various risks within the company’s affairs. This also reflects
ineffective measures implemented within the affairs of the company that caused its downfall.
Therefore, if the company had undertaken proper accrual accounting basis for reporting
processes, it would have safeguarded itself from such issue.
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ABC, OneTel, and HIH
i. HIH downfall
 Future claims
The reason of future claims played a role in the disintegration of HIH Insurance Ltd as this
step necessitates proper tuning processes that can assist a company to survive in the future
but HIH failed to implement the same. Therefore, the company encountered a negative
variation of 1.7% in its finance that altogether paved a path for its downfall. However, such
weak approach can be attributed to inappropriate management strategies for altering the
approaches on the basis of fluctuations in market. This created an increment in the company’s
liabilities because no proper verification strategies were adopted that worsened the overall
scenario (Westfield, 2003). Besides, it is well-known that in regard to market fluctuations,
insurance companies can be influenced in the absence of proper safeguard measures, as these
can facilitate in protecting the companies from disastrous situations. Since, the management
of HIH failed to implement the same, it resulted in the emergence of various risks that paved
a path for its disintegration.
 Enhancement in liabilities
Since HIH Insurance was considered the biggest companies, it intended to diversify its
operations throughout the globe so that it can obtain maximum profits. However, HIH
facilitated in such steps that paved a scenario wherein its liabilities exceeded its assets,
thereby creating a scenario of interruption of smooth flow of operations. Moreover, the
company also thought that such scenario would not affect its affairs but in reality, the
approach of its takeover played a major role in creating a downfall situation for the company
(Westfield, 2003). Besides, the company failed to undertake attempts to alter additional
provisions relying on market fluctuations. Moreover, even though it had the advantage of
doing so, it failed to undertake the same, thereby facilitated in digging its own grave. This
highlights the importance of management standards that could be adopted by the company to
rectify its inefficacies.
 Inaccurate planning processes
The takeover process undertaken by the company was a big one but there was no adoption of
safety measures in regard to the same. Moreover, it was also necessary to have proper
strategies to surpass the complications of higher liabilities, but the company entered the
market without proper research and professionalism. In addition, the company also failed to
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ABC, OneTel, and HIH
undertake measures to safeguard itself within a segment that could have allowed it design
proper provisions based on fluctuations in market. Nonetheless, this highlights the inefficient
management practices prevailing within the company’s affairs and the scenario became more
problematic on the release of false financial statements to the public.
 Secret policies
The policy of cutting cost emerged to be an advantageous situation for the company but it
also paved a path for enhancement in liabilities. Besides, this opportunity also could have
helped the company in covering up all its losses for development of future. In contrast to this,
the management failed to implement such strategies and instead reflected false financial
statements that can enhance company’s goodwill and reputation in the industry (Hoffelder,
2012). The significant reason behind the reflection of such false statements was to hide
material secrets from the public that included concealment of takeover strategy as well.
However, this backfired for the management and it worsened the entire scenario. This sheds
light upon the significance of ethical affairs within a company (Vause, 2009).
ii. Downfall of OneTel
It can be observed from the scenario of OneTel that proper handling of financial statements is
crucial in the current corporate environment. However, the company failed to maintain
reports like trial balances, debtors’ reports, etc that sheds light upon lesser significance to
such reports by the company. This played a key role in enhancing the company’s issues for
the future. Moreover, the most vital factor that resulted in lesser profits for the company was
the implementation of a conservative strategy in its activities. Besides, the company also
undertook two basis alterations in its primary policies. The first change was that no accounts
were put up in contrast to the intangibles of the company and the second change was that the
deferred expenditure plan was changed in the upcoming tenure (Mock et. al, 2013). Thus, due
to non-conservative strategies of accounting and decision to write-off some acquisition costs
of subscribers, the company encountered a major loss. Further, the false report issued by the
auditors of the company also highlight the adoption of immoral activities that existed within
the company. The mechanism and means of operating the company was immoral in nature,
thereby facilitated in a path of major complications. Nonetheless, such unethical affairs on
the part of auditors are considered to be inefficient in nature and therefore, must be
punishable by law (Parker et. al, 2011). On a whole, these situations altogether played a
key role in interrupting the smooth flow of operations of the company and as a result, it
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ABC, OneTel, and HIH
encountered a disintegration. This highlights the fact the OneTel was operating on inaccurate
moral standards and this scenario also reflects that corporate governance practices must be
duly fulfilled by a company.
iii. Downfall of ABC Learning
The previously mentioned analysis of different companies facilitated in establishing the
foundation for ABC Learning Ltd. Even though the company was also a major player in the
market, yet because of weak team of management, it had to witness disintegration within a
short tenure. The ideology of weaker management exerts the fact that the company failed to
adopt proper corporate governance practices and moral measures within its framework that
altogether resulted in the emergence of various complications (Teen, 2012). Further, even
though the company attained massive development in its respective field, it failed to stabilize
its activities for a better future. Moreover, the previously mentioned factors also play a key
role in shedding light upon the ineffectiveness of a company that was previously a major
player of Australia. In short, the company lacked proper corporate governance measures and
moral strategies that resulted into its disintegration (Kruger, 2009).
ABC Learning became insolvent in the year 2007 and therefore, it faced massive losses in the
upcoming years. Further, based on the company’s financial statements for the year 2008, it
can be seen that the company’s auditors facilitated in incorporating significant impairment
costs amounting to $1.168 billion and a major loss of $364 million owing to the significant
disposal of the stake. Moreover, the losses of the company increased on a wider level than
what was really expected, thereby resulting in the enhancement of its liabilities in comparison
to its assets (CPA, 2012). Such debts and losses played a pivotal role in creating a scarcity of
resources for the company the altogether declined its net assets from $2.22 billion to $284.5
million. Moreover, the issues of the company witnessed a major increment when the creditors
and administrators came to know that the company possessed 40c and 30c each for its current
assets for each dollar of its current liabilities (CPA, 2012).
Besides, these issues clearly highlight why the company had to encounter a downfall. In
addition, such complications and issues play a key role in highlighting the fact why the
current ratio of 0.3 and 0.4 has been lesser than one. This clearly portrays why the company
encountered major liquidity issues and failed to sustain in the market. This also means that
the repayment of debt obligations was impossible for the company as a result of interruption
in its smooth flow of operations (Wood, 2011). Overall, it can be observed that both quick
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ABC, OneTel, and HIH
and current ratios of the company witnessed a significant decline owing to the operations,
thereby signifying that major liquidity issues prevailed within the framework of the company.
In addition, it can be easily analysed what were the real problems behind the liquidation of
the company and why it failed to repay its debt obligations in the future (Mock et. al, 2013).
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ABC, OneTel, and HIH
Conclusion
It can be seen from the above evaluation of the three companies that all encountered
liquidation processes as a result of enhancement in liabilities and adoption of ineffective
corporate governance practices. Besides, the improper risk management measures facilitated
in all the companies’ framework also played a key role in their disintegration. In addition,
management inappropriateness can also be reflected through this study. Even though the
scenario started to worsen, the management of companies could have taken relevant steps to
get rid of such scenarios, but they failed to do so, and as a result, they witnessed a major
downfall. Hence, if the management would have addressed their approaches in an ethical and
effective manner, they would have prevented such scenario. Overall, ethics and corporate
governance approaches are required in the current working environment without which
companies cannot sustain.
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ABC, OneTel, and HIH
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:
http://www.smh.com.au/business/lessons-to-be-learnt-from-abc-learnings-collapse-
20090101-78f8.html [Accessed 3 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.
http://media.accountingeducation.com/1304/Parkeraaaj24(1).pdf
Teen, M.Y. 2012. The ABC of a corporate collapse, [online]. Available at:
http://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: http://www.smh.com.au/articles/2003/03/14/1047583693489.html
[Accessed 3 April 2018]
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Westfield, M., 2003. HIH : The Inside Story Of Australia's Biggest Corporate Collapse,
[online] Available at: http://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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