Corporate Governance Failures in Australia

This assignment examines three prominent cases of Australian company collapses: HIH Insurance Group, One.Tel, and ABC Learning Centres. It analyzes the underlying corporate governance issues that contributed to their downfall, including poor financial management, unethical practices, and a lack of transparency. The analysis highlights the importance of robust corporate governance structures in preventing similar failures.

REASONS FOR
LIQUIDATION OF ABC
LEARNING, HIH
INSURANCE AND ONE TEL
PHONE COMPANY

EXECUTIVE SUMMARY
The reason behind presenting this report is to identify reasons leading to failure of companies
in current time. In this particular report, we are discussing three companies in Australia which
are ABC Learning Centre, HIH Insurance and One. Tel Phone Company. We further discuss
reasons that led to company’s collapse. The report particularly takes into consideration ethics
and governance as the major causes that were responsible for liquidation of all three
companies. We also discuss growing liabilities and non-disclosure of the same was also key
reason for company’s failure. The report also provides an insight of the unethical issues
followed by the higher management and the auditors. Also, we discuss poor corporate
governance model adopted by the company that led to misstatement of financial reports.
Thereby, affecting company’s projected shareholders considerably that further led to their
collapse in all three cases.
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Table of Contents
ABC LEARNING CENTRE.........................................................................................................................4
INTRODUCTION..........................................................................................................................4
REASONS FOR ITS FAILURE……………………………………………………………………………………………………. 4
HIH INVESTMENT...................................................................................................................................5
INTRODUCTION..........................................................................................................................5
REASONS FOR ITS FAILURE……………………………………………………………………………………………………..5
ONE. TEL PHONE COMPANY..................................................................................................................6
INTRODUCTION..........................................................................................................................6
REASONS FOR ITS FAILURE……………………………………………………………………………………………………..6
CONCLUSION…………………………………………………………………………………………………………………………………….7
REFERENCES………………………………………………………………………………………………………………………………………8
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1) ABC LEARNING CENTRE
INTRODUCTION
ABC Learning Centre was a child care company formed in the year 1988 with its
headquarters in Brisbane, Australia. It was recognized as one of the leading child Care
Company across the world. The company expanded its business drastically which is clear
from the fact that there were around 18 centres in the year1997 which rose to 800 centres in
2006 (Rush, 2006). With Eddy Groves and Le Neve as owners, the company made net gain
of more than $50 million in the fiscal year 2004-05 and was considered as a profitable and
successful company in Australia. In the year 2001, the company issued its shares in the
Australian Stock Exchange. Its share prices increased tremendously through the years of
company’s operation which is evident from rise in its share price by over 300% from the
year 2001 till the year 2006.The said business was also supported by the government through
subsidies. The company extended globally by acquiring numerous companies. Acquirement
of competitor Peppermint in the year 2004 is considered as the largest amongst company’s
acquisitions (Thomson, 2008). Conversely, the company collapsed significantly in the year
2008 following worldwide monetary predicament. Its profits plummeted more than 40% from
the previous year. This came as a shock to its shareholders who never anticipated the
company to go down. With the resignation of both the owners, the company went into
deliberate receivership.
REASONS FOR ITS FAILURE
There are innumerable reasons for the collapse of ABC Learning Centre. Financial
discrepancies over huge acquisitions, lack of clear vision for operating business, questioning
accounting practices, pitiable corporate governance model, absence of concentration on
company’s working policies, misstatement of financial reports, overvaluation of share price,
faulty auditor practices and unethical practices followed by the management are the major
reasons for its failure. However, lack of proper corporate governance plan and unethical
issues are few of the major causes. The ethical issue faced by the company was low
remuneration paid to its workers. This was a cost effective strategy followed by the company
which would help it in increasing its profits by reducing its overall cost. Unethical practices
were also ensued by its auditors in not performing his duties and providing inefficient reports
and misstatement of fiscal reports which provided overvaluation of its assets and presented
fake picture of profitability of the company which was otherwise into losses. In the year
2004, the company was found culpable in paying low remuneration of $611 to its workers
which was estimated to be extremely less as compared to other companies. Good corporate
governance provides lucid set of laws to its shareholders, directors and workers which were
missing in case of ABC Learning Centre. The auditor of the company was not able access the
potential risk. Incompetence on the part of auditor is apparent from the actuality that he
lacked experienced view and disparaged in auditing fiscal report of the year 2007. The asset
side of the financial statement issued comprised of operating licences which were reported to
have no value and liabilities of approximately $1.1 billion were reclassified as long term
monetary debt. Existence of related party transactions was also one of the reasons for its
failure. As per one of the ASIC litigant, the practices adopted by the company in preparing
fiscal report displayed inflated value of shares based on future funds of the company which
were not sure to be actualized. Thereby, deceiving company’s projected users (Kruger, 2009).
Due to such practices, the ex- auditor of the company, Simon Green was debarred from
performing his duties as an auditor for five years (Kruger, 2012).
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2) HIH INSURANCE
INTRODUCTION
HIH Insurance was considered as the second biggest insurance company and employer in
Australia before its failure in the year 2001. It was recognized as M W Payne Underwriting
Agency Pty Ltd, at the time of its establishment in the year 1968 with Ray Williams and
Michael Payne as the founders of the company. In the year 1971, the company was taken
over by British company CE Health PLC with Ray Williams as the member of the board.
However, the company’s name was amended to HIH Winterthur in the year 1996. The
company became successful and expanded its business not only in Australia but throughout
the world by taking over numerous companies in different countries such as Solart in
Argentina, Great States Insurance Company in the United States etc. The company’s name
was further modified and was known as HIH Insurance Ltd after majority of its shares were
sold to public by Winterthur Swiss. One of its major acquisitions was FAI General Insurance
Company Limited (FAI). However, on 15th March 2011, company’s shareholders and the
general public were astounded by the news of company’s interim insolvency with financial
loss of $800 million (Kehl, 2001). The company comprised of over 240 companies during the
time of its collapse. Huge losses were sustained by its shareholders.
REASONS FOR COMPANY’S COLLAPSE
Hasty growth of the company by acquiring other companies globally, misstatements of
financial report, irresponsible administration, scam, insatiability, unsubstantiated allocation of
power, lower pricing of shares, intricate reinsurance actions and funds issues were reported as
some of the reasons behind the company’s collapse. However, the accounting practice
followed by the company is one of the major causes for its failure. HIH Royal Commission
was formed by the government to scrutinize the reasons which led to its failure. The company
failed in providing clear picture to its intended users about the financial condition of the
company. Several actions have been taken against company’s directors for their immoral and
unlawful deeds. The company’s higher executives including its Board of Directors were
incompetent in performing their responsibilities and failed in evaluating efficiency of the
company’s corporate governance plan (Rega, 2012). Its higher executives behaved
unethically by not notifying significant matters to its Board concerning the working of the
business which resulted in objectionable business ethnicity. The company’s CEO, Ray
Williams has always been governing position from the very beginning and the company was
operating in the interests of its higher managers instead of its shareholders. Also, the
company’s Board slacked in making calculated investment judgement and assessing the
threat that the company faced in relation to investment which is obvious from the truth that
the company failed miserably in making some of its major investment decisions. Although its
CEO had a plan but there was lack of its records. Hence, the rest of management couldn’t
follow them. There was fallacy about the earnings of the company and also lack of proper
evaluation, examination and revelation of the liabilities of the company. Moreover,
incompetence in the assessment of risk and huge exceedingly priced takeovers led to its
collapse which was predicted a year before. Also the information provided by the auditors
was questionable. Inadequate adherence of corporate governance plan and unethical practices
adopted by its senior staff were the major causes of its failure. Its collapse is considered as
one of the worst in the history of insurance company failures.
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3) ONE. TEL PHONE COMPANY
INTRODUCTION
One. Tel Company was considered as one of the major telecommunications company formed
in the year 1995 in Australia. Kalara Investment possessed major share in the company with
Jodee Rich and Brad Keeling as its owners and Optus had a share of 28.5% in the company.
The company expanded its customer base by providing numerous telecommunication
services and revenue increased manifold which is comprehensible from the information that
in the year 1996-97, company earned income of $148 million with net profit of $3.7 million.
The company was listed on the Australian stock exchange in the year 1997. The company
expanded worldwide in the year 1998 with its divisions in London, Los Angeles, Paris, Hong
Kong, Frankfurt, Zurich and Amsterdam by adopting a global strategy. Year 1999 was one of
the prominent in company’s record as Lucent Technologies reported that it would be funding
a European mobile network for One. Tel and the company became of the biggest listed
company in Australia. However, company’s downfall began in the year 2000 with a
proclaimed loss of $291 million for the financial year 1999-2000 and its share prices dropped
under $1.The year 2001 turned out to be disastrous for the company as its funds plummeted
drastically and Merril Lynch prediction about the exhaustion of company’s funds came true
and it collapsed miserably in the same year and creditors opted to end up the business.
REASONS FOR ITS FAILURE
There were several reasons for company’s failure. However, there was major issue in
company’s composition. Jody held a dominant position in the organisation and there was lack
of delegation of authority and decision making power to its managers. He encouraged those
who supported him as a result of which there were inadequate staff in the company most of
the times, which further resulted in customer dissatisfaction. Advertising was the basis for
gaining new customers and a lot of time and money was spent on the same. Also, employees
were highly unsatisfied as their responsibilities were not properly defined and were not
properly trained with more focus in employment of young staff. The company lacked in its
corporate governance model. There was no balance amongst its directors. It lacked proper
delegation of accountability and the deteriorated value of information was provided to the
Board. Company’s reports should be truthful and comprehensible as per good governance
plan which was lacking in company’s case. There was weakness in internal control as Jody
was a totalitarian who imparted few powers to other members of the organization. It also
failed in delivering apparent and recognized actions for selection of new directors. Reduced
communication to the Board and amongst employees and flaws in compensation to
employees further aggravated company’s problems. It is evident that poor governance
inflamed events that led to the company’s collapse (Reza, 2011). The financial reports the
company were fallibly presented and there were disparities in accounts and papers. There was
inaccurate information about the debts of the company. This was result of incompetence of
higher management. Also, the company had low quality earning. There were changes in
accounting policies of the company. In the last year of company’s performance, its CEO’s
compensation was high when the company was actually under loss. Moreover, company’s
audit was also recognized as of poor quality. Hence, it is clear from above discussion that
unethical practices followed by company’s CEO and poor governance issue led to its sudden
collapse. At the time of its failure, the company was ranked fourth amongst Australia’s
biggest telecommunication companies.
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CONCLUSION
At the end, we conclude that there are several companies that have collapsed in the current
years. In the above report, we have discussed in detail three companies ABC Learning
Centre, HIH Insurance and One. Tel Phone Company in Australia .The events that caused
their failure is also discussed. All three companies were successful and popular in their
respective fields. It is clearly concluded that ethical issues and poor corporate governance had
been major issues affecting all three companies and one of the major reason behind their
failure. Also, continuous increasing liabilities and non disclosure of them led to overvaluation
of company’s share price which in turn led to create artificial picture of company’s
profitability and affected its shareholders drastically. This led to sudden collapse of all three
companies. Also, unethical practices followed by higher management and the auditors were
also one of the major reason in all three cases.
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REFERENCES:
Kehl, D., (2001), HIH Insurance Group Collapse Available at https
http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Librar
y/Publications_Archive/archive/hihinsurance (Accessed 19th September 2017)
Rega, J., (2012), The Demise of HIH Available at
http://www.academia.edu/1231656/HIH_Collapse (Accessed 19th September 2017 )
Reza, M., (2011), The One .Tel Collapse: Lessons for Corporate Governance Available at
https://research-repository.griffith.edu.au/bitstream/handle/10072/42673/74746_1.pdf (Accessed
20th September 2017)
Rush, E., (2006), ABC Learning Centres A case study of Australia’s largest child care
corporation Available at http://www.tai.org.au/sites/defualt/files/DP87_8.pdf (Accessed 20th
September 2017)
Thomson, J., (2008), Five lessons from the spectacular fall of Eddy Groves Available at
https://www.smartcompany.com.au/finance/five-lessons-from-the-spectacular-fall-of-eddy-
groves/ (Accessed 20th September 2017)
Kruger, C., (2009), Lessons to be learnt from ABC Learning’s collapse Available at
http://www.smh.com.au/business/lessons-to-be-learnt-from-abc-learnings-collapse-
20090101-78f8.html (Accessed 20th September 2017)
Kruger, C., (2012), Five- year suspension for former ABC Learning auditor Available at
http://www.smh.com.au/business/fiveyear-suspension-for-former-abc-learning-auditor-
20120808-23uj8.html (Accessed 20th September 2017)
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