Auditing and Major Accounting Issues in the Collapse of ABC Learning Centres

This article provides an overview of ABC Learning Centres, major accounting issues that contributed to the collapse of the company, and the role of auditors in the collapse. It also discusses the consequences faced by auditors and regulatory and legislative reforms ensued the collapse of the company. The subject is auditing and the course code is not mentioned. The course name and college/university are also not mentioned.

AUDITING

TABLE OF CONTENTS
TABLE OF CONTENTS..............................................................................................................2
Overview of ABC Learning Centres................................................................................................3
Major accounting issues contributed to the collapse of ABC Learning Centres.............................3
Did Auditor of ABC Learning Centre reflect appropriately on the state of financial affairs of the
company?.........................................................................................................................................4
Role of auditors in collapse of ABC learning centres and consequences faced by them................5
Regulatory and legislative reforms ensued the collapse of the company........................................5
REFERENCES................................................................................................................................7

Overview of ABC Learning Centres
ABC learning was an Australian based corporation specializes in providing childhood
care and education services. It provides services such as long day, before school and after school
care services. Their vision is to ensure love, education and nurturing for children to provide them
with the best possible chance to grow and develop in their life. To achieve their aim, company
has created four building blocks that is, learning curriculum, physical and nutritional
development, Centre staff training and development, environment and facilities. The company
was one of the world’s largest provider of early childhood educational services that started their
business in 1988. The company is rapidly expanded year by year with having 2238 former
centres in the year 2006 including Australia, US, UK, New Zealand etc. (Richards, Garvis and
Phillipson, 2018). Previous the company was considered as non-profit organization but in the
year 2001 the company was listed in Australian Stock Exchange (ASX).
The major inherent and business risk faces by the company was overwhelmed by debt
repayments. The impact of which they need to sell its entire UK as well as 60% of US subsidiary
and then delisted from ASX. It is because the company is doubling its operation each year and
for which they require funds from market. Then, the company went into receivership because in
the year 2001 when company listed, its market capitalization was only A$25 million which
increased up to A$2.5 billion in the year 2006 (Press and et.al., 2018). The company generally
uses quite poor business model known as “a Black Box” which involve aggressive acquisition,
capital expenditure, leverage and weak accounting & operating cash flow. Thus in the year 2009,
the company was fully liquidated and acquired by GoodStart Early Learning.
Major accounting issues contributed to the collapse of ABC Learning Centres
The major accounting issues that contributed to the collapse of ABC Learning Centres are as
follows:
 Aggressive and continuous acquisition: In order to expand business all around the
world, the company acquire companies of various countries. Such an acquisition result
into the recognition of license of childcare and huge amount of goodwill. In the year
2006/7, the company have only A$37.4 million in goodwill and A$647.6 million in

childcare license. But in the year 2008 the goodwill increased to A$271 million and
A$2.4 billion in license account while their impairment charges are only A$ 2 million
and A$8.4 million respectively (Flack and et.al., 2020). The company’s 70% of the assets
were intangibles which have no value and worthless at the time of trouble. Thus, the
inherent risk attached with the valuation of assets is one of the accounting issues that
leads to collapse of ABC Learning Centre.
 Poor debt management: The companies over dependency upon the debt funds for
expansion is one the accounting issues that collapses the ABC Learning centre. The
company’s strong reliance over debt was became an issue when their profit fell down by
42% in the first half of 2007/8. This happen just after when company refinances A$1.1
billion of borrowing from current to non-current liabilities (Fordham and et.al., 2021).
 Poor operating cash flow: The company’s cash flow is started remaining negative after
the aggressive acquisitions. The company is not able to pay its interest, suppliers, salaries
and dividend because of poor operating cash flows. Their force sale of pledge shares also
affects the ABC company stock price which further have triggered the breaches of debt
covenants. The company basically reached at a point where they started facing
continuous negative profit in the financial statements. The impact of which the company
liquidated in the year 2009 (Saulnier, Gascuel and Alizon, 2017).
Did Auditor of ABC Learning Centre reflect appropriately on the state of
financial affairs of the company?
As per the ASIC, Mr Green a former partner of Brisbane firm was appointed as independent
auditor of ABC Learning Centre for the financial report of 2007. But ASIC on the other hand
viewed and stated that Mr Green has failed to perform its duties and role of auditor adequately
and properly. They basically failed to give true opinion on financial statement or annual report of
company (Kickbusch and et.al., 2020). The auditor also failed to obtained sufficient and
appropriate audit evidence related to various transactions and stated that the was free from
material misstatement which was not true in reality.

Role of auditors in collapse of ABC learning centres and consequences faced
by them
The role of auditor in collapse of ABC Learning centre is that they failed to identify the
correct treatment of various fees which basically causes overstatement of company’s revenue.
The consequences auditor faces while auditing is that the items not from the provision of
childcare services are incorrectly recorded as revenue. The impact of which the revenue account
of the ABC Learning Centre overstated. Such an action of the company is not known by the
auditor but on the same side it is the duty of the auditor to obtain sufficient audit evidence in
which they failed. The auditor also faces the consequence that the ABC was a going concern but
in actual the company was overburden by debt repayment which leads to liquidation of company.
The auditors are basically entitled for giving correct opinion on the financial statement of
company (Brewer, 2018). The auditor name Mr Green also do not use the auditing procedures
such as analytical procedure in order to assessed the inherent and business risk.
They also failed to use professional judgement and scepticism during the audit of 2007
financial reports. Along with that they also failed to obtain quality evidence related to third party
transaction, property plant and equipment, wages and salaries etc. The inherent risk related to
valuation of assets is also need to be identified and analysed by the auditor via applying
appropriate skills. But the auditor not able to identify that 70% of the ABC Learning Centre
assets is intangible in the form of goodwill and childcare license.
Consequences faced by Auditor
The consequences faced by Mr Green during the auditing of 2007 financial reports that they
are considered as watchdog not bloodhound (Fordham and et.al., 2021). They also face issues
related to identification of error and fraud done by management as it is not either preventable and
deductible. The auditor can only identify the error and fraud done by employees not the
management.
Regulatory and legislative reforms ensued the collapse of the company
The ABC Learning Centre basically collapse because it borrowed enormous amount of
funds from the market for expansion purpose but failed to repay it. It is because of the Global
Crises 2008 where there is no fault of free market. The root cause of this collapse is high level of

regulation which exist in the childcare industry. There was a barrier in entry and prevented
competition to enter market, the impact of which the prices of child care set by ABC is quite
high. The company basically held 25% of the Australian market which required a good and
balanced regulation but over-regulation such as unnecessary high cost of childcare leads to
inadequate level of supply (Press and et.al., 2018). The Australian government have to allow
reduce their regulation procedure so that more and more competitors can enter childcare market.
Because of the high price and short supply, the company not able to sustain in the Global
Crises which further leads to collapse of ABC Learning Centre. In order to resolve it, the
Australian regulations should allow easier entry to new aspirants in the market. This will result
into more competition and reduction in childcare price as per the parent’s wallet and income
conditions. The reduction in price thus result into the increase in demand and supply of childcare
services.

REFERENCES
Books and Journals
Richards, G., Garvis, S. and Phillipson, S., 2018. Early childhood education and care in
Australia: A historical and current perspective for a way forward. In International
Perspectives on Early Childhood Education and Care (pp. 6-19). Routledge.
Press, F. and et.al., 2018. Can we belong in a neo-liberal world? Neo-liberalism in early
childhood education and care policy in Australia and New Zealand. Contemporary Issues
in Early Childhood. 19(4). pp.328-339.
Flack, C. B. and et.al., 2020. Socioeconomic disparities in Australian schooling during the
COVID-19 pandemic. Melbourne, Australia: Pivot Professional Learning.
Fordham, D and et.al., 2021. Humans hastened the range collapse and extinction of woolly
mammoth. bioRxiv.
Saulnier, E., Gascuel, O. and Alizon, S., 2017. Inferring epidemiological parameters from
phylogenies using regression-ABC: A comparative study. PLoS computational
biology. 13(3). p.e1005416.
Kickbusch, I. and et.al., 2020. Covid-19: how a virus is turning the world upside down.
Brewer, A. M., 2018. Career learning, creativity and career capital. In Encountering,
Experiencing and Shaping Careers (pp. 197-207). Springer, Cham.
Online
ABC Learning Centre Annual Report, 2006. [Online]. Available through:
https://www.slideshare.net/rustamzalaldinov/abc-learningannualreport2006
Abc learning-annual-report-2007. [Online]. Available through:
https://www.slideshare.net/rustamzalaldinov/abc-learningannualreport2007
ABC Learning Centre Annual Report, 2006. [Online]. Available through: <
https://www.asx.com.au/asxpdf/20060929/pdf/3yqphxt2k7rsl.pdf>