Reasons behind the collapse of big corporate organizations in Australia

The collapse of big corporate organizations in Australia like ABC Learning, HIH Insurance, and OneTel phone was due to weak corporate governance, unethical practices, and financial liability. The absence of sound investment strategy, non-transparent business models, and weak operational cash flow led to acute financial crisis within the companies. The inefficient financial investments and unjustified high remuneration of executives also enhanced the financial burden of the organizations. The role of organizational liability was also significant in the collapse of these organizations.

A discussion on the collapse of big
corporate organization in the context of
Australia

Table of Contents
Introduction:....................................................................................................................................3
Discussing the major reasons (including ethics and governance) behind the corporate failure in
the context of the chosen organization............................................................................................3
Role of organizational liability as a reason behind corporate failure..............................................7
Conclusion:......................................................................................................................................7
Reference:........................................................................................................................................9

Introduction:
The liquidation or winding up occurs in an organization when the organization declares that it is
no longer financially capable to repay the financial debt made to the creditors of the company
and the company declares itself as bankrupt. Then the creditors of the company decides to
liquidate the company .A liquidation of the corporate organization takes place when the
organization has become insolvent and when there is no other option for the creditors of the
organization to maximize their return. However the share holders also have to agree with the
decision of the creditors that the liquidation of the company y should be done for the best interest
of the creditors, investors and share holders of the company. Once the entire major stake holders
of the company [] agree then a liquidator is appointed for the liquidation of the company. The
appointed liquidator of the company is authorised to cease the business operations of the
organization and also to sell the assets of the organization and to collect and distribute the fund
among the creditors share holders and investors of the company as per predefined priorities.
In recent years several incidents of big corporate failure or company windup has taken place in
Australia. Among the different organization the winding up cases of ABC Learning, HIH
Insurance and OneTel phone are worth of study as these organizations have made sudden
collapse due to acute financial crisis(Atsan, 2016).
The ABC learning was a well known brand of the Australian Child care industry. HIH Insurance
group was another big brand of the Australian insurance industry. On the other hand OneTel,
was the fourth largest telecommunications company in Australia and was one of the fastest
growing companies that among the ,listed companies of ASX.
Discussing the major reasons (including ethics and governance) behind
the corporate failure in the context of the chosen organization

ABC learning was established in 1988 by Eddy and Le Neve Groves and became a listed
company in Australia in 2001, and was doing a flourishing business with almost 2300 centres.
The organization ABC learning failed due to the absence of range major corporate governance
systems within the organization.There was complete absence of any application of investment
appraisal by the group that was accountable for supervising the costly purchased of the care
homes across Australia. Besides, there was no formal committee within the organization for
overseeing the operational activities of the company. The organization was growing
exponentially by purchasing properties at the major locations with in Australia and also bought
several single day-care centres and smaller childcare groups as a part of the expansion process.
In 1999 the organization owned around thirty centres. In 2001 the organization listed itself in the
Australian stock exchange (ASX) and the listing of the organization made it capable to acquire
more capital. From this time the organization registered a doubled operational growth in each
financial year with a massively growing asset acquisition. In 2006 the organization owned
around 660 centres in Australia and in 2008 before collapse there were 2,238 centres in
Australia, New Zealand, the United States and the United Kingdom under the possession of the
organization. Much of this huge acquisition of asset was not based on sound investment strategy
which finally pushed the organization in huge financial crisis(Governance For Stakeholders,
2012).
The incorrect accounting policy followed by the organization [the revaluation of the ABC’s
childcare licences was expected to generate A$390 million but the whole value creation process
was based on future expected net cash flows to be generated from the revaluation of licences
between 2001-2005 which may or may not be realised by the organization in reality] is also
responsible for generating the huge liability of the company. In brief the non transparent business
models, aggressive and unwise acquisition of capital assets, weak generation of the operation
cash flow are mainly responsible for generating acute financial crisis within the company which
finally led to the collapse of the organization(Couriermail.com.au, 2010).
The organization HIH is being perceived to practice ‘a conservative corporate culture’ but in
reality there was huge absence of corporate governance and business ethics which led to the
surprising downfall of the organization. One example of the lack of internal ethics and
governance is that there was dearth of independent directors who works in all organization for

taking sound business decisions and delivers disinterested advice to the organization. More over
the chairman of the organization was the former partner of the organization which indicates
towards unethical connections between the auditor and the chairman of the organization. An
aggressive acquisition strategy which demands that the growth of the organization has to be
attained at any cost also led the organization to accept several bad kinds of costly investments.
More over the culture of the organization of never accepting the bad news badly created a
conflict between the aspects of profit maximization and maintenance of sound corporate
governance within the organization. The collapse of the HIH Insurance group (“HIH”) lead to a
in a deficiency of A$5.3 billion in the Australian Economy and the collapse of this organization
has become the Australia’s largest corporate failure. According to the report of the royal
commission the company largely failed to the corporate mismanagement or in other words due to
the lack of application of the corporate governance (Mak et al.,2005). Most breaches of
corporate governance occurred within the organization when the company broke the law and
corporate ethics for covering up the financial difficulties that arise due to the aggressive
investment strategies(Jones, 2011). According to the investigation of the royal commission the
organization HIH the main reason behind the failure of the organization is not any kind of pre-
planned or systematic fraud rather the organization failed due to the lack of proper monitoring
and ego of the decision makers who was not ready to accept their failures. A number of Directors
of the organization were not being alleged for nor performing their duties and responsibilities in
a proper manner and the chief executive officers of the organization were never being questioned
or challenged by the board of directors when they were failing to take proper decisions
(Longdog.com.au, 2011).
The organization “One Tel” also collapsed due to the absence of the proper corporate
governance. At the time of collapse the organization was operating in seven countries and the
total sale of the organization was AU$653 million which is drawing an apparent sound financial
picture for the organization. But the organization failed due to its very weak corporate
governance structure. The excessive influence of the two chief executive officers over the Board
of Directors of the organization is going against the corporate ethics and representing a weak
presentation of corporate governance within the organization. There was no regular chairman in
the board of directors of the organization and instead the CEO or the other executive directors
acted as chairman of the board of directors of the company from time to time. The Non-

executive directors of the company were not involved in the pr5oiper monitoring process of the
organization. The audit operations as well as internal corporate governance and the executive
remunerations of the organization were mainly regulated by the CEOs and the executive
directors of the organization(Monem, 2011). The excessive control of CEO s over the Board of
Directors of the organization made the Board almost ineffective and incapable in implementing
control and monitoring over the operational activities of the organization. The large investors
were badly misleaded by the CEO and executive directors of the organization and mainly relied
over the apparent strong financial position of the organization. At the event when the
organization were taking wrong strategic decisions then the non-executive and ostensibly
independent directors maintained their silence instead of challenging the chief executive officers
if the company. The auditors realised a conflict of interest and was compromised as they were
also giving non-audit services to the organization. The worst kind of violation of the corporate
ethics that happened in the organization is that the absence of an independent Board of directors’
chairman that weakened the whole internal monitoring and control process of the organization
(Bartleby.com, 2008).
Thus the collapse of the organization of HIH and OneTel reveals that the poor corporate
governance structure and inefficient management is the sole cause of the failure of these two
organizations. The poor corporate governance strategy has led to the application of business
strategies that reduced the long term sustainability of the organization and apparently though the
organizations appeared as financially strong but application of unsustainable strategies ultimately
led the organizations towards failure and collapse. The ego of the decision-making authorities
has led to aggressive acquisition of assets at unreasonably high cost and making inflated
financial reports that were projecting unrealistic profit estimation and value creation with respect
to the companies. The preparation of this kind of aggressive financial reporting in one hand has
covered the inefficient decision making process of the organization and on the other hand
misleaded the big investors of the organization. The unethical connection between the co mpany
executives and the internal auditors make the audit process of the organization completely
inefficient and the audit process of the organization failed to rang the required alarm which was
an essential requirement for stopping the collapse. Besides along with the inefficient financial
investments the unjustified high remuneration of the executives also enhanced the financial
burden of the organization which necessitated the collapse of the organizations.

Role of organizational liability as a reason behind corporate failure
Huge financial liability of the organization ABC learning was mainly caused the company to
wind up finally in November 2008. Though during June and December 2007the total liability of
the organization remained relatively constant but in December 2007 around A$1.1 billion of
borrowings of the organization was being reclassified from current to non-current liabilities as it
was not possible for the organization to repay those debts due to acute cash crisis. Under huge
debt repayment pressure the organization was forced to sell 60% of its US subsidiary and its
entire UK subsidiary(Sumsion, 2012)
Financial liability also was the cause behind the collapse of HIH and the In August 2001at the
time of liquidation the amount of loss of the organization was in the range of AU$3.6 billion to
AU$5.3 billion (Poborský, 2015)..
The weak corporate governance also created a huge financial burden in the organization and at
the time of liquidation in 2000 the operating loss of the organization was AU$291 million.
Conclusion:
From the above discussions it can be understood that presence of a strong corporate governance
structure is an essential requirement for ensuring the long term sustainability of the organization.
Mere presences of the corporate governance with the organization will not serve the purpose; the
organization has to practice the corporate governance rules and requirements in reality with
striking stringency. The strong implementation of corporate ethics and corporate governance
within the organization works as alarm bell when something wrong happens within the
organization and protects the organization from long term damage and financial loss. On the
other hand the presence of the weak corporate governance fails to detect any kind of
malpractices and unethical activities with the organization and also failed m to prevent
inefficient decision making within the organization. Thus continues inefficient decision making
leads to the inefficient investments and the inefficient investments increases the financial liability
of the organizations (Leung et al.,2014). With the enhancement of the financial liability of the
organizations the managing bodies try to cover up the weak financial situation of the
organization and tries to make more cover up and all these ultimately initiate of the collapse of a
corporate organization .When an corporate organization fails financially then along with the

stake holders of the company the economy of the country where from the corporate organization
originates also faces huge economical loss. Therefore it is essential to take measures both the
organizations and economic regulators of the country to ensure that the corporate organizations
are strongly implementing the corporate governance within the organization.

Reference:
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