Analysis of Corporate Collapse of Three Australian Companies

The report analyzes the reasons for the corporate collapse of three Australian companies; ABC Learning, One Tel Phone and HIH Insurance. It examines the APES 110 codes of ethics and ASIC listing rules for corporate governance and shows the role of liabilities in the collapses.

Running head: ACCOUNTING FINANCIAL
Accounting Financial
Name of the Student
Name of the University
Author’s Note

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Executive Summary
The aim of the report is the analysis of the reasons for the corporate collapse of three Australian
companies; they are ABC Learning, One Tel Phone and HIH Insurance. The discussion provides
description of the companies while the second part examines the reason behind the collapse. The third
parts show the APES 110 codes of ethics and ASIC listing rules for corporate governance. The
discussion also shows the role of liabilities in the collapses.

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Table of Contents
Introduction.................................................................................................................................................. 3
Company Introduction.................................................................................................................................. 3
Reason for Liquidation................................................................................................................................. 3
Ethics and Governance............................................................................................................................... 4
Role of the Liabilities.................................................................................................................................... 5
Conclusion................................................................................................................................................... 5
References.................................................................................................................................................. 6

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Introduction
The winding up of the companies can also be considered as the liquidation process. In this
process of liquidation or winding up, the companies are required to face different steps or procedures for
close down the business operations on a permanent manner. In this process, the liquidator, responsible
for conducting the liquidation process, has the responsibility for the identification of the liabilities and
rights of the businesses so that the claims of the creditors, lenders and other stakeholders can be settled
down. Behind the liquidation of every business organizations, the presence of some specific reasons can
be seen that contribute towards the downfall of the business; some examples of these reasons can be the
adoption of inappropriate business policies, loopholes in internal control and corporate governance and
many others. This report takes an honest attempt for the analysis and evaluation of different dimensions
of the collapses of three major Australian companies; they are ABC Learning, One Tel Phone and HIH
Insurance.
Company Introduction
ABC Learning: ABC Learning was a leading business entity operated in the childcare educational sector
of Australia. It was listed in the Australian Securities Exchange (ASX) and the amount of market
capitalization of the company was AUD$2.5 billion. The presence of massive mortgage crisis contributed
to the managerial receivership of ABC Learning and a large amount of debt an also be held accountable
for the destruction of the company. ABC Learning was established in the year of 1988 and the company
expanded all over the Australian through more than 900 centers. ABC Learning made their expansion in
the market of United States (US) and United Kingdom (UK) in the year 2006. After that, the company
acquired the Busy Bee Group for an amount of US$330 million (Carnegie and O’Connell, 2014).
One Tel Phone: One Tel Phone used to be considered as one of the leading telecommunication
company having operation in the regions of Australia and the company was situated in 1995. The central
business philosophy of One Tel Phone was to cater to the demands and demands of the customers with
the help of delivering superior quality of products and services. Before the period of liquidation, One Tel
Phone acquired the position of fourth largest telecommunication company in Australia. One major target
of One Tel Phone was to deliver their youth consumers with mobile phone and internet services in order
to develop youth oriented image of their business (Abid and Ahmed, 2014).
HIH Insurance: HIH Insurance was the largest insurance company having operations in the regions of
Australia. Major progress of the business of HIH Insurance can be seen between the years of 1997 to
1998 as the company succeeded to expand their business globally. HIH Insurance had their name listed
in ASX. The company changed their name in the year 1995 by selling majority portion of their stakes to a
company of Switzerland. HIH Insurance had to incur a loss of $5.3 billion before the process of
liquidation. Some of the board members of HIH Insurance were convicted to imprisonment due to their
involvement in the financial manipulation of the entity. In Australia, the liquidation of HIH Insurance is
considered as the largest liquidations in the history (Clarke and Dean, 2014).
Reason for Liquidation
ABC Learning: Followings are the reasons of collapse of ABC Learning:
o There was a 42% fall in the profit of ABC Learning in the second half of the year 2017 and the
amount was $37.1 million. At that time, one major debt of the company was of $1.8 billion. These
two can be considered as the greatest reason for the collapse of ABC Learning (Coad, 2014).
o The massive fall in profit affected the share price of ABC Learning as it was dropped by 43% to
$2.15; and it came after a small trading of $1.15. Due to these financial turmoil, the proprietor of
ABC Learning was enforced for selling stake of their business worth $20 million and $6 million at
a value of $2.7 million. This aspect earned the company a trading halt. Moreover, the
management of ABC Learning filed in releasing their earnings for the years 2007 and 2008
(Marchini, Mazza and Medioli, 2018).

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o It needs to be mentioned that the auditors of ABC Learning failed to correctly inspect the financial
accounts of the business that lead to the receivership of the business of ABC Learning.
o The adoption of inappropriate method for intangible asset valuation can be considered as another
major reason. According to ABC Learning, the total value of their business goodwill was $2.4
billion where the company only charged $8.4 million as impairment. It contributed towards the
incorrect valuation of the future cash flow of the entity and profit dropped by 42%. These are the
crucial reasons for the liquidation of ABC Learning (Marchini, Mazza and Medioli, 2018).
One Tel Phone: Followings are the reasons of collapse of One Tel Phone:
o The board members of One Tel Phone adopted the strategy for showing large profit margin with
the help of deferring the major business expenditures for three years. The adoption of this
accounting strategy was an illegal accounting policy for One Tel Phone as it did not comply with
the accounting standards as well as policies.
o As a result of the adoption of the unlawful accounting policy, One Tel Phone registered a loss of
$291 million in the year of 2000. The share prices of One Tel Phone got affected by this as it was
dropped below $1 (Barnes, 2013).
o One Tel Phone faced major issue related to the lack of capital for running the daily operations of
business in the year 2001. Thus, in order to overcome this issue, the management of One Tel
Phone did sell their 5 million shares for $2.5 million. This was a massive blow for the company.
Moreover, One Tel Phone did lay off more than 1400 employees due to insolvency.
o Due to not exercising the responsibility of due care and diligence, One Tel Phone had to pay
compensation worth $92 million (Barnes, 2013).
HIH Insurance: Followings are the reasons of collapse of HIH Insurance:
o The board members of HIH Insurance had to made large amount of investment in order to acquie
FAI Insurance that was risky for the businesses of insurance companies; and it was a wrong
decision from the management of HIH Insurance (Lessambo, 2014).
o After that, the management of HIH Insurance took another wrong step by entering into the
business to finance films that led to the loss of more than hundred million dollars for the company.
o The natural calamity in Florida was an added reason for the fall down of HIH Insurance. For this
reason, HIH Insurance had to incur large debt and this debt contributed towards the loss of the
company. This was a big cause for the collapse of HIH Insurance.
o The management of HIH Insurance brought unexpected change in the payment related
accounting rule for the employees of California and this change led to the liquidation of the
company.
o It was seen from the estimation of the liquidator that HIH Insurance had to incur loss worth $800
million within a period of six months due to various reasons like quick expansion, unexpected
accounting policies and others (Adams and Borsellino, 2015).
Ethics and Governance
APES 110: ‘APES 110 Code of Ethics for Professional Accountants’ is regarded as an important
document for the accounting professionals as it provides the accounting professionals with the required
ethical code of conducts. APES 110 has mentioned about five codes of ethics that all the accounting
professionals are required to comply with and they are discussed below:
The first ethical code of conduct is Integrity and this code states that the accounting
professionals are needed to be straightforward as well as honest in all professional and business
relationships. The second ethical code is Objectivity and it restricts the accounting professionals in
allowing any bias, conflict of interest and influence for overriding professional and business judgment. The
third code is Professional Competence and Due Care and this code puts the obligation on the
accounting professionals for maintaining skill and professional knowledge in order to ensure the delivery
of competent professional services based on the recent developments in the accounting profession. The
fourth code of ethics is Confidentiality and this code puts the obligation on the accounting professionals

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for respecting the confidentiality aspect of information acquired at the time of delivering the professional
services. The fifth code of ethics is Professional Behavior and this code puts the obligation on the
accounting professionals to make compliance with the relevant regulations and laws for avoiding any
wrong action in the profession (APES 110 Code of Ethics for Professional Accountants, 2018).
ASIC Listing Rules: According to ASIC, corporate governance is a major driving force for the
performance of the companies and thus, ASIC has reviewed different aspects of corporate governance.
In this process, ASIC has provided the companies with some listing rules where the companies are
needed to consider all these rules for the establishment of effective corporate governance mechanism.
The first rule is the management of organizational conflicts. The second listing rule is related to the
engagement of the shareholders. The third listing rule is the oversight of the director in financial aspects
along with audit. The fourth listing rule is related to the risk management framework. The next listing rule
is related to the handling of corporate information. Executive remuneration is the topic of the next listing
rule. The next rule is related to the organizational culture. The next listing rule is related to the corporate
actions related to share capital. The next lasing rule is related to the roles of the directors as gatekeeper.
Introductory and procedural guidance is the last listing rule (Corporate governance | ASIC - Australian
Securities and Investments Commission, 2018).
Role of the Liabilities
Growing amount of liabilities in the business can be taken as another cause for the liquidation of
ABC Learning, HIH Insurance and One Tel Phone and they are discussed below:
In ABC Learning, stable amount of liability was there in the beginning of 2007; but the process of
refinancing in the second half of 2007 in ABC Learning contributed towards the reclassification of the term
loans from the current and non-current liabilities worth AUD$1.1 billion. This excessive increase in the
liability from 2007 to 2008 contributed towards the 42% fall in the profit of the company. Moreover, ABC
Learning had to make the payment of AUD$1.2 billion for violating the debt agreement (Newberry and
Brennan, 2013).
The management of HIH Insurance faced almost same kind of situation as the company was
highly leveraged with the term loans from the banks and other financial institutes and it contributed
towards the liquidation of the company. HIH Insurance had to face high amount of debt when they
acquired FAI Insurance for $300 million that had an actual prices of $100 million (Adams, 2015).
It can be noticed in the case of One Tel Phone that the management of the company adopted the
ill strategy to hide the business liabilities due to the excessive increase in the debts for the business. Due
to the non-payment of different debts, One Tel Phone had to make a payment of $92 million as
compensation. All these reasons together led to the collapse of the company (Lessambo, 2014).
Conclusion
It can be observed from the above discussion that many reasons were there for the liquidation of
the businesses of ABC Learning, HIH Insurance and One Tel Phone. One common factors responsible
for the collapse of all these three companies is the presence of wrong decision making from their
management in the areas like business expansion, decisions related to investment, adoption of the
correct accounting policies, manipulation in the financial accounts and others. In addition, the presence
of excessive amount of debt can be shown as a reason for the liquidations of these three companies.
Most importantly, all the three companies had major lack in ethics. At the same time, the presence of
ineffective corporate governance mechanism was also evident. These two aspects were also majorly
responsible for the collapse of the business of One Tel Phone, ABC Learning and HIH Insurance.

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References
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collapse.
Adams, M. and Borsellino, G., 2015. Is there a positive link between corporate governance and board
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<https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf> [Accessed 29 August
2018].
ASIC. 2018. Corporate Governance | ASIC - Australian Securities And Investments Commission. [online]
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2018].
Barnes, L.R., 2013. The Albatross Around the Neck of Company Directors: A Journey Through Case Law,
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Marchini, P.L., Mazza, T. and Medioli, A., 2018. Related party transactions, corporate governance and
earnings management. Corporate Governance: The International Journal of Business in Society.
Newberry, S. and Brennan, D., 2013. The marketisation of early childhood education and care (ECEC) in
Australia: A structured response. Financial Accountability & Management, 29(3), pp.227-245.