Causes of Corporate Downfall: ABC Learning, HIH Insurance and One Tel

The objective of this report is to evaluate the causes behind the corporate downfall of three Australian companies, which include ABC Learning, HIH Insurance and One Tel. The analysis provides explanation of the organisations while the next portion investigates the causes behind the declines. The final segment lays stress on highlighting APES 110 Code of ethics and ASIC listing rules in relation to corporate governance. Finally, the report sheds light on explaining the role of liabilities in corporate collapses of the three organisations.

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

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Executive Summary:
The objective of this report is to evaluate the causes behind the corporate downfall of three
Australian companies, which include ABC Learning, HIH Insurance and One Tel. The analysis provides
explanation of the organisations while the next portion investigates the causes behind the declines. The
final segment lays stress on highlighting APES 110 Code of ethics and ASIC listing rules in relation to
corporate governance. Finally, the report sheds light on explaining the role of liabilities in corporate
collapses of the three organisations.

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Table of Contents
1. Introduction:............................................................................................................................................. 3
2. Introduction of the companies:................................................................................................................. 3
3. Reasons for liquidation:........................................................................................................................... 3
4. Ethics and governance:........................................................................................................................... 4
5. Role of the liabilities:................................................................................................................................ 5
6. Conclusion:.............................................................................................................................................. 6
References:................................................................................................................................................. 7

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1. Introduction:
When any business organisation is shut down, it is termed as the process of liquidation. In this
process, it is necessary for the organisations to follow a series of steps for closing their business
operations permanently. Moreover, the role of the liquidator is significant in this process, as the individual
would be accountable to identify the business rights and liabilities for settling the claims of various
stakeholders that take into consideration lenders, creditors and others. It is observed that because of
certain reasons, there has been downfall or liquidation of the business organisations. The most inherent
reasons constitute of unsuitable business policies, deficiencies in corporate governance and internal
control and others. This report is concerned with critical evaluation of the various dimensions of the
downfalls of three significant Australian organisations, which include HIH Insurance, ABC Learning and
One Tel.
2. Introduction of the companies:
ABC Learning:
ABC Learning was deemed to be the leader in the education sector of children in Australia. The
organisation got listed in ASX having market capitalisation of $2.5 billion. However, due to the mortgage
crisis, there had been managerial receivership in the organisation and significant debt burden has
contributed to the destruction of the organisation. It was developed in the year 1988 and soon, it had
diversified its business operations in Australia by establishing 900 centres. Additionally, diversification of
the organisation could be seen in UK and US in 2006, after which the acquisition of Busy Bee Group was
made for $330 million (Adams, 2016).
One Tel:
One Tel was deemed to be one of the leading telecommunications service providers in Australia
established in the year 1995. The organisation had formulated one business philosophy, which was to
fulfil the requirements and wants of the customers by ensuring that higher quality products and services
are provided to them. Before it went into liquidation, One Tel managed to reach the fourth position in the
Australian telecommunications sector. The organisation had targeted the young customers by providing
internet and mobile phone services at cheaper prices for creating a youth-oriented image in the eyes of its
customers (Carnegie and O’Connell, 2014).
HIH Insurance:
It was the biggest insurance firm having diversified operations in the Australian market. The
organisation had made considerable progress between 1997 and 1998 due to its success in expanding
business operations internationally, due to which it was listed in ASX (Tricker and Tricker, 2015).
However, in 1995, it changed its name by selling a significant portion of shares to an organisation of
Switzerland, The organisation had to bear a loss of $5.3 billion before the liquidation process. Some of
the HIH board members were imprisoned, as they were engaged in manipulating the financial earnings of
the organisation. Thus, in Australia, the decline of HIH Insurance was deemed to be one of the biggest
downfalls in the nation’s history (Crockett and Ali, 2015).
3. Reasons for liquidation:
ABC Learning:
Due to the considerable downfall in profit, it had negative impact on the stock price of the
organisation. This is because the stock price fell by 43% to $2.15 after coming from a small
trading of $1.15. As the financial condition of the organisation had declined, the proprietor was
compelled to sell a portion of its shares valued $20 million and another stake of $6 million for $2.7
million. As a result, there had been trading halt for the organisation. Along with this, the

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management of the organisation filed in disclosing its earnings for 2007 and 2008 (Dagwell,
Wines and Lambert, 2015).
During the second half of 2007, ABC Learning had experienced decline in profit by 42%
amounting to $37.10 million. During that period, there was considerable debt burden of $1.80
billion for the organisation. As a result, these two causes have contributed jointly to the downfall
of ABC Learning (Di Pietr, et al., 2014).
The auditors of the organisation had not been able to investigate the financial reports of the
business accurately and as a result, business receivership took place.
Finally, ABC Learning had adopted incorrect valuation for intangible assets. The management of
the organisation stated that the goodwill of the business was $2.4 billion and impairment change
was $8.4 million. Hence, the future cash flows of the organisation are valued wrongly leading to
decline in profit by 42%. These reasons had contributed enormously to the decline in ABC
Learning (Du Plessis, Hargovan and Harris, 2018).
One Tel:
The board members of the organisation followed the strategy of overstated profit by deferring the
key business expenditures for three years. This strategy was considered to be illegal in terms of
accounting policy for the organisation, since compliance was not made with the prevailing
accounting policies and standards.
As the organisation had adopted this unlawful policy, it had to suffer a loss of $291 million in 2000
and as a result, the impact was severe on the stock price of the organisation, since it fell below $1
(Hay, Stewart and Botica Redmayne, 2017).
Another significant issue was the availability of lack of funds in order to carry out the daily
business operations in 2001. For dealing with this issue, the management of the organisation was
compelled to sell five million shares for $2.5 million. This turned to be a massive blow for the
organisation and 1,400 staffs were terminated from their posts due to insolvency position.
As One Tel had not adopted diligence and due care, the organisation had to incur compensation
amounting to $92 million (Henderson, et al., 2015).’
HIH Insurance:
The board members of the organisation had to incur significant amount for the acquisition of FAI
Insurance, which was deemed to be risky for the insurance business and this decision later
turned out to be wrong for the management of HIH Insurance (Hossari, 2014).
After this, the management of the organisation has taken an incorrect step by funding the film
industry. This is because it had incurred a loss of hundreds of millions of dollars due to such
investments.
The natural disaster that took place in Canada had contributed further to the decline of HIH
Insurance. Due to this reason, the organisation had to spend huge amount adding further to the
debt burden of the organisation and as a result, significant loss was encountered. This was
considered to be of the major causes of the collapse of HIH Insurance.
There was sudden change in the payment-related accounting rules for the Californian staffs,
which had added further to the liquidation of the organisation.
As per the anticipations of the liquidator, a loss of $800 million was incurred within one-half of a
year because of different reasons such as unexpected policies of accounting, rapid diversification
and others (Jones and Beattie, 2015).
4. Ethics and governance:
“APES 110: Code of Ethics for Professional Accountants”:
This is adjudged as a crucial document for the accounting experts, since it provides necessary
guidelines with the needed ethical codes of conduct. In this standard, five ethical codes are laid out, which
are necessary for the professional accountants to comply and these are demonstrated briefly as follows:

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Integrity is the first ethical code and according to this code, it is necessary for the accountants to
remain straightforward and honest in all business and professional relations. Objectivity is the second
ethical code and the accounting professionals could not exercise any bias, effect for overriding business
and professional judgement and conflict of interest. Professional competence and due care is the third
code, which obliges the accounting experts to maintain professional knowledge and skills for assuring the
delivery of effective professional services depending on current accounting profession developments.
Confidentiality is the fourth ethical code, which obliges the accounting professionals to pay respect to the
confidentiality aspect of information acquired during delivering the professional services. Professional
behaviour is the fifth ethical code, which mandates the obligation on the accounting experts in making
adherence to the pertinent laws and regulations in order to avoid incorrect action in the accounting
profession (APESB, 2018).
ASIC listing rules:
In compliance with ASIC, corporate governance is deemed to be significant driving forces for
evaluating the overall business performance and therefore, ASIC has reviewed the various corporate
governance aspects. In this method, ASIC has given all the organisations with certain listing rules, in
which they need to take into consideration the laws for developing sound mechanisms related to
corporate governance. The first rule is associated with managing the conflicts of the organisation. The
second listing rule is associated with the involvement of the shareholders. The third listing rule involves
director oversight in financial aspects coupled with audit. The fourth listing rule is associated with the risk
management framework. The fifth listing rule is associated with management of corporate information.
The sixth listing rule confronts executive remuneration. The seventh listing rule is associated with the
culture of the organisation. The eight listing rule is associated with corporate actions pertaining to share
capital. The ninth listing rule is associated with the directors’ role in the form of gatekeepers. The final
listing rule includes procedural and introductory guidance (ASIC, 2018).
5. Role of the liabilities:
The increased amount of business liabilities could be considered as another cause behind the
downfalls of ABC Learning, One Tel and HIH Insurance. These are discussed briefly as follows:
ABC Learning:
For ABC Learning, the organisation had a stable liability amount at the start of 2007; however, the
procedure of refinancing in the second half of 2007 had resulted in reclassifying the term loans from
current and non-current liabilities valued $1.1 billion. Such additional rise liability between 2007 and 2008
had resulted in decline in profit margin of the organisation by 42%. Along with this, ABC Learning had to
incur $1.2 billion, since they have breached the debt agreement (Miglani, Ahmed and Henry, 2015).
HIH Insurance:
For HIH Insurance, the situation is almost identical like that of ABC Learning, since the leverage
position of the organisation was high due to term loans from banks and financial institutions. As a result,
this had contributed significantly to the degradation of the organisation. Moreover, due to the acquisition
of FAI Insurance for $300 million, the debt burden of HIH Insurance had increased considerably due to
the fact that the actual acquisition price based on the then market value would be $100 million
(Ratnatunga, 2016).
One Tel:
For One Tel, it could be observed that the management of the organisation had adopted an
unsuitable strategy of hiding business liabilities. The reason is that the debt burden of the organisation
has increased considerably. Moreover, the organisation had not cleared its various payments to the other
debtors as well. Due to this, it had to incur a compensation amounting to $92 million. By taking into
account all these reasons, the collapse of One Tel was obvious and justified (Safari, Cooper and
Dellaportas, 2016).

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6. Conclusion:
Based on the above discussion, it is evident that there were numerous reasons, due to which
none of the organisations, namely, One Tel, HIH Insurance and ABC Learning were not able to sustain
their business operations in the Australian market. However, there were certain common factors behind
the collapse of the three organisations, which was incorrect decision making from the management in
certain areas such as investment decisions, business diversification, adoption of wrong accounting
strategies, financial account manipulations and others. Moreover, the availability of increased amount of
debt could be considered as a reason behind the liquidation of the three organisations. Most significantly,
all three companies had absence of significant ethical guidelines. Along with this, the presence of
inadequate mechanisms of corporate governance was evident as well. These two aspects had been
accountable for the downfall of One Tel, HIH Insurance and ABC Learning. Finally, the board members of
the organisation followed the strategy of overstated profit by deferring the key business expenditures for
three years. This strategy was considered to be illegal in terms of accounting policy for the organisation,
since compliance was not made with the prevailing accounting policies and standards. Moreover, the
increased amount of business liabilities could be considered as another cause behind the downfalls of
ABC Learning, One Tel and HIH Insurance.

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2018].
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2018].
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