Corporate Failures in Australia: Analysis of One Tel, HIH Insurance and ABC Learning

This report analyzes the corporate failures of One Tel, HIH Insurance and ABC Learning in Australia. It highlights the role of unsound corporate governance practices and unethical conduct by external auditors in these failures. The report also discusses the available guidelines for ethical conduct and recommendations for improving corporate governance practices.

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Executive Summary
The investors in Australia have borne huge losses on account of the corporate failures that
have happened over the last two decades. For the purpose of this report, the focus has been on
three key bankruptcies namely One Tel, HIH Insurance and ABC Leaning. The focus of the
report is to highlight the key reasons which led to the failure of these companies. During this
analysis, the role of liabilities as a cause requires special attention since it is often stated.
However, the analysis into the failure of these companies clearly highlights the liabilities was
only the trigger but the reasons for failure were deep rooted in blatant violation of sound
corporate governance practices by fraud managements in collusion with external auditors so
as to conceal the effect of their malpractices till bankruptcy became inevitable. Further, the
report also highlights the various measures taken to strengthen the corporate governance
since with special emphasis on APES 110 code of ethics and the ASX corporate governance
principles which have been included as part of the listing agreement.
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Table of Contents
Introduction...........................................................................................................................................3
Available Guidelines for Ethical Conduct.............................................................................................3
Corporate Failure Analysis....................................................................................................................4
Unsound Corporate Governance Framework.......................................................................................7
Recommendation...................................................................................................................................7
References.............................................................................................................................................9
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Introduction
At the turn of the 21st century, Australia has seen some of the largest corporate failures in
history. These failures have raised concerns about the faulty corporate governance practices
and the underlying role that they played in leading to these corporate failures. These instances
of bankruptcies had their immediate cause as burgeoning liabilities but a critical analysis of
these is required so as to highlight the actual contributing factors. The fact that various
measures have been taken by regulators and professional organisations to improve the
corporate governance framework implies that the lack of this might have been a culprit for
these disasters. The objective of this report is to critically analysis there cases of corporate
failures in order to identify the role played by liabilities. Also, a brief overview of the
corporate governance principles by ASX along with code of ethics for accountants in the
form of APES 110 has been provided.
Available Guidelines for Ethical Conduct
For improving the corporate governance framework and reducing the incidence of corporate
frauds, a key measure has been taken in the form of insertion of corporate governance
principles in the listing agreement which makes it mandatory for listed companies to abide by
the same. These principles are briefly explained as follows (ASX, nd).
 “Solid foundation for management and oversight” – It is imperative to enhance
accountability and transparency by sharing the roles and responsibilities of the various
members of the board.
 “Value addition through board structuring” – It is imperative that the members of the
board should possess the necessary skills so as to add value. Also, in order to maintain
the independence of the board, majority of the members must be non-executive
directors.
 “Decision making driven by ethics and responsibility”- Any conflict of interest must
be disclosed by the members so that they can use their power with requisite due
diligence, objectively and responsibility.
 “Safeguard financial reporting integrity”- Requisite measures must be taken by the
board to maintain the independence of not only the external auditors but also the
internal audit committee.
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 “Making timely disclosures”- The company should make public disclosures of all
material information at the earliest without regards to the impact of these disclosures
on the share prices and management compensation.
 “Respect the shareholders’ rights”- The shareholders’ have right to attend meetings
along with voting on shareholders’ resolution and the same should not be disrupted.
Also, medium to communicate with the company should be provided to shareholders.
 “Recognition and management of risk” – A risk management committee should be in
place with representation from non-executive directors so as to ensure that suitable
measures can be undertaken for keeping the risk in check.
 “ Fair and responsible remuneration” – The remuneration provided to the executives
must be fair and approved by the remuneration committee which ought ot be headed
by the non-executive director of the company.
With regards to accountants also, APES 110 serves as a useful code of ethics which spells out
the values that these professionals need to highlight at their profession (APESB, 2010).
Integrity – Professionals must avoid any dishonest conduct and fraud practices even at the
request of their clients.
Objectivity – Professionals must not be biased in their assessment and hence avoid situations
having an inherent conflict of interest.
Professional competence and due care – Professionals need to continuously update their
professional knowledge and should take requisite precautions so that there is no negligence
on their part.
Confidentiality – The personal and other privileged information about the clients need to be
safeguarded or kept confidential unless exceptional circumstances arise.
Professional Behaviour – Professional need to conduct themselves in a professional manner
when offering their services and interacting with clients.
Corporate Failure Analysis
A background of the various prominent cases of corporate failures is presented as follows.
ABC Learning
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The company after listing as ASX embarked an ambitious expansion plan where it aimed to
open a number of franchise so as to cover a large amount of territory. This plan was cheered
and applauded by shareholders as the stock outperformed significantly. The strategy that the
company adopted was too aggressive since while ensuring the geographical expansion, the
company cannot assure that the quality standards were met and as a result the brand of the
company suffered a setback. However, no change in this strategy was brought leading to
eventual bankruptcy (CPA, 2012).
HIH Insurance
After 1990’s, the company executed a host of acquisitions for aggressive growth both in
terms of geography as well as product portfolio. However, the company had insufficient risk
management practices for the business that the company was present in. The acquisitions
coupled with new product entry further worsened the risk management framework of the
company and hence the company suffered significant losses. However, instead of reporting
these losses and changing the risk management framework, the management continued with
these faulty policies leading to further increase in the losses which eventually brought about
bankruptcy (Mak, Deo & Cooper, 2005).
One Tel
The failure of this established player in the telecom industry can be attributes to the faulty
management practices which continued for long thereby leading to the bankruptcy of the
company. For enhancing the subscriber base and gaining new connections in USA, the
company created an aggressive promotion plan which was not financially feasible. Through
creative accounting, these losses were then kept off the books of the company. This ensured
non-intervention from the shareholders and the continuation of company policies and hence
the losses kept on mounting. This eventually paved way for the failure of the company.
(Monem, 2009).
Reason for Liquidation
ABC Learning
As discussed earlier, the management of the company pursued an expansion plan which was
focused on opening higher number of franchises with the objective of maximising revenue
from franchise partners as franchise fee. The company did not make any attempts to ensure
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that the franchise owners could have a sustainable business. The result was that the quality of
service at the franchises could not meet the minimum quality standards leading to surge in
customer complaints (Arens et. al., 2013). Despite the strategy failing to generate long term
wealth for shareholders, the management continues with the policy as there entire focus was
on maximising the compensation which they could draw. Further, the company also entered
into new markets by making acquisition. This also added to the woes of the poor management
policies and led to continuous deterioration in the company’s financial performance which
led to eventual bankruptcy of the firm (Kaplan, 2011).
HIH Insurance
The company primarily focused on inorganic growth which was fuelled with acquisitions not
only domestically but also internationally. However, there was little merit in most of these
acquisitions and they were only done in order to jack up the share price and also maximise
compensation of executives. A case in point is of FAI where the conduct of the board was
quite negligent and the decision to purchase the company was made without performing the
necessary due diligence. Also, the price paid for the acquisition of the company was
exceptionally high (Mirshekary, Yaftian & Cross, 2005).
The company also ventured into a competitive international market in the form of USA.
Owing to the high competitiveness, the company offered insurance premiums which lead to
losses. Also, the losses of the company were compounded owing to the reinsurance based
model where the company can potentially suffer the losses if there is default on the part of
reinsurer (Gay & Simnett, 2012). Despite this not being the norm in the insurance industry in
Australia, the company continued with the same policy while adding companies, geographies
and product portfolios. As a result, the associated losses also kept mounting which the
management concealed though quid pro quo relation with the external auditors (Mak, Deo &
Cooper, 2005).
One Tel
This is another example of the ambitious expansion strategy which was not well implemented
and the resulted losses were hidden for years thus confirming the downfall of the company. In
this case, the company aimed at enhancing the subscriber base of the company without
considering the underlying profitability implications. Further, the company also made
elaborate measures in order to ensure that the internal controls were absent and also the
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external auditor was not independent (Caanz, 2016). As a result, the company was able to
report false numbers of financial performance for an extended period of time. However,
during this period, the losses kept on mounting which eventually led to the failure of the
company (Gilbert, Joseph & Terry, 2005).
Unsound Corporate Governance Framework
It is apparent that for all the three companies, the bankruptcy was filed since the underlying
assets were not sufficient to meet the mounting business liabilities. However, the key
question one should ask is what led to this situation which is where the true answer lies. At
the heart of the failure of the three companies was a desire to exhibit ambitious growth. Each
of the companies had their own mechanism of pursuing the same (Brown and Caylor, 2009)
For instance, ABC aimed for growth through franchising, HIH through acquisitions and One
Tel through low plan costs to consumers. However, one common aspect was that for all the
three companies, the underlying strategy was flawed since it created growth in the top line at
the expense of lower bottom line. As a result, these strategies were not conducive for the
shareholders’ wealth (Arens et. al., 2013).
However, in all the cases, the management continues with their respective flawed strategy
and resorted to faulty corporate governance practices in order to enable the same. It is
apparent that if the corporate governance practices in these organisations were in line with the
ASX corporate governance principles for listed companies, the flawed management strategy
would have been rectified long ago and the companies could have been saved from
liquidation Bhagat, and Bolton, 2008). Also, the external auditors also played a critical role in
enabling these managements to continue with the value destruction. Had the auditors not
aided the management and would not have compliant with APES 110 ethical principles, the
corporate failure in these cases could have been averted (Deegan, 2014).
From the above discussion, it may be concluded that liabilities did not play a major role in the
failure of the three companies. Instead the primary reasons of failure include unethical and
irresponsible executives, unsound corporate governance practices and unethical conduct by
external auditors.
Recommendation
Based on the above analysis of the corporate failures, it is apparent that for avoiding the
corporate failures, it is imperative to pay significant attention on the corporate governance
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practices of the firm. This is because sound corporate governance practices ensures that the
abuses of power are kept within control and requisite disclosures take place in a timely
manner thereby ensuring action by shareholders and regulators. The introduction of ASX
corporate governance principles as part of the listing agreement is therefore a step in the right
direction since it provides a sound framework for the firms to base their corporate governance
practices. Also, there has been an increase in the directors’ personal liability for the breach of
duties towards the company and the shareholders (Arens et. al., 2013). These measures are a
step in the right direction but more steps need to be taken. This is particularly with regards to
the role of non-executive directors which need to be enforced with zero tolerance as they go a
long way to protect the interest of the minority shareholders who tend to be the worst
sufferers in corporate failures. Besides, measures relating to independence of audit committee
and external auditors need to be strictly enforced considering the importance of the same.
Further, the liability of auditors in case of fraudulent conduct also needs to increase (Clout
Chappelle & Gandhi, 2009).
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References
APESB (2010) APES 110 Code of Ethics for Professional Accountants, [online] Available at
https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed
September 10, 2018]
Arens, A., Best, P., Shailer, G. and Fiedler,I. (2013). Auditing, Assurance Services and Ethics
in Australia, 2nd eds., Sydney: Pearson Australia
ASX (n.d.) Corporate Governance Principles and Recommendations, [online] Available at
https://www.asx.com.au/documents/asx-compliance/final-revised-principles-complete.pdf
[Accessed September 10, 2018]
Bhagat, S. and Bolton, B. (2008), ‘Corporate Governance and Firm Performance’, Journal of
Corporate Finance, Vol.14, No.3, pp. 257-273.
Brown, L and Caylor, M. (2009), ‘Corporate Governance and Firm Operating Performance’,
Review of Quantitative Finance and Accounting, Vol. 32, No. 2, pp. 129-144.
Caanz, S. (2016), Auditing and Assurance Handbook 2016 Australia, 3rd ed., Sydney: John
Wiley & Sons
Clout, V, Chappelle, E and Gandhi, N (2013), ‘The impact of auditor independence
regulations on established and emerging firms’, Accounting Research Journal Vol. 26, No. 2,
pp. 88-108
CPA (2012) ABC learning collapse case study., CPA Website, [online ] Available at
https://www.cpaaustralia.com.au/professional-resources/education/abc-learning-collapse-
case-study [Accessed September 10, 2018]
Deegan, C. (2014). Financial Accounting Theory, 4th ed. Sydney: McGraw-Hill
Gay, G. and Simnett, R. (2012), Auditing and Assurance Services in Australia, 5th eds.,
Sydney: McGraw-Hill Education
Gilbert, W., Joseph J. and Terry J.E (2005), ‘The Use of Control Self-Assessment by
Independent Auditors’. The CPA Journal, Vol. 3, pp. 66-92
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Kaplan, R.S. (2011). ‘Accounting scholarship that advances professional knowledge and
practice’. The Accounting Review, Vol. 86, No.2, pp. 367–383.
Mak, T., Deo, H. and Cooper, K. (2005), ‘Australia’s Major Corporate Collapse: Health
International Holdings (HIH) Insurance ‘May the Force Be with You’, Journal of American
Academy of Business, Vol. 6, No.2, pp. 104-112.
Mirshekary, S., Yaftian, A. and Cross, D. (2005), ‘Australian Corporate Collapse: The Case
of HIH Insurance’, Journal of Financial Services Marketing, Vol. 9, No.3, pp. 249-58.
Monem, R. (2009), The Life and Death of OneTel, Griffith University, [online] Available at
http://www98.griffith.edu.au/dspace/bitstream/handle/10072/42673/74746_1.pdf [Accessed
September 10, 2018]
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