1FINANCIAL ACCOUNTING Executive Summary The main aim of this report involves in the analysis of the reasons behind the liquidation of HIH Insurance, ABC Learning and One Tel Phone. The first part of the report shows the reasons behind the liquidation of these companies. The next part shows the role of ethics and corporate governance in the collapse. The last part shows the role of the liabilities in the collapse.
2FINANCIAL ACCOUNTING Table of Contents Introduction.................................................................................................................................................3 Introduction of the Companies....................................................................................................................3 Reasons for Liquidation...............................................................................................................................3 HIH Insurance..........................................................................................................................................3 One Tel Phone.........................................................................................................................................4 ABC Learning...........................................................................................................................................4 Ethics and Corporate Governance...............................................................................................................4 HIH Insurance..........................................................................................................................................5 One Tel Phone.........................................................................................................................................5 ABC Learning...........................................................................................................................................5 Role of the Liabilities...................................................................................................................................5 Conclusion...................................................................................................................................................6 References...................................................................................................................................................7
3FINANCIAL ACCOUNTING Introduction Liquidation refers to the process to wind up all the business operations of the companies and for this reason, the companies have to go through some of the major business liquidation processes. In this process, the liquidators have the responsibility to carry out all the required steps for the process of liquidation like the recognition of the rights and the liabilities of the company’s payment of the dues of the creditors either fully or partially and others (Dodo, 2017). Some specific events or reasons play the major role behind the liquidation of the business enteritis and there is not any exception of this fact in case of the liquidation of three of the major companies in Australia; they are ABC Learning, One Tel Phone and HIH Insurance. The main aim of this report involves in the analysis of the reasons behind the liquidation of these three companies. Introduction of the Companies ABC Learningwas one of the leading educational organizations of Australia and the company was established on the year of 1988 in Queensland, Australia. The company had its name in the Australian Securities Exchange (ASX) and the market capitalization amount of the company was $2.5 billion. ABC Learning made the acquisition of Busy Bee Group in the year 20016 for $330 million in order to enter the market of US and UK. ABC Learning went into managerial receivership due to the increased amounts of debts and liabilities as a result the world mortgage crisis (Debbage and Dickinson, 2013). One Tel Phonewas established in the year of 1995 and was one of the major telecommunication companies in Australia. The motto of the company was to create a youth oriented image of their companies by selling high quality of mobiles and providing internet services. The company was always ready to fulfill the needs of their customer with the help of quality products and services. Thus, the company used to be regarded as the fourth largest telecommunication companies in Australia (Clarke and Dean, 2014). HIH Insurancewas established in the year of 1968 and it was regarded as the largest insurance company in Australia. The company made their global as well as Australian expansion in the year of 1997 and 1998. The company enlisted their name in ASX in the year of 1992. HIH Insurance sold its majority stake one of the companies in Switzerland in the year 1995 The loss amounted to $5.3 billion is considered as one of the major reason for the fall of the company and still world considers the fall of HIH Insurance as the largest collapse in the world (Logan, Sumsion and Press, 2015). Reasons for Liquidation HIH Insurance It needs to be mentioned that HIH Insurance made some of the major wrong decisions that led to their business collapse and the acquisition of FAI Insurance is considered as one of those major wrong business decisions. This was a huge investment for the company and was also too risky for the insurance business. Thus major damage was there for the company (Vucetich, Perry and Dean, 2014). Entering into the business to finance the movies is considered as another major reason for the collapse of the organization as it contributed towards million of losses for the company. The natural disaster in Florida also caused many large business losses for HIH Insurance. Due to this, the company had to face large business losses that lead to the collapse. Accounting is another major reason for the collapse of the company as HIH Insurance adopted aggressive accenting policies for the payment of the employee
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4FINANCIAL ACCOUNTING compensation in California (Tarr and Mack, 2013). It led to the violation in the accounting standards by the company. At the time of the process of liquidation, the liquidator estimated that the company had to incur a loss of over $800 million in a period of six months and the reasons for this loss are quick expansionstrategy,adoptionofaggressiveaccountingpolicies,ineffectivedelegationofthe responsibilities and others. One Tel Phone The same aspect can also be seen in case of One Tel Phone. The major reason for the collapse of One Tel Phone is the strategy of the company to show increased amount of profit by deferring the major business expenses for the period of three years. It was an illegal accounting policy that violated the accounting standards. For the adoption of this illegal accounting policy, the company had to face a loss of $291 million in the year 2000 (Williams, Bingham and Shimeld, 2015). It has major negative effects in the share prices and thus, the share prices fall below $1. In the year 2001, the director of the company sold 5 million shares of the company for $2.5 million as the company was running out of required cash for conducting the daily business operations. It was one of the prime reason or the collapse of One Tel Phone as the company had to lay off 1400 employees for the reduction of costs. Apart from this, due to this increase amount of loss for the investors, One Tel Phone had to pay the compensation of $92 million. Most importantly, it needs to be mentioned that the senior management of One Tel Phone failed in exercising their power related to due care and diligence. Thus, all these reasons together ensure the fall of this corporation (Lewis, 2013). ABC Learning There were some of the major reasons responsible for the collapse of ABC Learning. In the year 2007, the company had to face a debt of $1.8 million due to some of the major wrong decisions. For this reason, the profit margin of the company witnessed a fall of 42% and the amount is $37.1 million. This can be considered as a prime reason for the collapse of ABC Learning. Due to this scenario, the share price of the company had a fall of 43% to $2.15 after the start of a low trading of $1.15. In the presence of all these wrong decisions and losses, the management of ABC Learning had to sell the stakes of $6 million and $20 million for an amount of $2.7 million (Fin and McRobert, 2013). Apart from this, the management of ABC Learning did not disclose the details of their earnings for the years 2007 and 2008; and this reasons to the trade suspension of ABC Learning from the legal authority. The auditors of ABC Learning had a role to play in the collapse of ABC Learning as they failed in correctly signing off the financial accounts of the company that contributed towards the managerial receivership of ABC Learning. The fault in the accounting treatment for the intangible assets was another major contributor to the collapse of the company. $2.4 billion was the value of goodwill in ABC Learning related to licenses and other intangible assets, but the company only made the impairment of $8.4 million Due to this, the company had to face a 42% fall in the profit along with the wrong valuation of future cash flows (Lawson, 2017). Ethics and Corporate Governance Ethics is considered as one of the major success factors for the business organizations that shows the company about the concept of right and wrong. For this reason, the culture of the businesses has major influence on the business decision making process. It is expected that the management will take the ethical basins decisions along with the right course of actions (Crane and Matten, 2016). In order to be ethical, the business organizations may have to reject the short way for making large profits. Besides, the companies are required to pay attention to the implementation of effective corporate governance strategies. With the implementation of the correct ethical as well as corporate governance
5FINANCIAL ACCOUNTING strategies, the companies can become majorly beneficial. In today’s world, consumers pay attention to the ethical activities of the companies along with quality products and services. For this reason, the companies are required to carry on their business operations in the most ethical manner in order to attract more customers (Crane and Matten, 2016). The flowing discussions shows the ethical reasons for the collapse of these three companies: HIH Insurance It can be seen that HIH Insurance did not obtain the approval from the board of directors at the time of the acquisition of the acquisition of FAI Insurance. In addition, the directors of the company made abrupt resignation after the disposal of the shares (Jones and Bowrey, 2013). It shows that there was major corporate governance failure in HIH Insurance. In spite of knowing the fact that film business would require large investment that is too risky, the decision of the management to enter into this business shows lack of ethics and corporate governance failure for the company. The involvement of the management of HIH Insurance can be seen as the management did not satisfy their responsibilities of due care and diligence and this aspect indicates towards the absence of ethics for the company. Apart from this, the management of HIH Insurance launched the company prospectus that was full of material errors and omissions. In addition, overstating the profit in the year 1998 and 1999 was another ethical failure from the company. One Tel Phone The management of One Tel Phone was involved in the violation of the accounting standards and principles. In addition, the management of the company failed in the effective monitoring of the financial performance of the company that shows lack of corporate governance in the company. The management of One Tel Phone also ignored the risky investment areas in order to satisfies their own interest and it can be considered as a highly unethical business practice. The adoption of wrong pricing strategy is also considered as another major ethical and corporate governance issue in the company that led to the corporate collapse (Tricker and Tricker, 2015). ABC Learning In ABC Learning, the adoption of aggressive as well as illegal accenting practice is considered as a major ethical as well as corporate governance fault in the company. The company was also involved in the adoption of unethical bookkeeping proactive for this corporation. Apart from this, the failure of the company can be seen in the improper and unethical rendering of the business service. These are the major ethical issues in the company (Salim, Arjomandi and Seufert, 2016). Role of the Liabilities Theroleoftheliabilitiescannotbeignoredinthecollapsesofthesethreebusiness organizations. In the initial year of 2007, ABC Learning had a stable liability position. However, later in the year, the company had to face a reclassification of current as well as non-current liabilities for $1.1 billion that led to the refinancing for the company. In the year 2007 to 2008, ABC Learning had to make a payment of $1.2 billion due to the violation the debt covenant and it had its effects on the company profit as the profit fall by 42% (Fin and McRobert, 2013). In the case of HIH Insurance, the debt structure of the company was highly leveraged with term debts and it was one of the major reasons for the insolvency of the company. HIH Insurance took a
6FINANCIAL ACCOUNTING wrong decision of the acquisition of FAI for $300 million. However, in actual, the original value of the acquisition was $100 million (Tarr and Mack, 2013). In the case of One Tel Phone, the company had a huge amount of liability and the management of the company was majorly reasonable to hide these inabilities in the illegal accounting manner. There was a huge increase in the liability of the company as the company had to make the payment of $92 million as compensation. Thus, it can be seen that liabilities had major role to play in the collapses (Williams, Bingham and Shimeld, 2015). Conclusion According t to the above discussion, the major reasons responsible for the collapses of these three companies were wrong invent decisions from the senior management, wrong expansion plan, adoption of aggressive accounting policies, failure of the management in discharging the required duties and many others. At the same time, lack of ethics in the business operations and corporate governance failure can also be held responsible for the collapses of these three companies. Moreover, huge amount of liabilities was another major reason for the corporate failure of the business organizations.
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