An Analysis of Liquidation: A Case Study of ABC Learning Company

The collapse of ABC Learning was mainly due to the lack of corporate governance and internal control failures. The company made several major acquisitions without proper due diligence and valuation, leading to overvaluation. Similarly, other companies like Tel Phone and XYZ Inc. also suffered from similar issues, ultimately leading to liquidation. This highlights the importance of maintaining ethical practices and following accounting assumptions, such as going concern, to avoid financial crises. It is essential for auditors to be unbiased and not influenced by management or peers.

1
By student name
Professor
University
Date: 18 August 2017.
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Contents
Introduction...…………………………………………………………………………………………….......3
The case of liquidation with ABC learning, One Tel Phone company and HIH Insurance –
Reasons, ethics and governance..........……………………………..……………………………...4
Conclusion.....…………………………………………………………….....…………………………………7
Recommendation.....……………………………………………………………………………………..…8
Refrences.....……………………………………………………………….......................................9
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Introduction – Liquidation & its basics
Liquidation of the company implies shuting down of the operations of the company and
closing the books of the accounts and selling of the assets to meet the liabilities proportionately
in the order of sequence to be seen and managed by the iquidator of the company. Some of the
reasons are that the company may not be able to pay its short term and long term debts on time, it
may find that the excessive expenditure is required in continuing the business, the debtors have
not paid the money dues or the company is not having adequare resources to cover the cost or
because of the harsh competition (Knechel & Salterio, 2016).
In line with the above mentioned reasons, the director or partner of the company may
choose to liquidate the firm or the company based on the following reasons like if the company
is not being able to meet its debt and continuously incurring into the debts, then the company
may propose for voluntary liquidation. In some case directors or partners personal assets would
also be liable for the liqiuidation purposes in cases where they hold unlimited liability. (Raiborn,
et al., 2016).
Liquidation is also termed as winding up of the company and is often the official closure
of the company’s existence. The official liquidator is appointed by the creditors or shareholders
of the company and represents the creditors’s interests. There can be many other reasons besides
the above mentioned reasons basis which the company may go into liquidation like unorganised
upkeep of the business, weak internal control by the management, inadequacy of working capital
of the company, the location or the business might not be right, impertinent and uncompetitive
management, lack of planning to develop the correct business model, direct competition in the
market adversely, etc (Fay & Negangard, 2017).
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The case of liquidation with ABC learning, One Tel Phone company and HIH Insurance
ABC learning was one of the pioneer companies in Australia providing education
services to the children. It was also being listed in the Australian Stock Exchange and its market
capitalization at that time was around AUD 2.5 billion in 2006. The company went into
liquidation on account of failing to repay the subprime mortgage loan and thus overwhelming the
company. The auditors had to hold the signing of the audit report of the company for that year
citing the need to recast and reinstate the reported profits of the previous year. Amidst all this, it
went into liquidation in the year 2008 and was bought back by Goodyear Early Learning in
December 2009 which now operated in 650 centress across Asutralia (Sonu, et al., 2017).
The backdrop behind all this is the major acquisition and child care support which the company
started to give in he early 2000’s and the major increase in the number of centres as compared to
its major competitors who had barely 100 centres across the world. Will all these acquisitions,
they not only capitalised and improved the markets share in the UK but also captured 1% of the
markets in the US as well. It grew rapiding and aggressively negotiating to deal with Australia’s
largest employers like Department of Defence. It was highly profitable in 2004 -05 and 2005-06
giving the net profits percentage of 17% and 18% respectively on the sales revenue of $292.7
Milliion and $219.8 Million. In all this process, it kept on increasing its debt triggering a decline
in the share prices by 42% in 2007. Despite all this, it fell into receivership on account of
increase in the debt servicing obligations due to which the auditor could not sign the financial
statements. Even though the then federal government injected funds in the company, but it was
still delisted from S&P and Australian Stock exchange on account of creditors voluntary winding
up in this case.
The collapse of the ABC learning was mainly due to the lack of corporate governance in the
company just 9 months prior to its liquidation. In the backdrop, there was no control whatsoever
on the purchases being done by the group on account of the acquisitions (Jones, 2017). This was
just a rubber and stamo exercise as mentioned by the chief lawyer of the ABC company. The
court also mentioned that the major reason behind all this was the differences in valuation of the
major acquisitions being done to the tune of multi million dollars. It grew amazing and big to
have 2300 child care centres all over the company implying the market concerns on the reporting
and proper disclosure of these acquisitions. It was one of the major internal control failures on
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account of the company leading to weak corporate governance. It has no investment review
committee as is required to see the major acquisitions and sale in the course of the business. It
just had an odd “management group approval” which were doing nothing except the redundant
rubber stanmp exercise. One of the reports also showed up that an independent valuation of one
of the acquired companies 123 careers came to roughly at around $ 30 Mn but it was bought for
a huge amount of $ 70 Mn which was evident of the overvaluation. In this way, there were a
number of acquisitions which was being made by the ABC learning without proper due
deligence and proper valuation of the business to be acquired.
One tel Phone company was one of the major telecommunication giants in Australia
having over 2 Million customers across 8 nations. This again was the victim of the weak internal
control and non competiting management which gave wrong forecasting to the shareholders and
the market in terms of the revenue and the profits for the future years. It earned huge profits
during the past 4 years ranging from 40% to 1275 as basis this the revenue estimate was
expected to be increased by around 10 times in 2010 but the same could not happen inspite of the
huge growth by the company. This was because the company had invested huge amounts in the
spectrum licenses which als included public funding of $ 340 Mn. Moreover, inspite of the cash
crunch, the company kept on paying its director Rich & Keeling hefty amounts as salary and
bonus in 2000. This had a major impact on the company resulting into losses of $ 291 Mn and
soon thereafter share prices fell miserably to $1. All this followed the company to close its
opeartions and sell the assets to pay off its debts. Also, huge number of employees were laid off.
This was an example where the internal control system, the ethics and governance of the
company was challenged terribly and the information was not validated before flowing to the
market. Not only the sales, but the receivables, the accruals, the estimated profit figures based on
which the investments were made were all misstated. This called a early indication from the
auditors of the company but the auditors also kept quiet, reflecting low audit quality.
The 3rd company in the list is HIH insurance company which was the 2nd largest insurance
company in Australia at that time and got liquidated in 2001 with an imposing figure of loss
measuring $ 5.3 billion. This is still known to be the worst ever corpoarate collapse in the history
of Australia. All the dues and debts in HIH company is majorly attributable to the incorrect and
overstated pricing of the mergers and acquisitions done by the company in early 2000’s. It took
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over FAI insurance company and many others and accounted them at a very aggressive intent of
accounting. Inspite of suffering the losses and cash crunch, the company continued to pay a huge
amount as compete fee or severance fee to its CEO just before the close of the company. It was
found that liabilities and reserves were unstated in acquisition accounting like in CE Health
International and wrong figures were quoted to the stakeholders in terms of the net assets and
liabilities held by the company without correct disclosures. It was not only non compliant with
the corporate governance laws but also the ethics of the business and thus went into serious
losses in 2001, as a result of which the company had to liquidate.
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Conclusion
We see that the company went into liquidation owning to a lot of factors. There were several
reasons that had led to this and the management of the company was to be held liable for the
same. The books of accounts of the company wree not audited properly which shows that how
important it is for the auditor to take a valid stand. The liquidation could have been prevented
had the management taken a proper stand in this matter. If the management of the company did
not influence the opinion of the auditor, and showed huge revenues in its financial statements
which were actually from loss making units, the company would have been saved. When the new
auditor took over, they saw that their opinion regarding the financials of the company were
entirely different from those of the previous auditors. This led to internal probe into the matter
and when the auditors asked the management of the company to rectify the mistakes, the
management refused to do the same. This attitude of the management eventually led to the
liquidation of the company and that had also put a big question mark on other companies in this
sector (Grenier, 2017).
The overall scale of profitability of the liquidated company was much more than its peers, this
raised aquestion on the validation of the accounts. There were a lot of assumptions that the
company had done that showed that the books were not maintained ethically. The one lesson that
can be learnt form the downfall of the company is that we should try to maintain ethical practices
as much as possible and should never go for falsification of the records. If the company in any
way frauds, it is the responsibility of the auditor to look into the matter and comment on the
same. The audit opinion must be unbiased and should not be influenced by the company or its
peers. In the given case, the previous auditor pitcher plant worked as per the suggestions of the
management and that had affected the overall audit report which was proved to be tampered and
showed a wrong impression about the company accounts (Bae, 2017).
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Recomendations
There are various ways by which the companies acn avoid getting liquidated. Going concern is
one of the most important accounting assumption and it is important that the companies follow
the same. There are several laws stated that governs the liquidation policies of the companie
around the world. These liquidation policies helps provide a basis and several procedures that
will help the companies in the liquidation process and will also protect the interest of the
stakeholders who are dependant on the company. They are the biggest affected party because of
the entire downfall, they had invested in the company in the pursuit of getting good returns and
than if the company liquidates they face huge losses. So it is important that all the laws must be
followed, liquidators must be appointed nad all the investors who ahd invested in the company
should get their basic dues in return of the same. Thus this analsysis of the ABC learning
company helps us in developing a stand over the matter of liquidation. It provides a list of things
that the management should not do in order to avoid the same. This helps in the global evaluation
and development of the companies and also there has been changes in the liquidation laws that
has made the overall process less complicated (DeZoort & Harrison, 2016).
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Refrences
Bae, S., 2017. The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From
Korea. Journal of Applied Business Research, 33(1), pp. 153-172.
DeZoort, F. & Harrison, P., 2016. Understanding Auditors sense of Responsibility for detecting fraud
within organization. Journal of Business Ethics, pp. 1-18.
Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal
of Accounting Education, Volume 38, pp. 37-49.
Grenier, J., 2017. Encouraging Professional Skepticism in the Industry Specialization Era. Journal of
Business Ethics, 142(2), pp. 241-256.
Jones, P., 2017. Statistical Sampling and Risk Analysis in Auditing. NY: Routledge.
Knechel, W. & Salterio, S., 2016. Auditing:Assurance and Risk. fourth ed. New York: Routledge.
Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good
Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.
Sonu, C., Ahn, H. & Choi, A., 2017. Audit fee pressure and audit risk: evidence from the financial crisis of
2008. Asia-Pacific Journal of Accounting & Economics , 24(1-2), pp. 127-144.
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