Case Study Analysis of Corporate Governance Failures

The assignment content discusses the collapse of three companies - ABC Learning, HIH Insurance, and One Tel. The main reasons for their collapse are ineffective corporate governance policies, improper financial risk management, and ethical issues. These companies failed to comply with accounting regulations, adopted incorrect accounting methods, and engaged in fraudulent activities. As a result, they faced significant financial losses, leading to their eventual liquidation. The summary also provides recommendations for business organizations, emphasizing the importance of effective corporate governance, compliance with accounting regulations, and adherence to ethical codes.

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

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Executive Summary
The main aim of this report is to investigate into the reasons behind the collapse of three of the
major Australian companies; they are ABC Learning, HIH Insurance and One Tel. Various
stages of the report shows the reasons behind the collapse and corporate governance failure of
these three companies. In addition, the ethical issues are also discussed behind the collapse of
these three companies.

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Table of Contents
Introduction......................................................................................................................................3
Overview of the Companies............................................................................................................3
HIH Insurance..............................................................................................................................3
One Tel........................................................................................................................................3
ABC Learning..............................................................................................................................4
Reasons for Winding up and Failure of Corporate Governance......................................................4
HIH Insurance..............................................................................................................................4
One Tel........................................................................................................................................4
ABC Learning..............................................................................................................................5
Ethical Issues...................................................................................................................................5
HIH Insurance..............................................................................................................................5
One Tel........................................................................................................................................6
ABC Learning..............................................................................................................................6
Conclusion.......................................................................................................................................6
Recommendations............................................................................................................................6

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Introduction
Most of the people all over the world know the process of liquidations as another name of
winding up of businesses. Liquidations refer to the process to wind up all the operations of the
businesses (Hanrahan, Ramsay and Stapledon, 2013). In this process, liquidators recognize the
assets and liabilities of the companies; and the obligations of the creditors wither fully settled or
they are adjusted against assts of the companies. It can be seen that the board of directors are the
main operators of the businesses as they are the central part of the company’s governing body.
They have the power to take major business decisions and they take all the business decisions by
considering the interest of all the stakeholders of the companies like shareholders, customers,
employees, investors and others. Effective decision-making process ensures the growth along
with the long run of the companies (Singh, 2015).
There is a positive connection between effective business operations and corporate
governance of the companies. In every organization, some principles, guidelines and provisions
ensure the performance effectiveness of the business organizations. It is the failure of the
business organizations in the field of corporate governance in case they fail to comply with the
guiding principles of the companies (Xavier 2012). This particular report takes an honest attempt
to discover the major reasons of the winding up of the business operations of three of the major
Australian companies; they are ABC Learning, HIH Insurance and One Tel. The major financial,
corporate governance and ethical reasons are discussed below:
Overview of the Companies
HIH Insurance
In the initial years, HIH Insurance was one of the major insurance companies when they
started their business operations. From the period to 1997 to 1998, HIH Winterthur acquired
large numbers of companies all over Australia and all over the world. HIH Insurance got ASX
(Australian Stock Exchange) listed in the financial year 1992. In 1995, an insurance company of
Switzerland bought all the stake of HIH Winterthur and the name of the company changed to
HIH Insurance. This particular deal included the business operations of Colonial Ltd General
Insurance in Australia and New Zealand. As per the estimations of the liquidators, the total
amount of loss of HIH Insurance was $5.3 billion. Due to the investigation of the cause of the
collapse of HIH Insurance, many of the management employees of the company were convicted
and imprisoned based on different kinds of fraudulent charges. The collapse of HIH Insurance is
seen as the biggest corporate collapse of Australia (Corkery and Taylor 2012).
One Tel
Soon after the deregulation of the telecommunication industry of Australia, the inception
of One Tel can be seen in the year of 1995 as one of the major telecommunication companies in
Australia. Due to the process of deregulation, most of the Australian telecommunication
companies are under the management of liquidators. The major goal as well as objective of One
Tel was to deliver better service and quality products in order to cater to the demands of the
customers. For a short period, One Tel became the fourth largest telecommunication company in
Australia. The main initiative of the company was to develop a simple mobile phone company
that would be easy understandable to the customers. One Tel put major focus on the Australian

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residential market instead of focusing on the commercial market of Australia. It is because One
Tel wanted their customers to have full access in all types of mobile phones so that One Tel can
be beneficial (abc.net.au, 2017).
ABC Learning
In the initial years of inception, people of Australia considered ABC Learning as the
largest company in the Australian education industry. ABC Learning was listed in ASX with a
capitalization amount of approximately $2.5 billion. As a result of the subprime mortgage crisis,
ABC Learning had to face some major managerial issues as the company failed to repay their
overwhelming amount of debt. In addition, it was also the auditor’s fault as they failed to
conclude about previous year’s profit. ABC Learning established in the years of 1988 in
Queensland. From the time of establishment, ABC Learning was successful to establish more
than nine hundred centers in the regions of Australia and New Zealand by 2006. During the year
of 2006, ABC Learning made an announcement about the acquisition of United State’s second
largest child care provider for $330 million and United Kingdom’s fifth largest child care
provider, Busy Bee group. In this way, ABC Learning expanded their business in both United
States and United Kingdom with a market share of 1% (Sumsion 2012).
Reasons for Winding up and Failure of Corporate Governance
HIH Insurance
The major reasons for the winding up and corporate governance failure of HIH Insurance
are discussed below:
I. HIH Insurance made the acquisition of FAI Insurance and these deals did cost the
company a huge level of investment above the danger level. This particular aspect largely
damaged the financial condition of the company.
II. In can be seen that HIH Insurance entered into the film industry in order to diversify their
business. HIH Insurance had to face a loss of over hundred million dollars as the business
idea totally flopped (Debbage and Dickinson, 2013).
III. HIH Insurance had to face large amount of financial loss due to the natural disaster of
Florida. Due to this, the company had to take huge amount of debts that contribute to
huge loss to HIH Insurance.
IV. It can be seen that there was abrupt change in the accounting policies regarding the
compensations of the employees of the industry of California. This particular aspect
resulted in a huge monetary loss for the company.
V. According to the provisional liquidators of the company, HIH Insurance had to face a
loss of $800 million in a time span of six months. Some of the major reasons behind this
loss are quick expansion, complex business structure and others (Tricker and Tricker,
2015).
One Tel
The major reasons for the winding up and corporate governance failure of One Tel are
discussed below:
I. It can be seen that One Tel constantly reported low amount of profit for a constant period
and deferred its business expenses for three years. Moreover, it can also been seen that

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the adopted accounting principles were against the accounting standards and policies of
bookkeeping. These were some of the major reasons for the collapse of One Tel.
II. In the year of 2000, One Tel reported a major loss of $291 million. Due to this massive
loss, the share prices of the company fell below $1.
III. It has been seen that at the end of 2001 April, One Tel fell short in the required capital for
their business operations. After that, the director of the company, Rodney Adler sold 5
million shares of the company for an amount of $2.5 million. After this period, it has
been seen that One Tel became insolvent and they started the process to lay off their
workforce of 1400 employees (Meidl, 2014).
IV. The liquidator of One Tel demanded clarification on a report that included a
compensation of $92 million for the directors of the company. In addition, it needs to be
mentioned that the directors of One Tel did not properly exercise their power regarding
appropriate due care and diligence.
V. One of the major reasons behind the collapse of One Tel is that the company used to
charge one seventh from their customers as they were determined that they would recover
the cost of purchase in near future. However, this did not happened as per the company.
As a result of this, One Tel had to deal with some of the major financial problems like
low cash flow that contributed to the winding up of the company (Meidl, 2014).
ABC Learning
The major reasons for the winding up and corporate governance failure of ABC Learning
are discussed below:
I. In the second half of the year 2007, ABC Learning suffered a dip in the profit of 42 %
and the amount was $37.1 million. In addition, massive rise in the debts if ABC Learning
can be seen for $1.8 billion and the share price of the company decreased massively
(Sumsion, 2012).
II. It has been seen that there was 43% fall in share prices to $2.15 and the share trading
prices was very low that was $1.15. Thus, at the end of the year, it has been seen that the
founder of ABC Learning had no option but to sell the shares of the company worth $20
million and $6 million for a combined price of $2.7 million. As the company failed to
release the details about the earning for 2007 to 2008, the trading of the company was
stopped.
III. ABC Learning had to face massive problem as the debt level of the company increased
massively. In addition, the auditors of ABC Learning failed to conclude the accounts.
IV. For the valuation of intangible assets, ABC Learning adopted the incorrect methods of
accounting. ABC Learning values the $2.4 million amount of goodwill and intangible
assets by charging only $8.4 million. It contributed towards the 42% fall in the
company’s profit (Brennan 2014).
Ethical Issues
HIH Insurance
I. HIH Insurance did the acquisition of FAI Insurance without obtaining the approval from
the board of directors of the company. This is a major evidence for poor corporate
governance of HIH Insurance.

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II. HIH Insurance had ineffective decision-making process as HIH Insurance entered into
the business ventures that consisted of high risk. Thus, the company had to face financial
losses.
III. It has been seen that the directors of HIH Insurance did not carry their work as per due
diligence and frequents changes were made in managerial position.
IV. Mr. William was largely responsible for inadequate management as the profit of the
company was overstated wrongly (Liu, Yao and Hu, 2012).
One Tel
I. It has been seen that One Tel did not comply with the ethical code of conduct of the
businesses. In addition, the company also did not follow the accurate accounting
principles. These are major ethical breaches for One Tel.
II. As per the business operations of One Tel, it has been seen that the administration
department of the company massively failed in monitoring the financial performance of
the organization. In addition, the management of One Tel did not put attention to the
high-risk related investment areas of their business. This is a major ethical issue in the
company (Prasad, 2012).
III. One of the major ethical issues for the liquidation of One Tel was the failure of the
company in the adoption of effective pricing strategy. Due to this, One Tel had to face
loss of income along with worsen of liquidity position. From this, it can be observed that
the management of the company did not act ethically at the time of business operations.
ABC Learning
I. Improper and incorrect adoption of accounting policies was the prime reason behind the
liquidation of ABC Learning. Due to this, various fraudulent activities were spotted in the
financial statements of ABC Learning. Unethical management of bookkeeping was the
main reason of it.
II. ABC Learning failed to render proper service to their customers and this was another
major ethical issue in ABC Learning (Bianchi and Drew, 2012).
Conclusion
From the above discussion, it can be seen that there are two major reasons that are
responsible for the collapse of ABC Learning, HIH Insurance and One Tel; they are ineffective
corporate governance policy and improper financial risk management. All the issues in these
three companies are related with mostly these two aspects. Apart from these issues, there is
another major issue related to the collapse of these three companies and that is ethical issue.
Some of the major ethical issues in these three companies are non-compliance with accounting
regulations, accounting fraudulent and others.
Recommendations
Based on the above discussion, some recommendations are provided below:
 It is necessary for the business organizations to implement effective corporate
governance policies for the smooth running of the business operations.
 It is necessary for the companies to comply with all the accounting regulations so that the
financial risk factors of the companies can be effectively managed.

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 It is crucial for the companies to comply with all the ethical code of conducts of the
businesses so that any kind of ethical issues can be prevented.

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References
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