Corporate Governance Failures and Case Studies

This assignment examines the impact of failed corporate governance on three prominent companies: HIH Insurance, One Tel Phone, and ABC Learning. It analyzes the specific management failures and ethical lapses that contributed to their downfall. The objective is to highlight the importance of robust internal controls, ethical practices, and effective audit oversight in preventing such corporate collapses. Students are expected to draw upon provided case studies and academic sources to demonstrate a comprehensive understanding of corporate governance principles and their practical implications.

EXECUTIVE SUMMARY
In the past few decades, there has been the wave of liquidation of the companies across the
globe. This liquidation of the companies has led the recession in the global market which has led
to the severe phases of unemployment, slow running of business and similar other activities. The
nig collapse was of the Lehman Brothers which has led the fear among the banking industry
across the globe. The main of this report is to understand as to why the companies have gone into
liquidation over the decades, what are the circumstances prevailing at that time, whether
management of the company has been working properly in the interest of stakeholders of the
company and similar other factors. For the purpose of the report, three companies have been
chosen namely HIH Insurance, ABC Learning and One Tel Phone and the cases have been
discussed in detail.
With this aim in consideration, the report has been prepared with different heading and sub
headings wherever necessary.
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Contents
EXECUTIVE SUMMARY.................................................................................................................................2
INTRODUCTION...........................................................................................................................................4
EVENTS THAT LED TO THE LIQUIDATION OF THE COMPANY.......................................................................5
HIH Insurance..........................................................................................................................................5
One Tel Company....................................................................................................................................5
ABC Learning...........................................................................................................................................6
ETHICS OF THE COMPANIES........................................................................................................................7
HIH Insurance..........................................................................................................................................7
One Tel Company....................................................................................................................................7
ABC Learning...........................................................................................................................................8
CORPORATE GOVERNANCE.........................................................................................................................8
HIH Insurance..........................................................................................................................................8
One Tel Company....................................................................................................................................8
ABC Learning...........................................................................................................................................9
FINANCIAL STRESS AND THE ROLE OF LIABILITIES.......................................................................................9
RECOMMENDATION....................................................................................................................................9
CONCLUSION...............................................................................................................................................9
REFERENCES..............................................................................................................................................10
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INTRODUCTION
Each and every company shall work properly and effectively and shall serve the needs of their
stakeholders. It is because the company basically survives in the market because of the
satisfaction received by the stakeholders of the company. If the stakeholders of the company are
not satisfied then the company will not be able to run in the market. If such circumstance prevails
then, after sometime, the company gets into liquidation. Similar cases have been happened in the
last few decades across the globe. In this report the main consideration has been made in the
Australian based companies and for the purpose of the report three companies has been chosen –
HIH Insurance, One Tel Phone and ABC Learning. All the three companies have been gone into
liquidation because of the different reasons.
The company shall have ethical climate as the ethics governs the behavior of the personnel
working in the organization and along with that shall have good corporate governance. These are
two considered as the major pillars for effective working of the organization. With these two
pillars and the financial information, the company’s history has been discussed.
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EVENTS THAT LED TO THE LIQUIDATION OF THE COMPANY
HIH Insurance –
Due to entrance in the high risky areas, the company has gone into the liquidation. First event
that has taken place is the acquisition of Fire and all Risk insurance company. With this
acquisition the company has incurred the considerable damage claims. Second event is that the
company has entered into the insurance of the film financing which again has resulted in the loss
of dollar hundred million in the year (O’Brien,2008).
Next event is that gradually the company has entered into the insurance from the damage caused
by natural disasters and the company has suffered the major loss from the Typhoon of Florida.
The fourth event is that due to change in the government regulations, the compensation claims of
the Workers of California have been increased, due to which the company has incurred the huge
amount of losses (Mak, Deo and Cooper, 2005 and Mirshekary, Yaftian, and Cross, 2005).
One Tel Company –
The major cause of the liquidation of the company is the financial irregularity that the company
is pursuing deliberately despite of knowing that the practice that the company has adopted is not
permissible by the companies. The company is reporting the higher revenue and deferring its
expenses over the next three years. Due to this in the future years the company has been forced
to report the huge amount of losses.
The other major financial irregularity was the company has been paying the compensation to the
key managerial personnel at the increased rates regardless of the fact that the company is
entering into the losses and the share price has been fallen to 16 cents of the Australian Dollar.
The other major event was that the company has been charging very less price from the
customers in the view that the company would be able to cover the loss and generate the profits
over the period of six months. The company has purchased the per customer bundle of Australian
dollar 350 and has charged from the customer only Australian dollar 50 in the view that the cost
will be recovered in the next six months on purchase. But the same case has not happened and
the company has run into losses. The last event was the poor quality of the audit by the audit firm
of chartered accountants as they are signing off the financial statements without looking after the
consequences along with the irresponsibility of the management of the company (Reza, 2011).
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ABC Learning
The major event which has led the company to go for liquidation is that the company has been
engaged in wrong accounting of the Licenses and other similar Intangible Assets. The company
has in actual made the revaluation of the intangibles and has increased the profit accordingly but
simultaneously has made provision of the impairment but it has been calculated without the
proper base as the impairment has not event counted as 10% of the recognized revalued cost.
While making the revaluation of the intangibles, the company has not estimated the correct
future cash flows as in the future years the company has went into the decrease of profits by 42%
as compared to the earlier year. The second major event is that the company has been making the
profits at the cost of the employees and the quality of service provided to the children at centre. It
has been done by providing the low wages and salary to their employees and providing low
quality of education and care to the children. The same fact has been argued by the community
of Child Care of New South Wales.
ETHICS OF THE COMPANIES
HIH Insurance
Two ethical issues have been identified. One is related to the Business ethics and another one is
related to ethics in compliance. The company violated the ethics in business and ethics in
compliance. Ethics in business provides that the company shall enter into such business practices
which will increase the wealth of the shareholders and the survival of the company. But the
company has violated the ethics by engaging into the more risky areas like Marine, Film
financing and the natural disasters (Lipton, 2013).
Second business ethics has been violated when the company has acquired the Fire and All Risk
Insurance Company at a premium from Rodney Adler, then director of the acquired company.
Thereafter Rodney Adler has become the Non Executive director of the company. The
acquisition has been made without the consent of the Board of Directors and without carrying
and due diligence for the same (Cheng and Seeger, 2012). This has led to the unethical practice
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in relation to the Business Expansion. It is because the said acquisition has led the company to
run in the huge losses. Simultaneously the ethics in compliance has been violated as no due
diligence has been conducted and no prior approval has been taken which has led to the default
in compliance with the provisions of Corporation Act, 2001 (UK Essays, 2013).
One Tel Company
Two ethical issues have been identified. One issue is related to ethics in accounting and second
issue is relating to ethics in business. First issue is that the company has not following the proper
method of billing. This cause is referred to as the major one for the collapse of the company.
With the introduction of the Goods and Service Tax in the year 2000, the billing of the company
remains pending for weeks and also in most of the bills the amount has been calculated wrongly
(Avison, 2012). This has led the company’s financial statements incorrect due to which the
auditors have refused to sign the financial statements. Second issue in accounting was that the
company has been deferring the expenses over their future year which has led to huge losses in
upcoming years (Brown and Caylor, 2009).
The issue is that the company has been charging the lesser amount from the customer in the view
that it will be recovered is wrong and has been considered as futile. It affects the pricing strategy
of the management of the company. It depicts that the company has not adopted ethics in
business.
ABC Learning
Two issues have been identified. One is ethics in accounting and other is ethics in services. In the
first instance the company has not followed the correct method of accounting of intangibles and
has violated the Generally Accepted Accounting Principles and also the Accounting Standards.
Second issue is that management of the company has not deliver the best services to the
customers and has received several complaints and suits from the different authorities on account
of mismanagement of the children as in 2005, one child have fled from the centre after broking
the fence.
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CORPORATE GOVERNANCE
In all the cases, corporate governance practices are very low but the same have not been reported
in the Annual Report of the company or the Corporate Governance Statement.
HIH Insurance
The basic aspect due to which the company has bad corporate governance and the poor
management is that the company fails to identify the risk that has been undertaken by the
company and the risk that is associated with the nature of business of the company which is
insurance. The first major reason for the corporate governance failure was that the dominant
roles of the chief executive officer of the company who is Mr. Ray Williams. He has
dominatingly kept all the friends and relatives on the board so that there will be no accountability
to the senior management. Through this he has then started mixing the personal funds and the
funds of the company together as the company does not have any clear policy about this. Despite
of having the policy, the matter came to the Chief executive officer and it is resolved on
discretionary basis. The second instance which shows the failure of corporate governance is the
establishment of operations in the United Kingdom. The minutes of the meeting of the board of
directors have not shown any discussion regarding the opening of office at United Kingdom and
no reference has been made with the strategy of the company. With the poor management
information system and the irregular accounting system, the company’s ability to monitor the
operations has been greatly impaired and thus depicts that low corporate governance.
The second major reason of the corporate governance failure was that the acquisition of the
business in the United States has been made without analyzing the management concern that
setting up the operations at United States will be profitable. As a result, the company has
incurred the losses of $620 million (Jiangbo, 2003).
One Tel Company
In this case, the reason for having the bad corporate governance is company’s management
strategy regarding the price of the company. The company has charged very low and making its
revenue deferred over the period of seven months (Morey, Gottesman, Baker and Godridge,
2009).
The second reason was the composition of board of directors of the company. Annual report of
the company for the year 1998, states that the board has comprised four members, out of which
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two are chief executive officer – Jodee Rich and Brad Keeling and two are non executive
directors of the company – Rodney Adler and John Greaves. All members were subject to
election except Jodee Rich which has ensured that Jodee Rich will remain the chief executive
officer of the company. In the year 1999, the board of the company has been increased to eight
members. The composition of the various committees – Audit, Remuneration and Corporate
Governance are the same. The same composition has been followed for consecutively three
years. The violation of the accounting standards has shown the inefficiency of audit committee.
As per the ASX good governance principles, there shall be clear responsibilities between the
chairman and the management of the company. In the board meetings of the company, most of
the meetings have been either chaired by Finance Director and Company Secretary of the
company and the Chief executive officer of the company. It is in total inconsistent with the ASX
governance guidelines.
The other major reason is that company fails to disclose the full particulars through the flash
report to director monthly basis. This failure has shown the inefficiency and incapability of the
board of directors of the company.
ABC Learning
Being a listed company, the company shall have the proper audit committee, remuneration
committee and the grievance committee, etc. But the company does not have the same since its
listing at the Australian Stock Exchange. Along with non existence of the committees, the
company has been entering into the investment proposals without having the proper and correct
violation and without reviewing the investments terms and conditions. The management of the
company has not even relied upon the valuation of the proposed investment made by the KPMG,
being an independent valuer of the company. For the proposed investment of 123 Centre, KPMG
has assessed the value of $30 million whereas the company has purchased the same at the value
of $70 million. It depicts that the company’s management has not exercised their skill and due
care while entering into the investment proposal.
The liabilities of the company have been the same for 2007 full year and the liabilities under the
head current liabilities has been shifted to Non Current Liabilities. It depicts that the
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management is not participating effectively in the operations of the company and thus shows the
inefficiency of the management of the company.
The corporate governance system is very low as the company is providing the child care services
by sacrificing the quality of service and thus, leads to failure of the company.
FINANCIAL STRESS AND THE ROLE OF LIABILITIES
In all the three companies, it has been observed that although the companies have run into huge
losses and expenses, but the main reason of the collapse was the bad corporate governance and
the bad functioning of the management of the company in regard to accounting function, strategy
making function, pricing function and auditing function, etc. The liabilities have been incurred
by the company only because of the aforesaid reasons. Therefore, it cannot be interpreted that the
liabilities has been the major factor that have contributed towards the liquidation of the company.
RECOMMENDATION
It is recommended to have the best management policies and practices and due professional care
shall be made before opting for any decision for the company.
CONCLUSION
The liquidation of the companies in the earlier decades has strongly hit the corporate world
across the globe. Every company after that has been putting more focus on the internal control
system and on the working of the corporate governance and has started ensuring that the
company will have good corporate governance. In all the three companies – HIH Insurance, One
Tel Phone and ABC Learning, the major reason for failure was the bad management of the
functions of the company and also the presence of the bad corporate governance and ethical
practices. To conclude, the company’s function shall be managed properly and shall have the
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good corporate governance practices and simultaneously good audit firms shall be appointed
which can figure out and disclose all the possible deviations and flaws.
REFERENCES
Avison, D. (2012): “IT Failure and the Collapse of One.Tel” in Traunmuller, R. (ed.):
Information Systems: The e-Business Challenge, Kluwer, pp 31-46.
Brown, L. and Caylor, M., 2009, ‘Corporate Governance and Firm Operating Performance’,
Review of Quantitative Finance and Accounting, 32, 2: 133-144.
Cheng S and Seeger M, (2012), “Lessons Learned from Organizational Crisis; Business Ethics
and Corporate Communication”, International Journal of Business Management, Vol. 7, No. 12,
74-86
Jiangbo X, (2003), “HIH Insurance Limited: Corporate Governance and Corporate Excesses”,
available at http://www.seiofbluemountain.com/upload /product/201010/2010jjfzh05a8.pdf
accessed on 29/08/2017.
Lipton P, (2013), “The Demise of HIH : Corporate Governance Lessons”, EY Journal, 27th, 273-
277.
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, 6, 2: 101-110.
Mirshekary, S., Yaftian, A. and Cross, D. (2005), ‘Australian Corporate Collapse: The Case of
HIH Insurance’, Journal of Financial Services Marketing, 9, 3: 249-58.
Morey, M., Gottesman, A., Baker, E., Godridge, B., 2009, ‘Does Better Corporate Governance
Result in Higher Valuations in Emerging Markets? Another Examination Using a New Data Set’,
Journal of Banking and Finance, 33, 2: 254-71.
O’Brien, N. (2008), “Williams walks free today but HIH victims continue to pay the penalty”
The Australian, p. 5.
Reza M, (2011), “The One Tel Collapse: Lessons for Corporate Governance”, Journal of
Australian Accounting Review, pp 1-28
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UK Essays. (2013), “Collapse Of HIH Insurance” available at:
https://www.ukessays.com/essays/business/collapse-of-hih-insurance.php?cref=1 Accessed 30
August 2017
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