Analysis of ABC Learning Centre Collapse and ASA 701 Auditing Standard

This report provides a comprehensive analysis of the collapse of ABC Learning Centre, a major childcare provider in Australia. It delves into the company's background, tracing its rapid expansion and subsequent downfall. The report identifies key reasons for the collapse, including financial accounting irregularities, such as the misvaluation of intangible assets and related-party transactions. It also examines the failures in corporate governance and the auditing flaws that contributed to the company's demise. Furthermore, the report explores the introduction of the new auditing standard ASA 701 and discusses how this standard could have potentially mitigated the issues that led to the collapse. The report highlights the importance of robust financial practices, effective corporate governance, and diligent auditing in preventing such business failures.

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COLLAPSE OF ABC LEARNING CENTRE AND THE
INTRODUCTION OF NEW AUDITING STANDARD – ASA 701
Student Name: Student ID:
9/6/2017

SYNOPSIS
EXECUTIVE SUMMARY
Through this study, each and every company will be informed as to how the company gets
collapsed within the few years of expansion and the operations. The study has been conducted on
the collapse of ABC Learning Centre. The main aim of this report is to analyze as to how the
ABC Learning centre gets collapsed within the shorter time and identifying reasons for the
sudden downfall of the company. Along with the analysis and the identification, second major
aim is to identify the role of the auditors and the management of the company in bringing the
collapse of the company. The report has then helped in understanding how new auditing standard
on Communicating the Key audit matters have come into place and developed and the ways in
which the auditing standard would have helped in making the collapse as unsuccessful. With this
consideration, the report has been prepared.
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EXECUTIVE SUMMARY................................................................................................................................ 2
INTRODUCTION............................................................................................................................................. 4
ABC LEARNING CENTRE.............................................................................................................................. 5
BACKGROUND OF COMPANY..........................................................................................................................5
REASONS FOR COLLAPSE.................................................................................................................................6
Financial Accounting Mess..................................................................................................................................6
Failure of the Corporate Governance..................................................................................................................7
Auditing Flaw...................................................................................................................................................... 8
CLEAN REPORT ISSUED............................................................................................................................................8
NEW AUDITING STANDARD – ASA 701....................................................................................................... 9
AUDITNING STANDARD REQUIREMENTS.................................................................................................................9
KEY AUDIT MATTERS FOR ABC LEARNING.............................................................................................................10
 Accounting treatment of the Intangible Assets.........................................................................................10
 Rapid Expansion........................................................................................................................................10
CONCLUSION................................................................................................................................................ 10
RECOMMENDATION................................................................................................................................... 11
REFERENCES................................................................................................................................................ 11
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INTRODUCTION
The title of the report is the Collapse of ABC Learning Centre and the introduction of new
auditing standard ASA 701. The title has itself described the aim of the study. In the years of
21st century, many companies have went into liquidation due to the accounting frauds made with
the connivance of the auditor and the management frauds which shows the ineffective working
and functioning of the government. The major of these companies were – Lehman Brothers, HIH
Insurance, One Tel Phone Company, Cash Converters and ABC Learning Centre. These
collapses have led the global financial crisis across the World. In the report, the discussion will
be limited only to the collapse of the ABC Learning Centre. These collapses has led the
government of the country of Australia to take such measures so as to avoid the accounting and
management frauds and accordingly in the year of 2015, the government has issued the new
auditing standard number 701 on Communicating the Key Audit Matters in the Independent
Auditors Report. This standard has increased the role of the auditors of the company in
disclosing all the relevant information about the company like accounting policies, methods and
similar information. Simultaneously the role of the management of the company has also been
increased in relation to presenting the actual position to the auditors of the company and the
stakeholders. It has also been detailed as to how the collapse would not have happened in case
the new auditing standard has come into place earlier. With this consideration, the report has
been prepared with appropriate headings and sub headings. .
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ABC LEARNING CENTRE
BACKGROUND OF COMPANY
ABC Learning Centre Limited is the company based in the country of Australia and is regarded
as one of the largest company which is providing the child care facilities across different
countries across the globe. The company has first founded in the year of nineteen hundred and
eighty eight in the country of Australia. It has then expanded its operations throughout Australia,
United States and New Zealand. In the year two thousand and one, being the March month, the
company has been listed on the Australian Stock Exchange and since then the company has
experienced immediate rise and shown the tremendous growth for the continuous period of seven
years.
The main function of the company is to provide the child care services to the children up to the
age of not more than five years. It means children up to the preschool age. Most of the centre of
the company provides the after school and before school care services including the care for
vacations also. In the child care centre, the company provided the games for each of the different
age groups, imparting the beginning education through the series of different activities and
supply of hygienic food for the children at the child care centre. Apart from the business of
providing the child care services, the company also possess the institute namely National
Institute of Early Childhood Education. The basic premise of having the institution is to provide
the training facilities to the staff located at different centre for child care. This institute has been
established by the company in the year of nineteen hundred and ninety five. It shows that the
company from the beginning is in the wave of expanding its operations as the institute has been
opened within the period of seven years of incorporation of the company. The company has
started its operations in different fields lie in the year of two thousand and five; the company has
acquired Judius Propriety Limited to enter into the primary education area. But the time has
changed and in the year of 2008 the company has greatly collapsed.
.
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REASONS FOR COLLAPSE
The ABC Learning Centre was at the peak during the twenty first century and has been able to
capture the 20% of the market share on its own in the country of Australia. The company has
made noticeable achievements since its formation. The company has collapsed not suddenly but
slowly, as the root of collapsing has taken time to step into at the end and brought out all the
discrepancies and the frauds that the company has entered into in the earlier years (Bajada and
Trayler, 2010). The following are the reasons as to why the company has collapsed and has gone
for receivership:-
Financial Accounting Mess – The first and foremost reason for the collapse is the treatment of
every transaction while recording in the books of accounts. The company has not treated the
accounting part seriously and has more focused on the financial expansion across the globe.
There are two major accounting frauds that have come across by the company during its period
of survival.
The first major accounting fraud is related to the accounting treatment of the licenses
acquired by the company during the period its survival. Licenses are recognized as the
intangible assets as per the provisions of the Australian Accounting Standard 138. It is
because these are identifiable assets, does not have any form or any type of the physical
substance but carries the cost which can be easily measured in the real terms. As per the
provisions of the Australian Accounting Standard 138, the intangibles are required to be
accounted on the basis of either of the two models. One is Cost model and the other one
is revaluation model. As per the cost model, the intangible assets is recognized at the cost
incurred to acquire that asset and as per the revaluation model, the intangible asset is
recognized at the revalued figure which is equivalent to the market or fair value of the
intangible asset at that point of time. In the given case, though the company has been
following the provisions of the accounting standard 138 and valuing the intangible asset
at the revalued figure, but the company has taken the undue advantage of the provisions
and engaged in revaluing the intangible assets at the value higher than the value given by
the market or the market valuer. The revaluation has been made to an extent which has
shown that the intangible assets of the company counts as 72% to 81% approximately of
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the total assets as shown under the Assets side of the Balance sheet (McRobert, 2009).
Further as per the AASB 138, the company can revalue its intangibles only in certain
circumstances and only if the intangibles have the material impact on the financial
position and the financial performance of the company. As these licenses are not material
to the business of the company, therefore it has been declared by the Australian Securities
and Investment Commission that the company has been engaged in the malpractices and
the financial statements of the company is suffered from the severe material misstatement
and financial discrepancies (Thomson, 2008).
The second major accounting fraud is related party transaction that the company has
entered into during the period of its operations. Eddy Grooves, then owner of the
company, has entered into the number of related party transactions with the company like
Austock through which the company has made the transaction of $27 million. Austock is
the broking firm in which the major shares are held by Mr. Grooves. Secondly, the
company has paid $74 million to Queensland Maintenance Services in which Mr.
Groove’s brother in law is the owner (Sumsion, 2012). Another numerous transactions
have been happened with various related companies.
Failure of the Corporate Governance – In the plethora of articles and the newspapers it has been
mentioned on daily basis that the major reason for the failure of the company has been failure of
the operations conducted by the owner of the company – Mr. Eddy Grooves. He has worked in
accordance to the nature and size of the business and has worked at his discretion. Corporate
governance is referred to as the manner of governing the operations and functions of the
company with reference to the principles, policies and strategies of the company. These have
listed as follows:
Mr. Grooves has been engaged in the expansion of the business irrespective of the fact
that the company has been losing its market share, company’s accounting is being done at
the comfort level of the employees working there, the deterioration of the services
provided to the children of the child care facilities and so on (Penn, 2011).
The company has entered into the related party transactions and in the annual report, the
company has mentioned that company has not entered into any related party transactions
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and the company has no interest in the business of other company. This statement has
showed that the company the poor corporate governance and has bad corporate
governance practices.
The third failure has been due to the change in the government policy. Since the year of
1991, the law was that the government will fund the child care organization only if these
are the non - profit making organizations. But the year of 1991 has bought the change and
allows the grant to every organization engaged in the child care facilities whether it is the
profit making organization or the not for profit making organization. Since then the new
companies has started entering into the market. The company has not taken this change
into consideration and rather keeps on expansion of the company and acquires the
different child care centre like Future One, Peppercorn Management and Kids Campus
and have extra over their net worth.
Auditing Flaw- Despite of the above factors, the auditors of the company were in the wave of
issuing clean audit report. They have not issued any qualifying report for the adhoc revaluation
of the intangibles or the poor corporate governance practices or the disclosure in relation to the
going concern assumption of the business, etc. At the end of the year 2007 when the auditors
have been changed from the current auditor to the Ernst and Young, the latter refused to sign off
the balance sheet unless the previous year figures are reinstated and regrouped as per the current
year financial statement and have disclosed the fraud of valuation of the intangibles and thereby
increasing the profit.
The above factors state how the company’s business has been collapsed.
CLEAN REPORT ISSUED
In the case of every collapse of the business whether it is HIH, One Tel or ABC Learning, the
auditors have played the major role. The auditors are required to authenticate the financial
statements of the company and have to give report thereon whether the financial statements
represents the true and fair view of the financial statements of the company or not (Kachelmeier,
Schmidt and Valentine, 2016). In the given case, the auditors have been issuing the clean report
because of the following reasons:
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The auditors have the wrong view that the company’s accounting policy for the
intangible assets are correct and is as per the provisions of the accounting standard 138.
The auditors have placed excessive reliance on the preparation of the books of accounts
of the company.
The auditors have received the higher remuneration in lieu of taking the risk of signing
off the balance sheet.
The auditors have not exercised their professional due care while auditing the books of
accounts as they have never mentioned that the intangibles counts as 72% of the total
assets of the company and other similar discrepancies.
NEW AUDITING STANDARD – ASA 701
Auditor plays the very important role in the disclosure of the financial information to the
stakeholders and other shareholders of the company. It is presumed that the audited financial
statements provided to the users of the financial statements will be free from any type of
discrepancies and errors and will represent the true and fair view of the results of the company.
After having the consecutive collapses of business across the world and having the look of the
declined role of the auditors, the government has issued the new auditing standard ASA 701 in
the year of 2015 having the title as communicating the Key Audit Matters in the Independent
Auditors Report. This has given the right to the investors to take the legal action against the
auditors in case incorrect information is furnished (AASB, 2015).
AUDITNING STANDARD REQUIREMENTS
The major meaning and the content of this standard is the aim for which the standard has been
placed for the application by the auditors of the company and ways through which the key audit
matters noticed during the conduct of audit be reported in auditor’s report so as to make the users
of the financial statements understandable about any kind of discrepancies prevailing in the
company (McKee, 2015). The term key audit matters is defined as the areas which is related to
the significant high risk and communicating the key audit matters is defined as the disclosure of
the risky areas in the audit report of the company annexed with the financial statements of the
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company. The key audit matters are indentified by the auditor after consider the following
aspects:
Areas where there are chances of having the high risk as defined as per ISA 315
Areas where the judgment of the management has come into place and which requires the
urgent consideration by the auditor of the company.
Areas where the major transactions have occurred and which can have the material
impact on the audit being conducted by the auditor of the company (Cordos and Fülöpa,
2015).
KEY AUDIT MATTERS FOR ABC LEARNING
If the new auditing standard has come into force before the year of the collapse of the company,
then the collapse would not have happened in the history of the industries operating at various
countries across the globe. The annual report of the company would have included the following
key audit matters in the audit report, forming part of the annual report, in case the new auditing
Accounting treatment of the Intangible Assets – The audit report should have contain
that the company has followed the revaluation model on irregular basis and have violated
the provisions of the Accounting standard 138 on Intangible Assets.
Rapid Expansion – The audit report should have contained that with the process of the
rapid expansion, the company will face the problem of going concern in the future and
hence the financial statements cannot be said as prepared according to the going concern
assumption (Masytoh, 2010).
CONCLUSION
The auditor is the key person between the company and the stakeholders of the company. On the
basis of the auditor report only the investors invest their funds in the company and other similar
stakeholders participate in the business of the company. The above analysis helps in concluding
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that the auditors have helped the company in manipulating the accounts of the company and has
provided the misleading financial information to the stakeholders.
RECOMMENDATION
The report has recommended that the auditor shall perform his work with due professional care.
The government shall actively take part in the formation and application of the new policies for
the benefit of the stakeholders of the company.
REFERENCES
AASB, (2015), “ASA 701, Communicating Key Audit Matters in the Independents Auditors
report”, available on http://www.auasb.gov.au/admin/file/content102/c3/ASA_701_2015.pdf
(accessed at 06/09/2017).
Bajada, C. and Trayler, R., 2010. How Australia Survived the Global Financial Crisis. The
Financial and Economic Crises: An International Perspective, Edward Elgar: Cheltenham, UK
and Northampton, USA, pp.139-154.
Cordos, G.S. and Fülöpa, M.T., 2015. Understanding audit reporting changes: introduction of
Key Audit Matters. Accounting and Management Information Systems, 14(1), p.128.
Kachelmeier, S.J., Schmidt, J.J. and Valentine, K., 2016. The disclaimer effect of disclosing
critical audit matters in the auditor’s report.
Masytoh O, (2010), “The analysis of determinants of Going Concern Audit Report”, Journal of
Modern Accounting and Auditing, Vol 6(4), pp 27-36.
McRobert, A., 2009. ABC Learning Centres Limited-did the annual reports give enough
warning?. JASSA, (1), p.14
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McKee, D., 2015. New external audit report standards are game changing. Governance
Directions, 67(4), p.222.
Penn, H., (2011), Gambling on the market: The role of for-profit provision in early childhood
education and care- Journal of Early Childhood Research, 9(2), pp.150-161.
Sumsion, J., 2012. ABC Learning and Australian early education and care: a retrospective ethical
audit of a radical experiment. Childcare markets local and global: can they deliver an equitable
service, pp.209-225.
Thomson, J., (2008), “Five lessons from the Spectacular fall of Eddy Grooves”, available at
http://www.smartcompany.com.au/finance/five-lessons-from-the-spectacular-fall-of-eddy-
grroves.html accessed on 06/09/2017.
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