Financial Analysis of Liquidations: ACC70, Australian Companies

This report provides a comprehensive analysis of the liquidations of three prominent Australian companies: ABC Learning, One.Tel, and HIH Insurance. It delves into the background of each company, outlining their respective business models and key events leading up to their collapse. The report meticulously examines the factors contributing to their financial distress, including poor accounting practices, governance failures, ethical breaches, and unsustainable expansion strategies. It explores the role of liabilities in each case, assessing whether they were a primary driver of the liquidations. The report further investigates the ethical and governance issues that exacerbated the financial stress of each company, highlighting instances of mismanagement, fraud, and lack of transparency. Finally, the report concludes by summarizing the key findings and emphasizing the interconnectedness of financial, ethical, and governance failures in the downfall of these organizations.

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ACCOUNTING FINANCIAL ACC70
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Accounting Financial ACC70
Introduction
In the recent past, several Australian organisations were declared bankrupt due to failure to
meet their liabilities. Some of these companies include ABC Learning, One.Tel and HIH.
With these considerations, this paper aims to investigate on the major events that led to their
liquidation. The paper also aims to present analysis on whether liabilities have been the major
contributor to the companies’ liquidation.
Background of the Three Companies
The ABC learning was one of the Australian organizations. It was established in 1988 in
Ashgrove, Queensland and rapidly expanded its operations reaching around 43 childcare
centres by the end of June 2001 (Rush & Downie, 2006). The company was listed in
Australian Security Exchange in 2006 with a market capitalization of around $2.5 billion. It
went into administrative receivership after the upshot from subprime mortgage crisis resulted
to debt repayment overwhelming the frim (Kruger 2011). In 2005, the company purchases
Learning Care Group which provided it with over 70,000 extra licensed childcare places.
The main role of ABC Learning was operation of childcare centers. In essence, it provided
childcare services for different children from six weeks old to the pre-school age. It main
objective was to make sure that every kid is loved, educated and nurtured and therefore
ensure they are given the best probable chance in their life. After a successful history of this
company back in 2008, the company had its backdrop of severe financial and debt crisis that
forced it to go into a voluntary administration receivership as on November 2008. Over this
period, 40% of its centers were declared unprofitable and its board handed ABC over to the
administrator (Rush & Downie, 2006).
On the other hand, HIH Insurance comprises of numerous distinct government-licensed
insurance organisations, including the HIH Casualty as well as the General Insurance

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Limited, CIC Insurance Limited as well as the World Marine and General Insurance Limited.
In essence, HIH Insurance Company was the Australian largest Insurance firm prior to it
liquidation on March 2001 (Buchanan, Arnold & Nail 2003). Its liquidation is the largest
collapse in the history of the country with it losses being estimated at $5.3 billion. HIH
Insurance was established in 1968 by Michael and Ray before it was acquired by British
Company CE in 1971 and then transferred to Health International Holdings in the year 1989
(Allan 2006).
Furthermore, One.Tel Phone Company was the fourth largest company in the
telecommunication sector in Australia before its collapse. The company encompassed a group
of the Australian telecommunication firms established in 1995 most of which are under
external administration by the court after liquidation. The firm was established by Brad and
Jodee. The two has ventured in unsalable and obsolete software. In addition, the two were
properly connected in contact with investors, brilliant personnel and financiers who could
assist their firm grow. One-Tel developed at a significant rate and achieved great deals within
a short period of time. During its existence, OneTel Phone Company occupied the second
position in the Australian telecommunication organization (Avison & Wilson 2002). It had
over 2 million consumers and its operations were in eight major countries. Therefore, the
collapse of this firm was a shock to the different corporates operating in Australia and across
the globe. This firm had high profile or reputable directors and was known for its effective
promotion. Nonetheless, the firm was declared bankrupt in June 2001 and since that time it
has been in the process of being settled (HIH Royal.Com 2003).
ABC Learning Collapse
In spite of this company selling off assets, it fell into receivership in 2008. Its collapse is not
just a commercial let-down but it is also a governmental policy disaster. In essence, the

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collapse was attributed by overreliance on ever-increasing stock price by the government to
assist in funding the ceaseless expansion (Kruger 2011). Further, the collapse of ABC
Learning is also linked to poor accounting, governance as well as ethical practices. In
addition, ABC Learning collapse is linked to its increased debt servicing obligation over the
years as a result of its rapid expansion internationally mainly from acquisition in UK and US.
In essence, the main reason behind ABC Learning collapse is its opaque operation. Basically,
ABC Learning business model was not properly planned, economics of different sites were
not coasted and there was improper analysis for site selections. In addition, there was no
organization hierarchy and the company was not decentralized in a proper manner (Khan
2017). This provided room for lack of transparency in ABC Learning operations.
Further, ABC Learning income statement was also inaccurate in their source of income.
Another reason for ABC Learning collapse was staffing problem. The company had relief
staff provider with whom the company had legal dispute. This childcare owed 123 careers
around $9 million worth of the bills and around $31 million compensation package for about
16,000 staffs attributing to the high level of turnover and lack of effective personnel (Kruger
2011). Another reason was the ineffectiveness of the HR department. ABC Learning lacked
human resource practices since there were no HR planning practices as recruitment and
selection, job analysis as well as proper training. Finally, practice of nepotism also attributed
to ABC Learning collapse. Basically, ABC Learning CEO practiced nepotism by including
his former brother-in-law in major expenditures as he provided refurbishment and
maintenance of childcare centers.
Collapse of One Tel
There is no specific reason as to what led to collapse of One-Tel, nonetheless, weaknesses in
the governance practices in line with internal control system, audit quality, management

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communication with board of directors, management scrutiny as well as financial report
quality could be linked to the firm downfall. In essence, the collapse of One-Tel could be as a
result of numerous aspects such failure of the management and directors to exercise
appropriate duties as in the Act of 2001, lack of internal controls as well as lack of
independence in auditing role. To start with, failure of the management to in running the firm
could have attributed to One-Tel collapse (Avison & Wilson 2002).
The company management embraced management-by-crisis technique and instead failed to
carry out forward planning. In addition, the director failed to act on behalf of shareholders’
interests, thus disregarding agency relationship. Here the management approved excessive
expansions as well as loans, failing to ensure that suitable system of audits and controls are
observed. In addition, the management failed to act honestly contravening section 180, 182
and 183 of the Act. Another reason for One-Tel collapse was the failure of the auditors to
carrying out their functions in an independent manner (News archives 2001).
HIH Insurance Collapse
Collapse of this firm is considered as the biggest or massive collapse in Australia’ insurance
organizations history. The commission examining the events that led to its collapse reported
that there was not just a sole cause of HIH liquidation but there was some methodical disaster
in every section or level of its operations (Buchanan, Arnold & Nail 2003). Some of the
events include Rodney act of obtaining cash by deception, dishonesty in discharge of Rodney
duties as well as his act of intentionally disseminating any false information. Another event
that led to failure or collapse of HIH Insurance was failure of providing properly for the
future claims as well as all other issues particularly stemmed for the issue (Allan 2006).
Covering the future claims is an important facet of any insurance firm operation.
Nevertheless, by end of HIH life, the company was in a stand where the adverse swing of

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1.7% would be sufficient to bring up the firm to be the mismanagement of the varying market
situations that increased the HIH liabilities enormously and were not at any point covered by
the tactical forecasting initiatives which could have been anticipated to engross such
variations.
The varying market situation could have caused some serious destabilization for the
company. The collapse is also attributed by its antagonistic expanded business strategies
(Bailey 2003). HIH acquired numerous firms in its final years. These expansions are said to
have brought about greater or huge liabilities in the organization than it would otherwise be
in case it took into consideration that the liabilities would be in proportion to its expansion
(HIH Royal.Com 2003). In essence, HIH appeared to have misinterpreted the level to which
additional requirements required to be completed for variations in the market, which is a key
error that if it was addressed on time it could have enabled the company to evade the
liquidation (Buchanan, Arnold & Nail 2003). In addition, HIH also entered the market that
was either overcrowded or competitive offering relatively lower insurance premium to its
customers which resulted to legal and business risks or issues.
Furthermore, it acquired some troubled insurance organization with relatively high price
within it rapid growth in 1990s with one of the controversial acquisition of around $300
million of buying FAI who in a later date became the member of the HIH’s directors.
Furthermore, HIH Insurance had numerous fundamental issues like reserve problem and
under-pricing. Besides its collapse was not only contributed by it fundamental issues and
business strategy, but was also attributed by reckless management, greed, self-dealing, false
reports and fraud. In addition, the company was also attributed by stock market manipulation
as well as disseminating false information (Allan 2006).
Ethics and Governance in Explaining ABC Learning Financial Stress

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The ABC Learning governance was poor which is associated with its current financial stress.
In addition, its act of entering into numerous related-party transactions was unethical and
damaged its reputation to different investors (Rush & Downie, 2006). ABC Learning
corporate governance has some issues which included use of the margin loans by former and
founder chief executive in investing in the firm and related party transaction with the
relatives. These practices are unethical and could attribute to financial stress in an
organization (Khan 2017). The company management also lacked proper governance practice
in considering the effect their decision could pose on the organisation culture, and employees,
leading to low quality care. There is also issue of ethics in ABC management where the
management opted to follow pre-conventional level rule in maximizing their profit instead of
being concerned on the company employees.
Ethics and Governance in Explaining One-Tel Financial Stress
One of the ethical issues that could be pointed in One-Tel scenario was failure of the auditors
to observe independence while carrying out their duties. This could result in misstatement in
the financial statements going unnoticed. There is also some issues in governance where by
the management failed to scrutinize the proportion of debts that was being used to finance the
expansion in relation to the amount of cash flow getting in after the expansion (News
archives 2001).
Ethics and Governance in Explaining HIH Financial Stress
The fact that HIH board went unchallenged while pursuing its expansion strategies is
unethical and shows that there were some disasters in governance with no actual guidance
being applied in checking whether the firm’s plan was financially sustainable or correct. In
essence, it is totally unethical for the management to fail to be cautious while pursuing the
expansion, since any organization planning to expand its operations needs to be cautious to

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ensure its liabilities are well covered during its expansion (Allan 2006). By expanding
rapidly, it shows that there was poor governance since the company had little experience and
it left no margin in entering the new market. This shows major mismanagement and unethical
during HIH major expansion. There is also some ethics issues from HIH Insurance practice
ranging from lack of independence for the non-executive directors as well as dominance of
the CEO which could have led to the company’s financial stress (Bailey 2003). Further, there
were some corporate governance practice failures which are linked with the company’s
current financial stress. These included lack of independent information resources as well as
inadequate risk management.
Conclusion
In conclusion, it is evident that massive expansion of the three firms both in Australia and
globally was the key event that resulted to their liquidation. This is based on the notion that
with the massive expansion, the companies’ debt servicing increased, resulting to increased
long-term debt obligation which was not in proportion to the total return generated from the
new expansion. Thus, in simple terms it is evident that increased level of liabilities was the
main reason behind the collapse of the three companies. Hence, there is need for the
management of such firms to take into account of the liability levels before making any
decision to expand its operations.

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References
Allan, G. (2006). The HIH collapse: A costly catalyst for reform. Deakin L. Rev., 11, 137.
Avison, D., & Wilson, D. (2002). IT failure and the collapse of One. Tel. In Information
Systems (pp. 31-46). Springer US.
Bailey B 2003, Report of the Royal Commission into HIH Insurance; Viewed at 4th
September 2017 from; http://www.aph.gov.au/library/Pubs/RN/2002-03/03rn32.htm
Buchanan, B., Arnold, T., & Nail, L. (2003). Beware of the ides of March: The demise of
HIH Insurance.
HIH Royal.Com 2003, The failure of HIH insurance. Viewed at 4th September 2017 from;
http://www.hihroyalcom.gov.au/finalreport/Front%20Matter,%20critical%20assessment
%20and%20summary.HTML#_Toc37086537
Kehl D 2001, HIH Insurance Group Collapse; Viewed at 4th September 2017
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evaluate-main-reasons-for.html
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September 2017 from; http://www.smh.com.au/business/numbers-finally-start-to-add-up-
as-operators-go-back-to-basics-20110121-19zy6.html

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News archives 2001, “One.Tel acquires new customers; Viewed at 4th September 2017
from; httn://www.egoli.com.au/newsandviews/archives/13765.html
Rush, E., & Downie, C. (2006). ABC Learning Centres. A case study.