Analysis of Accounting Standards Application in Australian Liquidation

This report provides a detailed analysis of the application of accounting standards, focusing on the liquidation of several Australian companies, including ABC Learning, HIH Insurance, and One.Tel. It examines the events that led to these companies' financial distress and eventual liquidation, highlighting factors such as lack of capital, revenue losses, and unethical practices. The report delves into the ethical and governance issues, emphasizing how violations of accounting standards and corporate social responsibility contributed to financial stress. It also explores the role of liabilities in the liquidation process, explaining how unpaid obligations can lead to a company's downfall. The report concludes by summarizing the key findings and emphasizing the importance of adhering to accounting standards and ethical business practices to ensure financial stability and prevent liquidation. The study underscores the significance of transparency, accountability, and good corporate governance in maintaining a company's long-term viability.

RUNNING HEAD: APPLICATION OF ACCOUNTING STANDARDS
Liquidation

Application of accounting standards 1
Executive summary
This report contains a detail study of well-publicised Australian companies that went into
liquidation due to their inability of paying liabilities. The first part of the report explains and
analysed the events or the situations that forces the companies to stop their functioning and
wound up their business. The second part deals with the explanation of ethics and governance
that explains the financial stress of a company. It includes the ethics violated by the
Australian companies which led them into a financial distress. The last part of the report
explains that liabilities are also a major factor in the liquidation of the company followed by a
conclusion.

Application of accounting standards 2
Contents
Introduction................................................................................................................................3
Events that led up to liquidation.................................................................................................3
ABC Learning.........................................................................................................................3
HIH Insurance.........................................................................................................................3
One.Tel...................................................................................................................................3
Ethics and Governance that explains the financial stress...........................................................3
Liabilities – Being a trouble seeker............................................................................................3
Conclusion..................................................................................................................................3
References..................................................................................................................................3

Application of accounting standards 3
Introduction
As and when a company is incorporated it is assumed that it will run for a long time as per
the going concern concept. The concept implies that the company is going to carry on a
business for forever and will not have any intention to disrupt or stop its functioning.
However, economy has its own role to play and it make companies to go through the phase of
recession, depression, boom and many more. Hence, it becomes impossible to predict the
future of an ongoing business. Due to some unfavourable conditions, it may become
insolvent and liquidate in future. However, when situations flip in unfavourable direction,
any entity tries to fix up the scenario with everything that’s under its control. But sometimes
the only solution is to close the economic activity which anyhow means liquidation. It is a
process of shutting down or bringing a business to an end and distributing all its assets and
liabilities to the claimant. It is basically an event that usually occurs when a company become
insolvent and is not able to pay its financial obligations (RAJASEKARAN, 2011).
Events that led up to liquidation
There are different companies conducting various types of business, having different market
share and geographic regions. So, for every company, there are different events which can
lead to its liquidation. In general, situations like where company has lack of capital, loss of
revenue and is making losses it usually winds up their business because they become
insolvent. Apart from these internal factors, some external point are also there. Such as
unfavourable change in the economy, global crisis and many more due to which entities find
it difficult to survive in the market and choose to get liquidate (Lee and Lee, 2010).
However, a better understanding of the events that has caused liquidation can be developed
by analysing the case studies of the Australian companies who were wounded up in the past.
Also, it is not necessary that the company who is doing well and making profits in the past

Application of accounting standards 4
will remains the same in future too. The same is been reflected in the situations of the
following Australia based companies.
ABC Learning
This was an Australia based company dealing in the business of provide children education
services. It was listed on Australian Securities Exchange and was doing well for itself in the
past. Due to high profits, the company opted the practice of cost and wage cutting which does
not prove to be right in future. This led to the financial distress and profits started declining.
ABC learning was the only player in the industry of childcare. It has its own monopoly due to
which it became liberal in its governance which resulted in escaping of a few children. As a
result of which, company faces many challenges and was also dragged down in the court of
law (Corbi, 2011). However, being financing strong it pay off all its claims but it was held
guilty by the court. Due to this, the share prices of the company dropped and profits turned
into losses. All this led to the suspension of its share trading and delisting of ABC from ASX.
On the top of that, the creditors or lenders who were unable to receive their payments argued
for liquidation and soon the same happen and company was voluntary wounded up
(Governance for Stakeholders. 2012).
HIH Insurance
It was another company which has gone through the phase of liquidation. Brought up by Ray
Williams and Michael Payne, HIH Insurance was the second largest insurance company of
Australia. It got liquidated on 15 March 2001 and its collapse is treated as the largest
corporate collapse in the history of Australia. Usually, it is considered that the entity which is
involved in an insurance business will never run out of money and will continue to operate in
the long run. But the situation got reversed in case of HIH Insurance (Mirshekary, Yaftian
and Cross, 2005). The company started crushing, when its administrative staff was caught
indulging themselves in the unethical and illegal practices. Initially it was strong on the both

Application of accounting standards 5
the ends, financially and administratively. But the situation did not remain the same and the
company started earning losses due to the inefficient management who was busy in fulfilling
their own needs instead of working for the organization (Van et. al., 2007).
On the top of that the director of HIH was proved to have a criminal background as he was
caught indulged in a criminal offence. This affected company’s goodwill to a great extent. It
got defamed and became financially weak. As a result of which, its asset balance shows a
deficit which lead to a provisional liquidation of HIH Insurance. The company was demised
with the losses totalled up to $5.3 million (Chen and Suchanecki, 2007).
One.Tel
The company was established in 1995 and was a group of telecommunication companies
operating in Australia. The company was founded by Jodee Rich and Brad Keeling and has a
high-profile family background. Before its liquidation in 2001, it was rewarded as the fourth
largest telecommunications company of Australia serving mobile phones and One.Net
services to its customers. It had a customer base of over two million and it provide its service
in almost eight countries around the world. However, the destiny played its role and the
existence of One.Tel vanished in 2001 (Semanticscholar.org. n.d.).
The company had attained many heights in its initial years which led it to start a business in
partnership with Optus, but due to some uncertainties, the partnership did not last for long
and it was ended by a mutual consent. Furthermore, the company faces financial issues when
its accounts were manipulated by the chief executive officer named Jodee Rich. The
shareholders of One.Tel were unaware about this mischief and due to such manipulation hey
had faced financial stress. Also the strategies of the company failed to a huge extent and
created a blunder. This destroys the whole company and it got liquidated on 8 June 2001
(Griffith.edu.au. 2011).

Application of accounting standards 6
Ethics and Governance that explains the financial stress
The legitimacy theory states that each and every company has to comply with the norms,
rules and regulations of the society in which they are operating. Its operations, actions and
activities are required to be correct and legal in eyes of law and should be in favour of society
or communities (Tricker and Tricker, 2014). According to this theory, anything which is
harms the society is illegitimate and unaccepted. Getting in the books of good ethics,
companies must face their legal issues properly and should work according to the law. It must
be the responsibility of the organizations to disclose their each and every activity done in
favour or against of the society. Such responsibility of disclosure is often called as Corporate
Social Responsibility. Along with this, company must have a good corporate governance,
which comes with the factors like management of the company has to perform in the best
interest of its society and shareholders, proper utilization of the resources must be there and
desired outcomes should be achieved (Hoque, 2018).
However, when a company does not follow the ethics and got involved in unethical practices,
it started facing a financial stress. Along with this, their reputation is also kept on stake and
sometimes such practices ruin everything. The same was observed in the case of above
mentioned companies. All of them were financially strong and were doing well for
themselves. But as when profits started turning into losses and ethics got eroded, the
companies started losing their existence due to high degree of financial stress (Balachandran,
2011). ABC learning’s governance was liberated to a high level which proved to be a curse
for company’s fate. The greed of earning profits went too high that the management started
playing with the lives of children. Quality got compromised, workers left unpaid and
leverages were misused. On the top of that the motive of serving best quality services got
ignored and the company resulted in making losses. This resulted in financial stress for the
company and it indicates the violation of business ethics and bad corporate governance.

Application of accounting standards 7
In case of HIH Insurance, the director was involved in a criminal activity which hindered the
reputation and financial position of the company to a great extent. He was charged for
abusing and manipulating the customers to fulfil his self-motives. Also the top management
was also accused for conducting unethical practices. All this was a sign of breach of ethics
and financial instability which eventually ended up in the liquidation of the company.
One.Tel was the huge corporate collapse as there was no transparency in its financial
accounts and operations. Also the 41% shareholders were unaware about the actual condition
of the company. On the top of that, the CEO lacked accountability and heard commenting
that, everything always appeared fine in the business. This scenario left inadequate impact on
the governance of the company and causes the chances of liquidation.
The three companies has faced a huge financial stress due to their illegal activities and
unethical operations. They did not perform in interest of the society which led them to
remove their existence from the community or society in which they operates.
Liabilities – Being a trouble seeker
There is no harm in saying that the whole concept of liquidation is based on the liabilities of
the company. The concept states one thing that when a company is failed to pay its liabilities,
whether short term or long term, it has to wind up its business. In other words, liquidation is
refer to the event which arises when a company ran out of cash and assets and is not capable
enough to meet its obligations. So it can be said that liabilities are the one which plays the
main role and the only factor which can cause the winding up of the company.
The whole scenario of liquidation revolves around on factor which is payment of liabilities.
Unpaid obligations tend to create a cause and effect of liquidation. It is like if there are no
liabilities and obligations, then there is no need to sell the assets to make payments.
Eventually there will be no winding up of the business. However, it is not true that for every

Application of accounting standards 8
liquidation, liabilities are the reason. The situation can be other way around. Such as a
business established for a purpose and got dissolved once it is completed. Some business
units are framed according to a certain time period and after the time got completed, they end
up their operations. Also there can be situation the business of a company proved to be illegal
and illegitimate which forces them to shut down their activities. So apart from liabilities,
there are many other reasons for liquidation of a company. But most of the times, it was the
unpaid liabilities which makes the companies weak and force them to get liquidate.
Conclusion
The report concludes that it is very important for the companies to properly comply with the
ethics and should have a good corporate governance in order to avoid the situation of getting
liquidated. The Australian companies that were earning profits in their initial stage of
business got wounded up due to their illegal and unethical practices. The fraud conducted on
part of management forces them to undertake a financial stress which made them insolvent. It
also states that bad governance and ethics can lead to great amount of financial stress for the
company. This make them weak on many grounds as they are not able to meet their
obligations, retain their goodwill and work in the best interest of society. As a result of which
they have to face a situation of liquidation. Also the report states that always liability is not
the sole reason for the failure of any business. It can be the other situations and factors also
which the trouble maker for the companies become.

Application of accounting standards 9
References
Balachandran, V., 2011. Corporate Governance, Ethics and social responsibility. 2nd ed. New
Delhi: PHI Learning Pvt. Ltd.
Chen, A. and Suchanecki, M., 2007. Default risk, bankruptcy procedures and the market
value of life insurance liabilities. Insurance: Mathematics and Economics, 40(2), pp.231-255.
Corbi, R.J., 2011. Applies to Australian Liquidation. American Bankruptcy Institute
Journal, 30(2), p.48.
Governance for Stakeholders. 2012. The ABC of a corporate collapse. [Online] Available at:
<http://governanceforstakeholders.com/2012/12/28/the-abc-of-a-corporate-collapse/>
[Accessed 14 May 2018].
Griffith.edu.au. 2011. The One.Tel Collapse: Lessons for Corporate Governance. [Online]
Available at:
<https://research-repository.griffith.edu.au/bitstream/handle/10072/42673/74746_1.pdf >
[Accessed 14 May 2018].
Hoque, Z., 2018. Methodological issues in accounting research. 2nd ed. United Kingdom:
Spiramus Press Ltd.
Lee, C.F. and Lee, J. eds., 2010. Handbook of quantitative finance and risk management.
London: Springer Science & Business Media.
Mirshekary, S., Yaftian, A.M. and Cross, D., 2005. Australian corporate collapse: The case of
HIH Insurance. Journal of Financial Services Marketing, 9(3), pp.249-258.
Semanticscholar.org. n.d. IT Failure and Professional Ethics: The One.Tel Case. [Online]
Available at:
<https://pdfs.semanticscholar.org/e291/7dd59fe849c2e875d86def1bab73a129cd81.pdf >
[Accessed 14 May 2018].

Application of accounting standards 10
RAJASEKARAN, V.L., 2011. Corporate Accounting. New Delhi: Pearson Education India.
Tricker, B. and Tricker, G. 2014. Business Ethics: A Stakeholder, Governance and Risk
Approach. Abingdon: Routledge.
Van Peursem, K.A., Zhou, M., Flood, T. and Buttimore, J., 2007. Three cases of corporate
fraud: an audit perspective. (Department of Accounting Working Paper Series, Number 94).
Hamilton, New Zealand: University of Waikato.