Financial Accounting Case Study: Analysis of Corporate Downfalls

This case study provides an analysis of the corporate liquidations of HIH Insurance, OneTel, and ABC Learning in Australia, highlighting the importance of strong audit policies and corporate governance. The report examines the factors contributing to the downfall of each organization, including rapid expansion, overestimation of assets, weak risk management, unethical practices, and failures in financial reporting and internal controls. It emphasizes the critical role of the Board of Directors in ensuring ethical conduct, effective oversight of acquisitions and finances, and adherence to corporate governance principles. The study concludes that a robust corporate governance model, supported by strong management, is essential for preventing fraud and safeguarding stakeholder interests, and recommends that regulatory bodies prioritize the implementation of such models to mitigate the risks associated with corporate failures.

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FINANCIAL ACCOUNTING

Liquidation
Executive Summary
The downfall and failure of organizations in Australia proves to be an eye opener for other
organizations and a teaching lesson. The downfall of HIH, OneTel, ABC learning clearly
indicates the need for strong audit policy and corporate governance. In this report, the major
emphasis is on these three organizations. The downfall of all the three organization has
studied and discussed in the report. As per the report the weak areas has been in the process
of corporate governance and weak management.
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Contents
Introduction...........................................................................................................................................3
Liquidation............................................................................................................................................3
 ABC downfall................................................................................................................................3
 HIH Downfall................................................................................................................................4
 OneTel Downfall...........................................................................................................................5
Recommendation...................................................................................................................................6
Conclusion.............................................................................................................................................8
References.............................................................................................................................................9
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Introduction
The foundation of ABC Learning has held in 1988 and by the year 2000, it had more than 30
branches. ABC Learning developed from one seedling to a huge tree after being enlisted in
2001. In Australia, it had around 660 centers while 2238 centers all over in United States,
United Kingdom, and Australia. As per CPA (2012) there were various reasons behind the
company’s failure out of which the madness for ruthless extension and accession were the
main ones. Also, the recorded assets and goodwill were roughly overestimated which resulted
in issues related to accounting. The auditors also faced difference of opinions. Since 2007 the
company was largely indebted to an extent that it had to rearrange finances with the bank
CPA (2012). Repayment of long-term loans in the short term also crashed the cash flows.
Because of being subjected to unethical operations in financial aspects was highlighted the
value of shares also fell down suddenly. Finally, as a result of all this, the company wounded
up.
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 ABC downfall
ABC, the giant in childcare centre galloped to a strong and promising start however, could
not sustain in the market owing to various factors. Matter of improper management together
with lack of vision led to the downfall. Improper management and lack of proper risk
management technique created the downfall (Kruger, 2009).
ABC Learning stood tall and expanded in the atmosphere that was challenging and
competitive at the same time. This accounted for the enormous growth of the company in a
short period of time. Being the first corporate daycare and childcare center in Australia it
grew very fast over a short period of time. It also witnessed 300% increment in its share price
in a time of five years from listing. A lot of factors including economic were behind the
company’s failure. A lot of improper management was seen in ABC as it focused largely on
profit-making by whatever means possible. There was a lot of complaint with regards to poor
quality and inefficient personnel. Thus, the company started failing. As per Livne (2015),
ABC was careless about its management and its performance which resulted in a severe
setback. The company ignored mismanagement and financial troubles that were as a result of
its focus on ruthless acquisitions.
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At last in 2008, ABC Learning went through a global financial crisis that locked the
company’s destiny because of the massive troubles related to its economy and finance. As
advocated by Geoffrey et. al, (2016) the company was highly indebted and there was a lot of
loopholes in the financial information which made the company achieve a bad reputation in
public with the news of company into unethical practices. The reputation of the company was
also largely affected. The company also failed to follow rules related to corporate
governance. In order to benefit Mr. Grooves related party transactions were accepted. For the
maintenance of ABC Centres, Queensland Maintenance Services that had Mr. Grooves
relative as the Director was paid a huge sum of money. The Brisbane Basketball Team that
belonged to Mr. Grooves was also paid by ABC (CPA, 2012). The risk management
techniques and strategies were too weak. The company also failed in the corporate
governance. The company denied all the allegations regarding the transactions performed in
the personal interests of the directors or their relatives and the malpractices that buried the
faith of the investors because of failure in corporate governance (CPA, 2012).
It is ascertained that ABC transformed from a dwarf to a giant which is a miraculous and
unbelievable journey in itself. It took over twenty years to expand while just five years to fail.
It was because of the failure on the management part as it could not manage and tackle its
success (Wood, 2011). ABC lacked a strong base which made it ineffective in its operations.
The estimated vision for its growth, expansion, and acquisitions could not work because of a
weaker base. The shortcomings in its finance and accounts along with the alterations in
government policies resulted in the failure of the company that once grew like a phoenix
(Parker et. al, 2011).
 HIH Downfall
HIH Insurance was founded by Ray Williams in 1968. With the ending of the year 2000,
investors thought it to be a giant company with high reliability because of its asset base that
was estimated to be of $8.1 Billion. The company suddenly crashed by March 2001 which
shocked the Australians. The insurance liabilities and debt advantage of the company were
blamed for its downfall as per the reports from the investigations primarily (Westfield, 2003).
The company was relying on debts in huge numbers which paved for various problems
resulting in its failure majorly. As per Kaplan (2011), some acquisitions of the company
were overpriced, it lacked necessary understanding and communication of risks associated
with the business. Unethical practices, fraud, self-dealing, insider trading, greed, improper
management, falsification in reports in the company too accounted for its downfall. Immoral
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practices and improper management also devastated the company’s performance and thereby
it failed.
HIH grew fast in a decade with the formation of 200 subsidiaries and more which covered all
departments of insurance in its domestic as well as global trade operations. It started
relatively on a smaller scale. The troubles started because of the strategies related to trade
expansion. To succeed in a market that has high competition one must be able to adjust and
regulate the market share. It offered premiums at a lower rate to enter into US markets which
gained a lot of customers attention (Westfield, 2003). It landed into legal troubles because of
entering the UK market and its areas without having a complete understanding of the
associated business risks. $100 Million is the worth of FAI for which the company paid $300
Million with regards to its acquisition was a questionable bid in itself. Also, the insurance
policies were underpriced and company made no provisions for future contingencies. As per
Lapsley (2012) the company was alerted not less than a year before its failure by the actuary
advisors but the company did not bother to put more capital and opted for reinsurance that
proved dismal. This ignorance towards the advice of the advisors disrupted and troubled the
company hugely. Many related party transactions with the external auditors also came into
the picture. Few bribery cases were also highlighted (English et.al, 2010). The auditor’s
report also came into question because of such bribery and related party transactions. Thus,
all these factors and ignorance in total resulted in the failure of HIH Insurance which could
have overcome.
HIH was considered as a feeble combined entity. Weaker companies were acquired by HIH.
Its financial strength and synergies were highlighted as 1 + 1 = 3 that was completely wrong.
The loss of the shareholder's interests was going up as because of the influence of Ray
Williams, who was the CEO of the company. In the presence of him, the company could not
regulate its corporate governance as none was able to overrule his opinions.
 OneTel Downfall
OneTel ranked four in all over Australia in terms of telecommunications. Because of errors in
strategy making, unhandled growth, failing to meet expectations and inadequate pricing
policies the company crashed. The policies and procedures of accounting also failed because
it did not match with its competitors. There were serious failures in corporate governance.
The company lacked audit quality, financial reporting, internal controls, management
communications, etc.
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OneTel faced various troubles in its Financial Reporting. Ledgers, journals, accounting
reports and trial balances failed the verification and acknowledgment of various authorized
personnel. No doubt, that the Finance Director of the company hardly reviewed its books of
accounts. Less importance was given to finance and accounts by the top management of the
company and the internal control and reporting procedures lacked effectiveness. Over
acknowledgment of arrears also led to its poor earnings (Mock et. al, 2013). Thus, there was a
rapid fall in earnings. OneTel also made two impactful and considerate alterations in its
accounting policies. One of which being ignoring its intangibles in the first year and making
alterations in its policies with regards to deferred expenditures in the subsequent year. The
adaptation of non-conservative accounting policies accounted profits prior to the year 2000.
Some trade operations and expenses related to subscriber acquisition were suddenly shelved
and crossed out. This made OneTel suffer a huge loss. OneTel lacked audit quality because
the auditors gave an unprofessional verdict. The auditor’s report had serious shortcomings. It
reflected personal interests (Mock et. al, 2013). Not only this, OneTel suffered huge losses
that were kept under the wrath and it disregarded millions of expenditure. All of this was
reflected in the financial report for 1998-99 to ASC. There was a lot of cash billing issues and
customer billing concerns which impacted operating cash flows on a large scale. The
company failed to accomplish the estimated goals and results because it practiced aggressive
pricing policies and customer acquisition campaigns that were hell lot expensive (English
et.al, 2010). It was hard to sustain and accomplish the estimated goals in a neck to neck
competitive market and control the future with feasibility with such high pricing policies.
The accounting policies at OneTel lacked firmness. Also, the information in financial reports
was misleading. The investors were infused with wrong information by means of EBITDA
which was given focus by the Management Discussion and Analysis. The accrual percentages
determined by OneTel and decisions related to accounting policies were fabricated in order to
show that the company is in a positive scenario. The company concealed its low audit quality,
fabricated financial statements, poor quality of financial reporting, inadequate cash flows,
low earnings from its investors.
Recommendation
It is the duty of the company’s Board of Directors to make sure that the company is
functioning ethically and should also look after its acquisitions, accounts, finance, cash flows,
and related provisions. Fundamental and technical analysis needs to be performed before
investing in the shares of any company. Corporate governance should be given huge
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importance by the Board of Directors to ensure the goodwill of the company and build
investors interest. The company should perform ethically and in the best interests of its
people. Fabrication and misinterpretation of any information should be avoided and this is
possible when the auditor takes the responsibility and provides utility to the organization.
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Conclusion
The above discussion clearly emphasizes that the organizations need to have strong model of
corporate governance and must be backed up by the management. This helps to drives the
organization and eliminates the fraud if any. It is imperative that the regulatory body
concentrate on the implementation of strong model because downfall of such major entity is a
huge blow to the stakeholders at large. Further, corporate governance mechanism should be
strongly followed because the liquidation of big giants causes immense trouble. Hence, the
regulatory body should have regulations considering the long term view and impact.
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References
CPA. 2012 ABC learning collapse case study [online]. Available at:
https://www.cpaaustralia.com.au/professional-resources/education/abc-learning-collapse-
case-study [Accessed 3 April 2018]
English, L., Guthrie, J., Broadbent, J. and Laughlin, R. 2010 Performance audit of the
operational stage of long term partnerships for the private sector provision of public services.
Australian Accounting Review. [online]. 20(1), pp. 64-75. DOI: 10.1111/j.1835-
2561.2010.00075.x
Geoffrey D. B., Joleen K., K. K.S., and David A. W. (2016). Attracting Applicants for In-
House and Outsourced Internal Audit Positions: Views from External Auditors. Accounting
Horizons. [online]. 30(1), p.143-156. DOI: https://doi.org/10.2308/acch-51309 [Accessed 4
May 2018]
Kruger, C. 2009 Lessons to be learnt from ABC collapse [online]. Available at:
http://www.smh.com.au/business/lessons-to-be-learnt-from-abc-learnings-collapse-
20090101-78f8.html [Accessed 3 May 2018]
Livne, G. (2015) Threats to Auditor Independence and Possible Remedies [online].
Available from: http://www.financepractitioner.com/auditing-best-practice/threats-to-auditor-
independence-and-possible-remedies?full [Accessed 21 April 2018]
Mock, T. J., Bedard, J., Coram, P., Davis, S., Espahbodi, R. and Warne, R. 2013 The audit
reporting model: Current research synthesis and implications. Auditing: A Journal of
Practice and Theory. [online]. 32, pp. 323-351. DOI: https://doi.org/10.2308/ajpt-50294
Parker, L., Guthrie, J. and Linacre, S. 2011. The relationship between academic
accounting research and professional practice. Accounting , Auditing &
Accountability Journal. [online]. 24(1), pp. 5-14.
http://media.accountingeducation.com/1304/Parkeraaaj24(1).pdf
Westfield, M., 2003 HIH : The Inside Story Of Australia's Biggest Corporate Collapse
[online]. Available at: http://www.smh.com.au/articles/2003/03/14/1047583693489.html
[Accessed 3 April 2018]
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Wood, D A. 2011 The Effect of Using the Internal Audit Function as a Management Training
Ground on the External Auditor's Reliance Decision. The Accounting Review. [online]. 86(6),
pp. 34-56. DOI: https://doi.org/10.2308/accr-10136
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