Financial Reporting and Liquidation: A Study of Australian Companies

This report provides a detailed analysis of the liquidation of three Australian companies: ABC Learning, HIH Insurance, and One.Tel. The study examines the events that led to the winding up of these companies, focusing on the role of financial reporting, business ethics, and governance. The report explores the concept of liquidation, emphasizing the importance of insolvency and the inability to meet liabilities. It delves into the specific circumstances of each company, including the subprime mortgage crisis impact on ABC Learning, unethical practices at HIH Insurance, and financial statement manipulations at One.Tel. The analysis highlights the significance of ethical conduct, adherence to theories like legitimacy, Utilitarianism, and virtue ethics, and the impact of financial stress caused by non-compliance. The report concludes that while liabilities are a major factor, compliance with business ethics is crucial for a company's survival in the market. It underscores the importance of sound financial practices, ethical governance, and responsible management in preventing financial distress and liquidation.

RUNNING HEAD: ACCOUNTING AND FINANCIAL REPORTING
liquidation

Accounting and financial reporting 1
Executive summary
The report explains a detail study of the three companies operating in Australia that went into
liquidation. The first part provides a brief introduction about liquidation and the second part
deals with the events that led to the winding up of those companies. The third part explains
some ethics and governance which once violated can bring financial stress to the company.
Fourth part and the conclusion delivers that liability is the main factor, not the only one, in
the shutting down process of an organization. Conclusion consists of the findings of the study
which stated that compliance with business ethics is very important for the companies to
survive in the market.

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Contents
Introduction...........................................................................................................................................3
Events leading to liquidation.................................................................................................................3
ABC Learning...................................................................................................................................4
HIH Insurance...................................................................................................................................4
One.Tel..............................................................................................................................................5
Ethics and governance - explaining financial stress...............................................................................6
Liabilities – A major contributing factor to liquidation.........................................................................8
Conclusion.............................................................................................................................................8
References...........................................................................................................................................10

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Introduction
Liquidation is the process of closing down a business and distributing all its assets to the
claimants. It is that situation which occurs when a company becomes insolvent and is not
capable enough of paying its liabilities. Basically it ran out of cash and have insufficient
funds to pay off its obligations. At time of liquidation, all the assets remain are used to pay
the creditors, lenders and shareholders as per their priorities (RAJASEKARAN, 2011).
However, it is always assumed that a company will be a going concern which means it will
continue to operate for a long run in future. It is assumed that it will remain forever and there
is no intention to stop their operations. But the assumption sometimes proved to be wrong as
economy has its own factors to play. Situations like recession, depression, global crisis and
many more are prove to be unfavourable for the companies which make them financially
weak. But still, the companies try to fix such events as long as it can do under its control.
However, sometimes the situations goes out of control which end up in the winding up of the
company. The terminology used for this scenario is named as liquidation, which is faced by
many Australian companies in the past (Lee and Lee, 2010).
Events leading to liquidation
The principle fact which is involved in the process of liquidation is the insolvency of the
company and its inability to pay its liabilities and financial obligations. As there are different
types of companies which operates in diverse geographical areas dealing with different
business activities. So they have various economic conditions for them. In general, situations
like conducting an illegal business, lack of cash and capital, weak financial skills, over or
under trading and lack of planning and managerial skills may lead to the liquidation of the
companies. They are forced to wind up their business and sell all their assets to make debt
payments.

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However, the events which led the three Australian companies to liquidation are discussed
below. By critically analysing the case studies of all the companies, one can easily develop a
better understanding of the events that results in pack up of the company.
ABC Learning
It was at times, world’s largest service provider of early childhood education, operating its
business in Australia. The company was listed on Australian Securities Exchange, having a
great market capitalization in 2006. After facing a fallout from United States subprime
mortgage crisis, the company was unable to make its debt repayments and the auditors were
not able to prepare the financial reports as they do not have the previous year report. This led
ABC to enter into administrative receivership (Barnes, 2007).
Being the only player and a dominant one in the childcare market, ABC Learning got more
liberalized which resulted in the escaping of few children. Due to which, the entity had to
faced many challenges including the court hearings also. However, since it was financially
strong it pay off all its claim but proved guilty in the court. In addition to this, it has faced an
unexpected drop in its profit in 2007 and due to the fall in share price the company was
unable to pay its debt. This resulted in the delisting of ABC from ASX and forces it to
liquidate its business in June 2010 (Corbi, 2011).
HIH Insurance
It was once known as the Australia’s second largest insurance company which came into a
provisional liquidation due to the insufficiency of funds for paying the debts. The demise of
the company was the largest corporate collapse in the history of Australia. Earlier it was the
company having high volume of assets which were been used to pay its liabilities. Even after
settling off all the obligations, the company still left with some liabilities which created asset
deficiency in the firm. In addition to this, HIH’s administrative staff was involved in the

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illegal and unethical practices which resulted in the losses for the company. The inefficiency
of the management and staff also led the company to liquidate itself (Mirshekary, Yaftian and
Cross, 2005).
Apart from this, the former director of HIH was sentenced to prison for pleading guilty for
the four criminal charges. He was involved in the stock market manipulations and other
related charges. Such criminal background degraded the reputation of the business, defamed
it and make it financially weak. Also Standard & Poor withdraw its rating from HIH and half
of its business was purchased by Germany’s Allianz. As a result of which, the company
enters into a provisional liquidation on 15 March 2001 (Van et. al., 2007).
One.Tel
It was an Australia based telecommunications group established in 1995, when the Australian
telecommunications industry degraded. The founders of the company are Jodee Rich and
Brad Keeling who belongs from the high profile families. Prior to its liquidation, it was
fourth largest telecommunication company of Australia dealing in providing mobile and
network services to the customers (Griffith, 2011).
Despite of sufficient funding from the shareholders and the investors, the company reported a
loss in year 2000. As a result of which, its share prices falls to a great extent. In addition to
this, it came into a partnership with Optus but due to some issues it did not last long.
Furthermore, the chief executive officer of One.Tel manipulated the final accounts of the firm
and did not disclose the same to its shareholders and investors. As a result of which,
company’s shareholders remained unaware of this mischief which causes financial stress in
the company. Moreover, the strategies framed by One.Tel did not work well and force the
company to wind up its business on 8 June 2001 (Barney, 2009).

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Ethics and governance - explaining financial stress
There are many business ethics which are required to be followed by the company in order to
operate legally in a country. Theories like legitimacy, Utilitarianism and virtue ethics are
used for defining the good governance and ethics for a company. Legitimacy theory focuses
on the norms and regulations of society, which every company is required to comply with. As
per this theory, the actions, operations and activities of the entities must be in accordance
with the society’s rules and regulations. The management of the organization must perform in
the best interest of its community in which it is operating (Abrutyn, 2016). Utilitarianism is a
theory in normative ethics which says that an action is right, if its outcome is in favour of
majority of people. In other words, the companies must perform those activities which give
positive outcomes for everyone. The people of organization should not work for self-motive
and personal gain (Sheng, 2012). Another theory is virtue ethics which is concerned with all
the virtues including honesty, integrity, moral values and many more. Companies should
follow all these virtues in their business so to avoid the situation of financial stress (Van,
2014).
The term financial stress is explained as the condition where company is not able to meet its
financial obligations, usually due to illiquid assets and insufficient funds. However this
situation arises when companies do not follow the above ethics and work for their motives. In
order to avoid such situations, entities must face their legal issues properly and should work
according to the law. It should make a proper disclosure of its affairs in favour of society and
its key people. Such disclosure is known as corporate social responsibility which has to be
fulfilled by all the companies operating in Australia. This also led to the formation of a good
corporate governance and achievement of desired outcomes.
However, when an organization does not follow such ethics and get involved in unethical and
illegal practices, it has to face financial stress as a result. Such stress was also faced by the

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three Australian companies which end up getting liquidated. It was observed that initially
they all were financially strong but not working according to business ethics. This turn their
profits into losses, hamper their existence and developed a high degree of financial stress.
Talking about ABC Learning, the company was highly liberalized and the motive or the
greed of earning more profits make the company to compromise the quality of service, left
the workers unpaid and subsidies were misused. ABC Learning deviated from its motive of
delivering best quality services to the children which result in the violation of Utilitarian
theory and virtue of ethics. This makes the company weak and force it to get liquidate.
The case of HIH Insurance shows that its former director was caught involved in some kind
of illegal practices which caused him sentenced to jail. This was the breach of legitimacy
theory as it was against the society and the virtue of honesty. Along with him, the company’s
top management was also involved in unethical practices which created financial instability
in the organization. All this was the sign of breach of ethics ended up in the liquidation of the
company.
Another case was the huge corporate collapse of Australia. It was the liquidation of One.Tel
which was due to the manipulation in the financial statements of the company. In this, the
shareholders and other key people were not aware about the modifications made in the final
accounts by the CEO of the company. Lack of accountability and heard commenting was
there which forces the company to face a high degree of financial stress. The company
prohibits the theory of Utilitarianism and has a bad governance which led to the winding up
of the business.
Therefore, it can be said that the not complying with the business ethics made the three
companies to face a huge stress in financial terms due to the illegal activities and unethical

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practices. Also they did not perform in favour of society and works for their sole purpose and
motives.
Liabilities – A major contributing factor to liquidation
The whole concept, process and theory of liquidation highlights only one factor which is
insolvency of the company. The insolvency means when a company is not able to pay off its
liabilities due to insufficient funds. It is the huge amount of liabilities only, which brings a
company to the edge of winding up. The whole scenario of liquidation revolves around on
factor which is payment of liabilities. Unpaid financial obligations act as a cause and effect of
liquidation. Like if there are no liabilities then there will be no need of selling the assets to
pay them. As a result of which, no situation of liquidation will arise.
However, it is not always true that liabilities are the only factor for the winding up of a
company. Sometimes there are other reasons also such as completion of an objective for
which the business was established, ending of a time period of the business or when the
company is operating illegally and for the wrong purposes. Also there can be events where
the company may prove to be illegitimate and is require to shut down its activities. So, apart
from liabilities there are other reasons also. But the major factor which contributes to the
liquidation is the financial obligations or liabilities of the organization.
Conclusion
From the above report, it can be concluded that it is very much necessary for the companies
to completely comply with all the business ethics and create a good corporate governance. In
order to avoid the situation of liquidation, organizations must perform in favour of society
and shareholders’ interest. The Australian companies which get liquidated did not followed
the business ethics, rules and regulation and also violated many theories. The fraud conducted
by their management forces them to undertake a financial stress and made them insolvent.

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The report also stated that the liabilities are the major reason for the winding up of the
company because they are the only items which left unpaid due to the lack of funds and the
same resulted in the liquidation of the company. However, it was also stated in the report that
there are many other and external factors which also leading the shutting down of an
organization.

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10
References
Abrutyn, S. ed., 2016. Handbook of contemporary sociological theory. Switzerland: Springer.
Barnes, A., 2007. Australian unions in 2006. Journal of Industrial Relations, 49(3), pp.380-
393.
Barney, J.L., 2009. Corporate scandals, executive compensation, and international corporate
governance convergence: A US-Australia case study. Temp. Int'l & Comp. LJ, 23, p.231.
Corbi, R.J., 2011. Applies to Australian Liquidation. American Bankruptcy Institute Journal,
30(2), p.48.
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].
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.
Sheng, C.L., 2012. A new approach to utilitarianism: A unified utilitarian theory and its
application to distributive justice (Vol. 5). United Kingdom: Springer Science & Business
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Tricker, B. and Tricker, G. 2014. Business Ethics: A Stakeholder, Governance and Risk
Approach. Abingdon: Routledge.
Van Hooft, S., 2014. Understanding virtue ethics. Routledge.

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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.