Financial Reporting & Corporate Collapse Case Study

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Accounting Financial
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Executive summary
This report is regarding the criteria’s which led to the company into the situation of liquidation.
All these criteria are evaluated on the basis of Aluminium Boats Australia, HIH Insurance &
Steller Homes. This report also characterized the aspects which are necessary as per the code of
ethics for professional accountant in order to maintain fiscal framework as per APES 110. This
report was also discussed about the some of the corporate governance issues which are
contributed to each company collapse.
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Contents
Executive summary.........................................................................................................................2
Introduction......................................................................................................................................4
Code of ethics..................................................................................................................................7
Corporate governance issue contributed to each company collapse...............................................8
Type of liquidation..........................................................................................................................8
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Introduction
The report considers three companies named Aluminium Boats Australia, HIH Insurance &
Stellar Homes. Aluminium Boats Australia is engaged in the activities of construction. This
company is specialized in ferries & leisure craft. HIH Insurance is one of the finest company
which is engaged in the insurance sector. Another Australian company Stellar Home is also
engaged in the sector of construction. The report describes the important events for above three
companies that led them into the situation of liquidation, it also explains the necessity of a code
of ethics for a professional accountant to maintain the trust of external users or financial
institutions. This report also highlights the reason for some company collapse due to the failure
of corporate governance.
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Question- Discuss the events that led up to the liquidation. Also, discuss APES 110 code of
ethics for a professional accountant. Highlight some of the corporate governance issues
contributed to each company collapse.
Answer- company- Aluminium Boats Australia
Aluminium Boats Australia was founded in 1999 with the objective of becoming world- class
aluminium & composite high-class light craft. Aluminium Boats Australia is specialized in
ferries & leithe sure craft. It uses high, quality of raw material & latest high-quality construction
techniques.
In the year 2003, the company launched a catamaran yacht. In September 2004 company
launched wave piercing catamaran passenger ferry for tangalooma wild dolphin resort on
moreton island. As on the date of November 6, 2014, Aluminium Boats Australia has collapsed
into voluntary administration.
Company- HIH Insurance
HIH Insurance is one of the biggest insurance company in Australia. HIH Insurance is
considered to be the highest corporate collapse in Australian corporate history. Assets of the
company considered to be $8 billion.it is considered to be largest in the insurance sector. As on
the date of 15 March 2001 HIH Insurance appoint an official liquidator.
The board of HIH Insurance thinks that this would give him sufficient time to review the
financial position of the company. At the same time management of the company presents half-
yearly results of the company for the six months to 31st December 2000. Financial statements are
estimated to be in loss of around $ 100 million. This is not reported to be actual figures. All these
are reported to be rumours at last.
Mc Grath is appointed as provisional liquidator of the company. As per estimation made by Mc
Grath the total loss of HIH Insurance is around $800 million over the six months to 31st
December 2000. As on the date of 27 August 2001, the winding up order is made.
Company- Stellar Homes
Stellar Homes Company was established in the year 2004 by Darryn peter. The company is
engaged in the construction sector. The company has built more than 500 homes over the past
10-year period of time, considered to be huge in the construction sector. At the time of collapse
around 38 homes are under construction stages. Creditors of Stellar Homes suffered huge losses.
The company is not in a position to pay off all debts owed to the company. According to the
directors report Stellar Homes suffered loss around $5 million.
Director of Stellar Homes said over $3.4 million is owed to secured creditors & around $1.5
million to an unsecured creditor of the company. Official website of the company has been shut
down. Holding site of Stellar Homes is in place only. As per a statement made by officers of the
company the administration of the company is in the best interest of all the creditors (Carnegie
and O'Connell, 2012).
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Events of liquidation
Liquidation is also termed as winding up of the company. It is a process by which the existence
of the company brought to an end. This situation is arising when the financial position of the
company is not up to the mark. Assets of the company are not sufficient enough to pay the debts
of the company. In the process of liquidation, a liquidator is appointed by shareholders of the
company or court. Expenses of the liquidation process & remuneration of a liquidator are paid by
the company. When a company enters into liquidation each class of creditors must be paid in full
if company having sufficient assets (Henderson, 2012).
Creditors of the company ranked as below: -
 Secured creditors with a fixed charge of the company having 1st priority over others
 Preferential creditors
 A secured creditor having a floating charge
 Unsecured creditor
 Government dues
 Shareholders of the company
Liquidation events simply mean
 Sale, transfer or disposal of all assets of the corporation.
 100% of the common shares subject to the option vested at the time of the liquidation
event.
 Borrower or acquirer of resulting entity is not able to pay off the obligations at the
closing of acquisition, merger or sale of the corporation.
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Code of ethics- A member shall comply with following fundamental principles which are
defined as below.
 Integrity- Integrity simply means all the members should be straightforward & honest
towards their work. It also implies fair dealings & truthfulness. Before investment in
shares of any company, Investors of the company rely upon the report of the auditor.
Auditors need to show their integrity towards all external users of the financial statement
so that they can able to trust the company. Most of the organizations fail because they
don’t follow the principle of integrity. Members of the institute need to work
professionally hence required complying with integrity approach.
 Confidentiality- Confidentiality simply means all the members of the institute remain
confidential for all the client’s information obtained during the course of the audit. This is
the basic principle, any sensitive information not to be disclosed in public unless
otherwise required by laws & regulation. It is the duty of the member to remain
confidential all price sensitive information. Price sensitive information simply means
when it is published in public than it affects drastically the market price of the share. In
order to maintain confidentiality, necessary monitoring is required to undertake on
regular basis. Members are required not to disclose any irregularities of the client to
income tax department unless otherwise required by law.
 Professional behaviour- All the members should be competent enough to conduct
auditing accordingly. Members are required to be professionally qualified, skilled &
experienced. Members are required to be professionally qualified to conduct auditing
work. Member of the institute conducts auditing work by following due diligence
approach. He should act & behave professionally at the .client location. Applicable
standards & guidelines need to be followed by a member in their work. The principal of
professional behaviour is required to be mandatorily complying by all the members.
Member is required to conduct their auditing work in a timely manner.
Before accepting any professional work, a member in practice shall determine whether it
is practicable or not to accept. This would not create any threat to compliance with the
fundamental principles. A member in practice shall assess the importance of threats &
apply all necessary safeguards. All threats are required to be reduced up to an acceptable
level.
 Objectivity- Objectivity simply means members of the institute conduct their audit work
in an unbiased manner. They are not involved in a conflict of interest situation. Conflict
of interest is a situation in which member will do work or to interfere in the projects of
the company for their own personal benefits. Every member of the institute required to
follow the concept of objectivity. A member may be showing to circumstances that may
spoil objectivity. It is unrealizable to define & prescribe all such situation.
 Professional competence & due care- All the members are required to be competent
enough to ensure that the client & employees of the company receive professional
services. Member of the institute needs to visit client workspace at regular intervals along
with their engagement team. While scrutinizing the financial statements of the company
the engagement team also maintains professional behaviour & exercise as per the
objectives & scope specified in the audit plan (Han Fan et. al., 2013).
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Corporate governance issue contributed to each company collapse
Weakness in the internal control system becomes corporate governance failure for Aluminium
Boats Australia. Management of Aluminium Boats Australia has strong policies on paper but
they are struggled to implement in their business properly. Using company personal assets for
their own personal purposes also become the reason of corporate governance failure (Tricker and
Tricker, 2015). Top level management of the company involved themselves in bad trade
practices. They involved themselves in a conflict of interest situation. For their own personal
benefits projects are selected. Relate party transaction by Aluminium Boats Australia also
become the reason of corporate governance failure (Claessens and Yurtoglu, 2013).
Type of liquidation
There are three types of liquidation which are described as below-
 Creditor’s voluntary liquidation- creditor’s voluntary liquidation simply means that the
company is unable to pay debts to the creditors of the company. Assets of the company
are not sufficient enough to set off all liabilities i.e. considered insolvent. This criterion is
recognized very rarely in any company. This situation only occurs when there is an
internal misappropriation of assets & embezzlement of cash situations.
 Member’s voluntary liquidation- Member voluntary liquidation is kind of solvent
liquidation. It simply means that the company is capable enough to pay their debts in
total. In the case where shareholders of the company wish to sell their shareholding in
total then this approach is used. This situation is arising in a case where members of the
company lose faith over the financial aspects of the company. The assets of the company
are sufficient to clear the debts of financial specialist (Ballantyne, 2015).
 Compulsory liquidation- when an association is indulging into any illegal transaction or
trading then tribunal on behalf of central government can be order compulsory liquidation
to any company. Compulsory liquidation of a company is mandatory in a case where
court orders winding up the order. The company is required to follow instructions given
by the court & liquidate company accordingly.
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Conclusion
The report describes the background of the company named Aluminium Boats Australia, HIH
Insurance & Stellar Homes. This report accomplished the situations or events which affect the
economic situation of the company. This report also explains the important events of liquidation.
This report also shows the framework of professional ethics which are necessary to comply by
members of the institute. At the end of the report, it is identified corporate governance issues
which become the reason of company collapse. This report also included various types of
liquidation events which occurs due to drawbacks of the company.
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References
 Ballantyne, S. (2015). Receivers, liquidators and undertakers. Ausmarine, 37(3), 10.
 Carnegie, G. D., & O'Connell, B. T. (2012). Accounting scandals in Australia since the
late 1980s. Creative accounting, fraud and international accounting scandals, 135-161.
 Claessens, S., & Yurtoglu, B. B. (2013). Corporate governance in emerging markets: A
survey. Emerging markets review, 15, 1-33.
 Han Fan, Y., Woodbine, G., & Cheng, W. (2013). A study of Australian and Chinese
accountants’ attitudes towards independence issues and the impact on ethical judgements.
Asian Review of Accounting, 21(3), 205-222.
 Henderson, V. (2012). Prospect theory, liquidation, and the disposition effect.
Management Science, 58(2), 445-460.
 Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and
practices. Oxford University Press, USA.
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