Corporate Governance and Ethics in Business Failures: A Report

Desklib provides past papers and solved assignments for students. This report analyzes company liquidations.

Accounting Financials
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Executive summary
It includes detail discussion of three companies Aluminium boats Australia, HIH Insurance and
Stella homes. The report elaborates the different events of each company which leads to
liquidation process. It also mentioned the importance of corporate governance in preventing the
event of liquidations. The report gives a discussion about the code of ethics and its importance in
the company.
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Table of Contents
Define what liquidation is and discuss the event which triggers liquidation for the following
companies?......................................................................................................................................5
Aluminum Boats Australia..........................................................................................................5
HIH Insurance..............................................................................................................................6
Stella Homes................................................................................................................................6
What are APES 110 code of ethics and elaborate any 5 code of ethics?.........................................7
Integrity........................................................................................................................................7
Professional Competence.............................................................................................................7
Professional behaviour.................................................................................................................7
Objectivity...................................................................................................................................8
Confidentiality.............................................................................................................................8
Define the corporate governance issue which results in the collapse of above-mentioned
companies?......................................................................................................................................9
Define different types of liquidation and mentioned which type of liquidation is opted in
liquidated companies?...................................................................................................................10
Evaluate whether liability is the major factor for the downfall of the company?.........................11
Conclusion.....................................................................................................................................12
References......................................................................................................................................13
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Introduction
This report contains a critical analysis of three companies regarding their reason for liquidation
and how these companies went into that process. A brief discussion on the code of ethics for
professional accountants is given in the report and analyse how different code of ethics helps to
avoid the events which lead to liquidation. It also mentions the value of good corporate
governance in the organization and how it helps to grow the business in the long run.
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Define what liquidation is and discuss the event which triggers liquidation for the following
companies?
Liquidation is the process where companies business comes to an end and initiation of
conversion of companies assets into cash. The main reason for the liquidation is where the
company is unable to pay its debt. There is mainly three types of liquidation and those are
creditors’ voluntary liquidations, Compulsory liquidation, and Members voluntary liquidation.
Poor corporate governance also results in business breakdown. Proper governance practices
should be exercised by the organization to deal with adverse situations occurs as a result of
normal operational activities. An administrator is appointed at the time of liquidation process
who manages all the assets of the company and also manage to pay debt obligation of the
company.
Aluminum Boats Australia
Aluminum boats Australia was incorporated in 1999 and indulges in the business of vessels. It
manufactures commercial, defines and luxury vessels in Australia. The company had a total staff
of 160 employees in the operating time of 15 years. The high quality of raw material and
improved construction techniques was the reason for its success. The company manufactures a
lot of different projects such as wave piercing catamaran passenger ferry followed by catamaran
yacht is launched by the company in the year 2003. In the year 2014 company business has
collapsed.
The event which triggers the liquidation process of the company is a massive fire in one of its
navy patrol vessels. The company had suffered multi-million dollar lost because of fire. This
event results in the loss of a maintenance contract with the Royal Australian Navy. The reason
for the fire is still undiscovered. Company’s director Roy Whitewood opted for the voluntary
liquidation as he believed that this process will help the company to overcome from such
financial disaster. Company dismissal 90 employees out of 160 employees of the company. This
disaster put an example for all manufacturers of Australia towards more specialized
manufacturing.
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HIH Insurance
The company was incorporated in the year 1968 by Ray Williams and Michael Payne. It was
Australia’s second largest insurance company with the total assets base of $8.1 billion. The
sudden collapse of HIH insurance hit the Australian insurance community at its core. In the year-
end, 2000 companies internal reports demonstrate the risk position of the company as it had
higher insurance liabilities and his debt obligations were also very higher. It makes company
riskier and there is the possibility of solvency risk as well. After considering all liabilities of the
company its total assets sum up to $133 million only. The formal winding process started on
August 2001 and estimated loss with the liquidation was in between $3.6 billion to $5.3 billion.
Director of the company Mr. Rodney Adler was held guilty for the offense of the misleading
information and was sentenced under the charge of acting dishonestly. Co-founder of company
Ray Williams also held guilty for fraud and was sentenced with a non-parole period of more than
2 years.
Stella Homes
A Stella home is a housing construction company. It was incorporated by Darryn peter in the
year 2004. It a huge construction company with the total project of more than 500 homes in last
decades. It has been sponsoring North Adelaide Football club from the last couple of years. Due
to solvency issue company was collapse with total 38 unfinished homes. The company was not
able to pay its debt obligations due to which creditors of the company suffered huge losses. The
company owed $3.4 million to the secured creditors and $1.9 to an unsecured creditor. Total 20
employees of the company were also owned $100000 by the company. Stellar homes suffer loss
around $5 million.
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What are APES 110 code of ethics and elaborate any 5 code of ethics?
Code of ethics is the guidelines for professional behaviour and ethical decision making within
the organization. Section 110 of the code of ethics for professional accountants defines the
professional responsibility required for the auditor of an organization and it also differentiates
between the responsibility of management and auditor. Codes of ethics are as follow:
Integrity
Honesty is required at most to deal with the controversial situation in the organization. Members
are required to promote trusted and fair dealing with information. There must be the check on
misleading information in the reports and information provided to the stakeholders. Shareholders
rely on the report and information provided by the auditor for their investment decisions hence
it’s an auditor responsibility to make sure it is free from any misstatement. Avoidance of
principle of integrity is one of the main reasons for business failure.
Professional Competence
Member must have accurate knowledge and possess the required skills to perform the duties.
Proper follow up should be there with the applicable rules and regulations. Members need to be
act carefully and responsibly in conformity with the assigned work. Engagement term required to
maintain professional decorum and remain unbiased at the time of forming an opening on the
financial performance of the company.
Professional behaviour
Professional behaviour deals with work according to the required accounting and professional
standards. They should not welcome any situation which brings the conflict of interest for them.
They should not indulge themselves in any event which adversely affects the reputation of the
organization as well as profession. The principal of professional behavior should be mandatorily
followed by all the members. They required to do work in a timely manner and with at most
responsibility. Members should identify and evaluate all the risk associated with the engagement
before accepting the same.
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Objectivity
Objectivity means that members need to perform audit work in an unbiased manner. They should
first understand the work objective and act accordingly. The judgment of members should not be
influenced by unethical services and it should not lead to an undue advantage. Every member
should follow the principle of objectivity as its help auditor to work in the best possible interest
of the company.
Confidentiality
Member needs to maintain the confidentiality requirement of information acquire from their job
arrangement. They need to be very alert about the possibility of the disclosure of the confidential
information as it leads to legal repercussions. With the disclosure of sensitive information, the
company may lose a competitive edge and leads to financial embarrassment. The member should
not take undue advantage with the internal information of the company by using it in the public
domain. Loss of confidentiality results in monetary as well as non-monetary losses which make
it the most required principal while and after performing the audit work.
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Define the corporate governance issue which results in the collapse of above-mentioned
companies?
Corporate governance is a mechanism by which a company is controlled and directed in an
effective manner. It involves balancing the interest of all the stakeholders of the company which
includes customers, management, employees etc. A good governance practice promotes
accountability, fairness, and transparency in the organization. Board of directors of the company
is responsible for the better governance of the company’s activities as long term success of the
company depends on the same. Rules and regulation should be followed strictly by the internal
as well as external members of the company. Corporate governance includes the following:
 There must be a mechanism to identify the situation which leads to the conflict of
interest with roles, responsibility, and duties.
 Proper supervision and control of the sensitive area of operation and information.
 Explicit and implicit agreement between the company and its stakeholders related to the
rights and responsibilities.
There is no sign of good governance in Aluminium boats Australia as the reason for its
breakdown is the fire in their multi milliner vessel. Directors must ensure the physical security
of the assets especially those which can affect the financial stability of the company at its core.
HIH insurance is an example of bad corporate governance. Boards and managers are responsible
for providing accurate information to the stakeholders of the company. In this company
directors and managers indulge themselves in bad trade practices which lead to complete
disaster. The main reason for the liquidation of HIH insurance is the lack of accountability and
conflict of interest. Stella home is the company which collapses due to lack of assignment of
roles and responsibility of the managers, non-assessment of the debt obligation in a timely
manner. There should be a clear responsibility between the managers and employees of the
organization. Overall the main reason for the collapse of the above mentioned companies is lack
of responsibility, conflict of interest, lack of effective internal control and poor trade practices.
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Define different types of liquidation and mentioned which type of liquidation is opted in
liquidated companies?
There are three types of liquidations
1) Creditors’ voluntary liquidations when the company is unable to pay its debt then
creditors of the company make application for the liquidation of the company. It is the
situation where a company becomes insolvent and there is no way a company can
address its debt obligations. Assets of the company are not sufficient for the pay off its
liabilities. This happens mainly due to the lack of internal control over cash assets and
internal misappropriation of assets of the company.
2) Members’ voluntary liquidations it is considered as solvent liquidation there is no such
situation of insolvency. Members voluntarily asked for the liquidation of the company to
release their investment and breakdown the business. In this type of liquidation company
is able to pay off its debt.
3) Compulsory liquidations court can issue a winding-up order on the application by
either unpaid creditors or member and shareholders itself. It generally happens when the
company involves itself into illegal activity and repercussions for the same are very high.
When a court issues the winding up the order than its mandatory to liquidate the
company. All the given instructions by court need to be followed by the administrator.
Aluminum boats Australia has gone into members voluntary liquidation as the company was
solvent to an extent and companies directors and managers make an application for appointment
of an administrator to protect the interest of stakeholders.
An order of the royal commission is issued by the statutory authority. Compulsory liquidation
process is issued for the HIH Insurance as they indulge in bad corporate practices and take
undue advantages.
Stella home has collapsed due to insolvency reasons. The company was not able to pay its debt
obligation towards secured as well as unsecured creditors. Creditors voluntary liquidation opts
for the Stella homes.
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Evaluate whether liability is the major factor for the downfall of the company?
Every business has its own source of assets and liabilities. Optimum utilization of resources and
effective management of the liabilities of the company is very important for the continuation of
the business. Liability management refers to make sufficient arrangement for the liquidity to pay
the debt when they become due and hedge the funds from the risk associated within the business
activity. Liabilities can be one of the main reasons for the downfall of the business however
there are some other reasons as well such as poor coordination and inventory management,
ineffective credit arrangement, dead assets, unexpected growth etc. which could be a reason for
the breakdown of business.
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