Financial Analysis: Corporate Failures in Australia (ACC701)

This report provides an executive summary and detailed analysis of corporate failures in Australia, specifically focusing on the liquidation of companies. It examines the factors contributing to the collapse of businesses, emphasizing the role of structural characteristics, cyclical factors, and governance issues. The study utilizes case examples of ABC Learning, HIH Insurance, and One.Tel to illustrate the causes and consequences of corporate failures. The report highlights the importance of government supervision, financial management, and ethical considerations in preventing such collapses. It explores how factors like low liquidity, high leverage, and poor internal controls contribute to the risk of failure. The analysis also draws lessons from these collapses, emphasizing the need for robust corporate governance, effective financial reporting, and prudent risk management to ensure long-term business sustainability. The report concludes by underscoring the increased risk of failure in public companies due to their structure and the separation of ownership and control.

Trimester 2, 2017 Accounting Financial
ACC701

EXECUTIVE SUMMARY
The factors that lead to the failure of the corporate sector in Australia were examined
and studied in the present study by considering case studies of nonfinancial companies of the
public sector. The study revealed the fact that the success or failure of corporate sector
depends on the structural level characteristics of the company. Public companies have greater
control, and there is a separation of ownership, so managers are allowed to take risks, so
chances of failure of public companies are more than the private companies. In some of the
overseas research, it was found that the cyclical specific factors of the company like low
liquidity, high leverage or low profitability also contribute to the failure of a corporation. The
key determinants of risk of failure of a company are the structural and cyclical level
characteristics.

TABLE OF CONTENTS
Introduction................................................................................................................................4
Liquidation of companies in Australia.......................................................................................4
Case examples of liquidation.....................................................................................................4
ABC Learning........................................................................................................................4
HIH Insurance........................................................................................................................5
One.TelPhone Company........................................................................................................6
Conclusion..................................................................................................................................7
References..................................................................................................................................8

INTRODUCTION
The present study is based on case evaluation of companies who went into liquidation
and had impacted Australian economy significantly. The study will include a description of
liquidation of companies and primary factors that led corporate entities to this situation.
Analysis and evaluation in the study will be supported by case examples of ABC Learning,
HIH Insurance and One.Telphone Company. It will also include lessons that learnt by
companies operating in Australia from this major collapses.
LIQUIDATION OF COMPANIES IN AUSTRALIA
Liquidation or winding up is process undertaken legally for the closure of all
operating activities of the business. It involves selling all asset of the business and winding up
the affairs of the company as stated by the law (Hodne and et, al 2013). The process of
liquidation undertaken by law brings the end of a company as it is a lawfully created entity
which cannot die a natural death.
In accordance with the case study of Carnegie and O’Connell (2014) economic
downturn leads to corporate failure, even though there are controlled changes in specific
characteristics of the company. The information that is necessary to rank companies
according to failure risk is provided in company specific factors. Debt – at –risk frame work
measures the contribution of failure of cooperation to financial risk stability (Chen, Ramsay
and Welsh, 2016). This shows that it is usually concentrated in large companies and corporate
debt at risk is low in total. It also indicated the importance of trade credit, in the leverage
form that can have an impact on corporate failure and as a potential channel which promotes
shocks. The ability to transmit distress in the business increases its importance towards
financial stability.
CASE EXAMPLES OF LIQUIDATION
ABC Learning
The collapse of ABC Learning is considered to be a crucial case of liquidation in
Australia. As per the view point of Damiani, Bourne and Foo (2015), the primary reason of
liquidation was the low supervision of the government. Further ABC Company implemented
the trick of the Macquarie Bank of leveraging a consistent streamline of income financially to
finance acquisitions, and expected an always increasing market share price would finance the
infinite growth (Crockett and Ali, 2015). However, they do not contain the sense or the base

of a varied asset to drive the model effectively and were utterly exposed to a significant
increase in costs of credit.
The government has the total role in providing half revenue for 70 percent in private
sectors for childcare services. It must not be more rapid release in the concept of taking
control over the management of ABC learning. The absolute size, the debt of firm- it has
loans of approx $1b or above to the big four banks alone, will be more difficult even if the
budget excesses to be limitless (Betta, 2016). Been pointed out by Sue Lines, ABC Learning
does not own the land by which its centres are located. How much land the company holds is
still mysterious. There is no point to say anything about the $20m in fundamental
entitlements for employees.
Another option for this aspect, however, is exclusive of profited centres of the cited
company, leaving unprofitable or low-profit centres in limbo (Clarke and Dean, 2014).
Relatively, the government must not begin to play a governance role proportionate to its
importance of finance. The proposed company board, imbalanced with the politicians, seems
to be failed in practising a vital level of controlling over the management of Eddy Groves.
HIH Insurance
The plan of HIH soap composition is well-known, as the company suffered from a
failure in 2001 with debts of approx $5.3billion, which Ray Williams and their legion
received by gross collapse, and charged a very little for premium and failed to pay out
sufficient amount to claims.
They covered through under reserving that will increase profits and making use of
financial reinsurance agreements to convert a loss into profits. The chief executive of the
company, Williams diverted the community of investment through a series of takeovers, that
ended in paying out of amount $300 million in 1998 for Rodney Adler's FAI Insurances.
Mark Westfield's easy yet effective past of the collapse of HIH is likely to be aimed
for those who desired to chase the money instead of personalities. During 1999, HIH takes
over its major competitors, FAI Insurance by considering the fact that chief executive of
company Rodney Adler as one of its corporate directors (Miglani, Ahmed and Henry, 2015).
With approximate $8.1bn base of an asset in the 2000 year end. HIH is largely apparent as a
deep, reliable and healthy company. However individual internal records showed the debt
leverage ratio of company and liabilities of insurance were relatively too high, due to this,
there was a high risk of insolvency (Brennan, 2014). At last, in 2001, the corporate unstable

financial position becomes weaker day by day, and HIH suffered from the biggest ever
collapse in the history of Australia, bearing the loss of more than $5bn. The company was
progressing to operate effectively in order to service and examine old claims, without the
taking of new business on boards. A financial regulator of Australia establishes to identify the
clear event chains that resulted in the collapse of HIH.
Another main factor determined in the failure of HIH was the deficiency to offer
proper future claims, and all problems arise from his sole issue. Concealing future claims is
considered to be an essential element of any insurance company; however by the termination
of its existence the company was in a situation where only a 1.7 percent negative shifty could
bring the firm to insolvency. The main reason for the collapse was misstatements in new and
changing conditions of the market, that raised liabilities of the firm adversely and strategic
planning was unable to conceal it, and this may be likely to amend these changes (Brennan
and Fenech, 2014). New and changing conditions of the market can lead to severe damage to
any insurance company. However, these risks are recognizably, and most of the companies
make extra efforts to reduce their experience to these changes. The reason that HIH radically
exposed itself in its every part was the intense quick expansion of the company. As
mentioned before, HIH obtained several companies in its ending years and creating an
extreme force for global expansion.
At last, it is now all clear that HIH must be more careful while following its
expansion and must have such steps that ensured that its liabilities are timely covered.
Through rapid expansion, the company entered in those markets in which they had no or little
experience, although none of the provision seems to be made for the requirements to take
additional margins when entering into new markets (Welsh, 2014). This is said to be the
proper case of mismanagement and over attitude in the time period of expansion.
One.Telphone Company
In 2001, the OneTel collapse was considered to be the major collapse ever. During the
collapse, it was among the 4th largest tele company in Australia with approximately two
million consumers and handing its operations in over eight countries. Analysis of both
qualitative and quantitative information from various sources recommended that the collapse
of One-Tel collapse is a typical case of failed hopes and expectations, misstatements, wrong
use of pricing policy and uncontrolled growth (Dagwell, Wines and Lambert, 2015). The
firm’s sudden growth and downfall were linked with severe lacks in its corporate governance

inclusive of failure in internal control, quality of audit, board study management, and
managerial communication with the board, financial reporting and weak links of executive
paying. Hence, the failure of One-Tel contains various significant aspects of corporate
governance role in avoiding company collapse.
One.Tel had the weak quality of financial reporting and earnings as well. It was
possible to record minor positive earni9ngs in its initial time period because of its non-
traditional policy of accounting options and huge positive accumulations. It contained poor
controls over internal system and inconsistency in reporting and recording (Keneley, Wines
and Jain, 2017). However, it also has a low-quality audit. It constantly achieved a weak and
incompetent audit estimations regardless of severe contravene of Corporations Act, auditing
standards in 1998. Although One-Tel’s declining working cash shortage, problems in cash
collecting and losses covered by none traditional policies of accounting, company’s auditor
were unable to solve the issues. There was minimal variation in the board’s opinion (Chen,
2016). The management didn’t reveal to the board regarding the solvency position and
performance of the firm. On the contrary to this, the no- supervisory directors were incapable
of examining the efficiency of the management and asked weird questions to management
regarding how they work in business, the association of executive pay with the performance
was very poor in the company. The managerial authorities achieved huge bonus on
performance at the time of declining company’s performance.
The collapse of One-Tel’s collapse left various courses on company’s strategies.
Primarily, it is not sufficient to obtain customer in big scale unless and until those customer
supply to firm’s profitability. Next, pricing policies according to of competitors just to get
market shares, and this can lead to terrible consequences. It is not sufficient to produce sales
revenue until those revenues are gathered in a timely manner (cash). One-Tel’ termination
left various lessons on company’s governance also (Gray, 2017). Initially, powerful internal
system control, quality of financial reporting and audit, effectual management inspection,
revealing of corporate affairs to the board, and a solid connection with executive payments
and corporate performance are essential for firm’s effective corporate governance. Next, the
board is less interested in identifying issues and problems of firms where there is leading
CEO in firm. After that, beard teams which are not executive must prepare their own
explorations to the firm performance and strategies (Manganelli and et al., 2014). Thus, non-
executive board members must be provided admission to upper to lower management to
certify the reliability of information. Further, firms’ large investors must be actively

interested in overseeing the firm. The involvement of auditor in the service of an audit might
give and take audit quality. The board members must always control on the meeting of the
board to preside the agenda of the board to assess the management attitude efficiently.
CONCLUSION
The present study shows that increasing financial obligations is not the sole primary
reason for liquidation by considering three major cases of collusion in Australia. For long
term sustainability, businesses must comply with regulatory and ethical aspects by
considering long term financial aspects instead of focusing on short term benefits. Present
study clarifies the fact that chances of failure of public companies are much more than private
companies as they take more risk with greater separation of ownership and more controlling
power given to their managers. Subsidiary companies of foreign parents are less likely to fail
as compared to stand alone companies. An important role is played by the cyclical factors
which include usual suspects like high leverage, low profitability and low liquidity. These
cyclical determinants that are related to the rate of failure are same for listed as well as
unlisted companies. But, leverage increase and size decrease raise the chances of failure for
listed companies whereas ageing decrease the probability of failure of unlisted companies.
Hence it can be cited that liquidity and profitability are important for all companies. Further,
aggregate conditions also determine the failure rates annually.

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