Company Liquidation Analysis: OneTel, HIH Insurance, and ABC Learning

This report provides a comprehensive analysis of the liquidation of three major Australian companies: OneTel, HIH Insurance, and ABC Learning. It examines the key factors that led to their downfall, with a particular focus on the role of increasing liabilities, ineffective corporate governance, and inadequate risk management. The report delves into specific issues such as improper financial reporting, secretive plans, and inadequate planning processes. Through detailed case studies, the analysis highlights how these companies failed to address their financial obligations and how ethical lapses contributed to their ultimate liquidation. The report emphasizes the importance of strong corporate governance, effective risk management, and ethical practices in ensuring the long-term sustainability of businesses. The report highlights the importance of ethics and governance in the downfall of companies. The report concludes by summarizing the common threads of failure and suggesting measures to prevent similar outcomes in the future.

PROFESSIONAL ACCOUNTING

ABC, HIH & One.Tel
Executive summary
Several cases have taken place in the recent scenario that has generated dubiousness in the affairs
of companies. Besides, many companies have been liquidated because of maximization of
liabilities in comparison to assets. OneTel, HIH Insurance, etc are some of the instances that shed
light into this context wherein liquidation occurred as a result of complications encountered by
these companies. Nevertheless, this report intends to highlight the complexities faced by both
these companies that resulted in their liquidation as a whole. The major underlying cause behind
their liquidation can be attributed to their increment in liabilities in a way that assets became
inadequate to address every obligation.
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ABC, HIH & One.Tel
Introduction
With the due passage of time there has been major liquidation of companies in Australia. The
major among them are HIH Insurance, OneTel and ABC learning. The notable differences
among all the three have been the liquidity crunch owing to a huge burden of debt and a
complete disturbance in the ethics. The liquidity crunch together with the improper governance
played a leading role in the liquidation. In short, it can be said that liabilities was the major factor
that led to the downfall of all the companies. It needs to be noted that when the debt of the
company stretches over a particular limit then the business faces immense problem. Moreover, if
the business does not have proper liquidity to meet the obligations then liquidation is bound to
happen. In the report below, the major highlight of study will be on liabilities that led to the
liquidation of the companies.
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ABC, HIH & One.Tel
Analysis
OneTel is one of the largest telecommunication companies based in Australia that encountered
liquidation owing to improper measures and ineffective developments throughout its operations.
Furthermore, the company also failed to implement effective corporate governance strategies
into its affairs that enhanced more of its complications. For instance, internal control
mechanisms, inefficient audit processes, etc are some of the inefficacies that prevailed within the
company’s operations that resulted in its downfall. HIH Insurance Ltd encountered the same
situation in the year 2001 even though it was considered as one of the biggest companies that had
a massive base of assets. In the year 2001, owing to maximized liabilities and debts, the
company failed to repay its obligations with its base of assets, as it was immensely burdened by
such obligations. Besides, it was also observed that because of inadequate knowledge and
interpretation in association with business risks, the company failed to sustain in the market.
Other issues like improper managerial practices, fraud, etc also played a role in degrading the
company’s position (Heeler, 2009).
Thus, both these companies encountered liability issues that were the major reason behind their
downfall. With the help of this report, the exact complexities have been discussed for a better
understanding of this context.
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ABC, HIH & One.Tel
Issues in corporate financial reporting
Financial reporting must be done in a way that it presents a true and fair view of the company’s
performance. However, in relation to OneTel, such reporting requirements were not properly
complied as many financial reports like the debtor’s reports and trial balance were verified
unprofessionally (Sawyer, 2003). Besides, the finance director of the company was proved
incapable of assessing such reports for the benefit of the company as a whole. This proves that
the management was hardly concerned about the company’s reputation and hence, these resulted
in the appearance of significant risks within the company’s affairs (Heeler, 2009). This also
highlights the inappropriate strategies within the company’s affairs that resulted in its
disintegration. On a whole, the major reason behind the low-income level of OneTel can be
attributed to its adoption of accrual system of accounting in a traditional sense. In simple words,
since the strategy was outdated, it failed to generate an influence upon the company.
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ABC, HIH & One.Tel
Major cause behind liquidation
 Increment in liabilities
Since HIH Insurance was one of the biggest companies, its main objective was to diversify its
business across the entire world so that it can fetch enhanced revenues to the company. However,
the company in order to fulfill its vision enhanced its liabilities more than its assets that created
major complications for it. The company thought that the ratio of its takeover to its liabilities was
of no importance but this was not the actual scenario. As a matter of fact, the strategy of takeover
only played a key role in disintegrating the company (Westfield, 2011). Besides, the company
initiated no attempts to change the additional provisions based on market fluctuations. Moreover,
it had the opportunity to control the same and yet it failed to do so. This sheds light upon the
ineffective management standards within the company that failed to rectify its inaccuracies. In
short, the management and the ethics situation was weak thereby leading to major concern in the
system.
 Future claims
This reason also resulted in the downfall of HIH Insurance because proper tuning for future
claims is vital for the survival of a company and yet, HIH failed to do so. As a result, the
company witnessed a negative trend of 1.7% that played a key role in disintegrating it.
Moreover, the major reason behind such weak strategy can be attributed to the ineffective
management measures for changing strategies based on market fluctuations. This resulted in an
increment of liabilities and since no verification measures were implemented by the
management, the situation became worse. Further, it is well known that based on market
fluctuations, insurance companies may get affected and adoption of adequate safety measures
can assist in safeguarding such situations but the management of HIH failed to adopt such
strategy. On a whole, the dominance of HIH in the insurance market and its major takeover
attempt resulted in the generation of major risks that caused its downfall.
 Secretive plans
The plan of cost cutting came out to be an excellent opportunity for HIH but it also resulted in
the increment of liabilities. Besides, such an opportunity could have assisted it in making up its
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ABC, HIH & One.Tel
losses for the future. However, the management did not adopt such measure and instead decided
to portray fraudulent statements so that it could grant additional power to the company. The
major reason behind the portrayal of fraudulent statements was to conceal financial secrets from
the common public and the management thought that the takeover attempt could also be
concealed from such a strategy, but this backfired the management and enhanced its
complications more. Moreover, the statutory bodies had no idea about such a situation and it was
implied that the company would adopt immoral activities especially when it had resulted in a
situation of its disintegration.
 Inadequate planning process
Since the process of the takeover was going to be a big one, accurate safety measures had to be
adopted but HIH failed to do so. Besides, it was also compulsory to have effective strategies to
overcome the issues of liabilities with the company’s dominance but it was observed that the
company entered the market with no prior research and professionalism. Furthermore, the
company failed to adopt measures to restrict itself within a scope so that adequate provisions can
be framed based on market fluctuations. This sheds light upon the inappropriate management
practices within the company and the situation worsened when false statements were released for
concealing facts.
OneTel’s disintegration
From the case of OneTel, it can be stated that handling of financial statements was not done
properly and the management did not maintain significant reports like debtors’ aging report, trial
balance, etc. Furthermore, since these financial statements were not given due priority by the
management, it created major complications for the company. The most crucial factor that
resulted in the low revenue figures for OneTel was the adoption of a conservative approach in its
affairs. Besides, it implemented two basis alterations in its base policies. The first alteration was
that no accounts were decided to be put up in contrast to the company’s intangibles and secondly
the deferred expenditure policy of the company was altered in the subsequent year. Owing to
non-conservative policies of accounting, and decisions to write-off few subscriber acquisition
expenses played a key role in the company’s loss (Gilbert et. al, 2005). Besides, the auditors also
issued a fraudulent report despite the fact that the management adopted unethical strategies. The
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ABC, HIH & One.Tel
means and mechanism of running the company was not ethical thereby was a big cause of worry.
Such immoral activities on the part of auditors are very inappropriate and hence punishable by
law. On a whole, all these scenarios played a pivotal role in hampering the company’s
operations, thereby resulting in its liquidation as a whole. This clearly emphasized that the
company was running on poor ethics and that the very situation indicates that the governance
was altogether disturbed hence; the management was doing the irrelevant activities (Manoharan,
2011).
ABC Learning’s disintegration
The previously mentioned scenarios form the foundation for ABC Learning that has assisted it to
develop in the market. However, ABC also pursued a weak management team that resulted in its
downfall within a short span of time. The concept of weak management emphasize that the
company had poor ethics and governance was faulty leading to major issues. Even though the
company attained massive enhancement in the segment of growth and development, yet it failed
to stabilize its affairs for a better future (CPA, 2012). Besides, the previously mentioned causes
also assist in highlighting the disadvantages of a company that was once a massive company of
Australia. A pioneer in the field yet ABC lacked the ethics and the management thereby leading
to a big fall of the company (Kruger, 2009).
In the year 2007, ABC Learning became insolvent and hence, it encountered massive losses in
the subsequent year. Based on the financial statements of the year 2008, it can be observed that
the auditor of the company incorporated impairment expenses amounting to $1.168 billion and a
loss of $364 million on the majority disposal of the stake (Kruger, 2009). However, such losses
enhanced more than what was expected, thereby resulting in the increment of liabilities. Such
losses and debts played a key role in generating a liquidity scarcity that decreased the net assets
of the company from $2.22 billion to $284.5 million (CPA, 2012). Besides, the complication
enhanced when the administrators and creditors witnessed that the company possessed 30c and
40c each for the current assets for every dollar of its current liabilities. These issues clearly shed
light why ABC Learning had to witness a downfall. Furthermore, such issues represent a current
ratio of 0.3 and 0.4 and it is well known that when the current ratio of a company is lesser than
one, it signifies major liquidity problems encountered by the company. Besides, this also means
that the company cannot repay its debt obligations in the future (Teen, 2012). The current ratio,
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ABC, HIH & One.Tel
as well as quick ratio of the company stood too low meaning that the company has liquidity woes
(Gilbert et. al, 2005). Such a situation clearly indicates that liabilities were the major concern and
ABC failed to address owing to a lack of liquidity.
Conclusion
It can be observed from the previously mentioned analysis that ABC Learning, OneTel, and HIH
Insurance encountered disintegration even though they were highly developed companies in their
respective segments. The major reason behind their downfall can be attributed to their ineffective
corporate governance strategies and inadequate risk management approaches that resulted in
their liquidation as a whole. In addition, the inadequacies on the management’s part can also be
highlighted with the help of this study. Even though the situation started to worsen, yet the
management adopted secretive attempts to conceal relevant data instead of initiating
safeguarding measures. The downfall of these companies started because of liquidation and the
management failed to address the situation in an efficient manner. On a whole, effective
corporate governance measures and other strong may have assisted in this scenario to address the
situation. Hence, ethics and governance is the need of the hour and is highly needed in the light
of the prevailing situation so that any adverse situation can be negated.
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ABC, HIH & One.Tel
References
Cook, T 2001, Collapse of Australia's fourth largest telco adds to growing list of corporate
failures, viewed 10 September 2017, https://www.wsws.org/en/articles/2001/06/onte-j08.html
CPA 2012, ABC learning collapse case study, viewed 10 September 2017
https://www.cpaaustralia.com.au/professional-resources/education/abc-learning-collapse-case-
study
Gilbert, W. Joseph J & Terry J. E., 2005, ‘The Use of Control Self-Assessment by Independent
Auditors’, The CPA Journal, vol. 3, pp. 66-92
Heeler, D 2009, Audit Principles, Risk Assessment & Effective Reporting, Pearson Press
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http://www.smh.com.au/business/lessons-to-be-learnt-from-abc-learnings-collapse-20090101-
78f8.html
Kruger, C 2009, Numbers finally start to add up as operators go back to basics, viewed 12
September 2016, http://www.smh.com.au/business/numbers-finally-start-to-add-up-as-operators-
go-back-to-basics-20110121-19zy6.html
Manoharan, T.N., 2011, Financial Statement Fraud and Corporate Governance, The George
Washington University.
Sawyer, L 2003, Sawyer's Internal Auditing, Institute of Internal Auditors.
Teen, M.Y 2012, The ABC of a corporate collapse, viewed 12 September 2016,
http://governanceforstakeholders.com/2012/12/28/the-abc-of-a-corporate-collapse/.
Westfield, M 2003, HIH : The Inside Story Of Australia's Biggest Corporate Collapse, viewed 12
September 2016, http://www.smh.com.au/articles/2003/03/14/1047583693489.html
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ABC, HIH & One.Tel
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