Financial Accounting Assignment: Liquidation of HIH, OneTel, and ABC

This report provides an in-depth analysis of company liquidations, focusing on the financial accounting aspects and the factors that lead to business failures. It examines the cases of HIH insurance, OneTel, and ABC Learning, highlighting the events that led to their liquidation, including ineffective monitoring, poor planning, inappropriate corporate governance, and ethical breaches. The report explores the reasons behind the financial stress experienced by these companies, emphasizing the role of liabilities, inadequate cash flow management, and conflicts of interest. It also discusses the importance of corporate governance and ethical practices in preventing financial failures, concluding that companies need to prioritize financial planning and avoid conservative corporate cultures to survive in the market. The analysis draws on various sources, including reports and academic research, to provide a comprehensive understanding of the causes and consequences of corporate liquidation.

Advance financial accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
EVENTS THAT LED TO LIQUIDATION....................................................................................1
THE REASON BEHIND COMPANY’S FINANCIAL STRESS..................................................3
MAJOR FACTOR – LIABILITY...................................................................................................4
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Liquidity is regarded as the stage where it becomes difficult for the organization to
conduct its business operations and in turn company has to sell its assets when the company
becomes solvent. The ultimate reason behind liquidation can be considered as high debt burden
where the company has taken the higher amount of loan and is not able to repay the amount
back. The present study is based on three organizations named HIH insurance, OneTel company
and ABC learning that have gone into the process of liquidation due to the presence of different
reasons. Apart from this corporate governance and ethical activities of the companies have been
analyzed in the present study.
EVENTS THAT LED TO LIQUIDATION
A large number of valid reasons are present due to which companies operating in the
market reaches the liquidation stage and in turn, it becomes difficult to conduct overall
operations. The liquidation of HIH insurance was the biggest example of liquidation in the
Australian market where the overall analysis has shown that some issues in the internal system of
the enterprise were present such as ineffective monitoring, poor planning, ineffective utilization
of financial resources, etc (Jiangbo 2008). HIH group operates on the wider basis and is
comprised of HIH Casualty, FAI general insurance company, General insurance limited, etc.
Further, the directors of the organization breached their duty, and due to this reason, they were
not involved in the key affairs of the enterprise.
Overall the corporate culture of the business was conservative in nature along with the
poor governance practices that directly led to the downfall of the organization in the market.
Considering the acquisition strategy of HIH company which was also aggressive and this acted
as the main issue while maximizing profits. In March 2001, the estimated value of the firm was
between $3.6 billion and $5.3 billion as analyzed by liquidators. Further, the liquidation of the
business badly affected the construction sector where different builders undertaken by the
company had to seek replacement coverage (governance 2011). The key reason behind
liquidation was the inability of the organization to pay claims of insurance policy holders and
another form of debts that were due. The report published by the HIH royal commission
indicated that company witnessed loss of $73 million against a net earned the premium of $1550
million on 30th June 1999. So, this reflects the key reasons behind the failure of the company in
the market.
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In case of OneTel company, the ultimate reason behind failure was inappropriate
corporate governance. CEO’s of the organization has the high amount of control over the major
affairs and on other executives. Further, this directly led to the conflict of interest and this was
mainly compromised due to the provision of non-audited services of the organization. The top
executives of the company were not at all able to manage key activities, and this raised situation
of liquidation. The company was not able to manage its main expenses as the adequate amount
of profits were not earned (Monem 2011). This situation was adverse for OneTel company
operating in the market. Some valid reasons due to which organization reached into liquidation
position were wrong strategic decisions, ineffective pricing policy, unbridled growth, etc.
Further, it is a well-known fact that every organization has to take some corrective action for
managing overall cost and this is only possible when proper planning is done by top executives
which were not present in case of OneTel company (governance 2011). On the other hand, some
issues have been identified in the corporate governance structure of the enterprise that involves
ineffective audit control, poor pay to performance link execution, inappropriate communication
between management and board. Due to all these valid reasons, it became quite difficult for
OneTel company to operate in the market and company has to shut down its operations.
Considering the case of ABC learning center where the key operations of the company
were to deliver childhood education services in the market of Australia. Further, due to the
presence of a large number of reasons organization was not able to survive in the market
(Sammut 2008). The key reason was the rise in the overall level of the expenses that involves
advertising cost, staff salary and another type of costs due to which profitability level of the
company declined at the faster pace. Further, corporate governance practice of the organization
was also inappropriate where top executives of the firm were not able to manage overall
operations. In the year 2008, the organization suffered the loss of 1.78 billion. Apart from this,
the debtor director voted to enter into the practice of voluntary administration in Australia. Apart
from this, cash problem was witnessed by the firm in the year 2008 and due to this reason
situation of liquidation occurred (Crikey 2008). The firm was not able to manage its major
expenses, and overall profitability level decreased at the faster pace. So, these were some of the
valid reasons due to which ABC learning has to shut down its operations.
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THE REASON BEHIND COMPANY’S FINANCIAL STRESS
At the time of carrying out business activities and operations, it is required by
corporations to take care of areas such as corporate governance and ethics. In simpler terms,
corporate governance can be defined as the set of rules and procedures which promotes long
term relationship between management and all stakeholders. The practices of corporate
governance have a direct impact on the overall operations and business activities of an
organization. Companies such as HIH insurance company, ABC learning center, and One Tel
have set the example of how inappropriate corporate governance practices can increase the
overall financial stress on businesses (Bank 2006). The practices carried out HIH insurance
company cannot be termed as ethical as the company’s Board of directors were indulge in breach
of The Corporate Act which is completely against business ethics.
However, the insurance company has taken strict actions against those directors by
restricting them to be the part of decision-making process. Conservative corporate culture is also
considered as another major factor which has resulted in financial failure or liquidation of HIH
insurance company. Another reason why HIH insurance company practices are considered as
unethical is that the organization has misguided the investors by presenting wrong financial
figures and data in front of them (Steele, Wee & Ramsay 2016). Such type of practices directly
results in creating several obstacles in the long term growth and success of companies.
The financial failure of ABC learning center is another example which indicates the
significance of corporate governance practices and ethics in business operations (Walsh 2010).
The company was not able to obtain an adequate amount of cash flow, and overall operations
were affected by the same. In the short run, the learning center was somehow able to manage its
operational cost whereas, in the long term, it became quite difficult for the company to deal with
the same. The failure in corporate governance practices can also be witnessed by the fact that
ABC learning center was not able to carry out effective management of the funds which it has
obtained through the renowned banks operating in the country (Sammut 2008).
The concept of ethics and corporate governance reflect the fact that it is required by
companies to measure the impact of decision the on all stakeholders before taking any decision.
However, the case of One Tel was completely against this concept and this, resulted in
liquidation of the company in the long run (Morrison & Anderson 2015). Here, the two CEO’s of
One Tel were taking major decisions linked with financial management, operations and the
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views of other people on the board were not taken into consideration (Lane 2016). The result of
this is that the organization started to witness such as shortage of finances and losses every year.
Another reason, which has led to the liquidation of One Tel, can be termed as its auditor’s
conflict of interest.
MAJOR FACTOR – LIABILITY
Liability alone cannot be considered as the reasons behind liquidation of HIH insurance
company, ABC learning centre and One Tel. The main reason here is that these companies were
not able to carry out ethical practices and operations with guidelines of corporate governance. In
the modern era, the competition among businesses in Australian market has become so intense
that it is no longer easy for companies to sustain in long run (Saville 2003). Furthermore, ethics
and practices according to the guidelines of corporate governance can assists in carrying out
smooth flow of all functions and activities. HIH insurance company, ABC learning centre and
One Tel financial failure can be termed as perfect example of the situation which can be occurred
due to inadequate and ineffective financial planning (Kruger 2011).
These companies would have managed their cash flow and finances by carrying out
following business ethics and corporate governance practices.
CONCLUSION
In the modern era, companies cannot sustain in the marketplace without carrying out
adequate financial planning. Furthermore, businesses should avoid implementing corporate
cultures which are highly conservative. It can be inferred that HIH insurance company, ABC
learning centre and One Tel financial failure due to lack of corporate governance practices is a
big learning for other businesses operating in the Australian market. The failure in obtaining
required cash flow has resulted in creating several obstacles in the growth of the company.
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REFERENCES
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<http://www.theaustralian.com.au/business/business-spectator/the-abc-of-policy-failure/news-
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d1167b3594b991bee8853fe647e03465>.
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