Financial Accounting: A Report on Australian Company Liquidations

This report analyzes the liquidations of three prominent Australian companies: ABC Learning, HIH Insurance, and One.Tel. It delves into the financial accounting issues and underlying causes that led to their failures. ABC Learning's downfall is attributed to excessive expansion costs and poor cost management, while HIH Insurance faced issues related to fraudulent activities and corporate governance failures. One.Tel's collapse stemmed from a lack of corporate governance and inappropriate financial practices. The report highlights key factors such as accounting irregularities, debt burdens, and ineffective corporate oversight. It offers insights into the importance of sound financial management, robust corporate governance, and regulatory oversight in preventing company failures, emphasizing the need for accurate financial reporting and ethical business practices. The report provides a detailed understanding of how these companies went into liquidation and offers recommendations to prevent similar financial failures in the future.

Financial accounting
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Table of Contents
Introduction.................................................................................................................................................3
ABC learning...............................................................................................................................................4
HIH insurance.............................................................................................................................................6
One.Tel Phone Company.............................................................................................................................8
Conclusion...................................................................................................................................................9
Recommendation.......................................................................................................................................10
References.................................................................................................................................................11
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Introduction
The liquidation is the situation in which the company stops its existing operation and in the
recent year, many of the Australian company has gone into liquidation because they were unable
to meet out there liability. The present report discusses the reason of liquidation of the ABC
learning, HIH insurance and One.Tel phone company which was liquidated due to the company
financial stress. The report will help in identifying the possible reason which leads to liquidation
of these companies. The liquidation is the process through which life of the company is brought
to end due to certain reason. The company can either have voluntary liquidation or compulsory
liquidation. Compulsory liquidation is when the company closed down by the order of the court
and the voluntary liquidation is when the director, member, shareholder and other employee
dissolve the company due to incapability to perform the basic function. Among the three above
cases the reason behind the liquidation of the ABC learning was due to inability of the company
due to huge expenditure incurred by the company. On the other hand the HIH insurance and
One.Tel were compulsory liquidated as the company has ignored the corporate governance at the
time of conducting its operation.
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ABC learning
The ABC learning was once one of the largest service providers of early childhood training
program in Australia which went into liquidation due to fallout from the supreme mortgage
crises. The reason behind the failure of the company was thehigh cost of the care as the company
was operating with the cost of 80 to 90 percent of the operating revenue (Pretorius and Le Roux,
2011).The company was barely able to generate the surplus but was able to generate the
operating profit of 30 to 40 percent. The vision of the company corporatize of the cottage
childhood industry was sound and was supported by thegood demographic trend. Also, the
company strategy of attaining economy of scale by bringinga large number of childhood care
was also well executed. The company has only focusedon buying as many centers possible as the
company center from the year 2001 to 2005 has gone up from 43 to 697 and was not
concentrating over the growing cost of the center. The biggest acquisition of the company was
made in 2004 of rival company peppercorn childcare and grabbed the 450 center of the company
at a cost of $340 million. The company expansion plan at any cost leads to increase in liability
which was akey reason behind the liquidation of the company.
The grove during the year 2005 started the global push by acquisition in the United States and
later in the Britain. As stated by Ross, et. al. (2012), company concentrated over growing global
and took the eye of the company Australian childcare operation which wasthe main profit
generating asource of the company. The staffing cost of the company was increased particularly
staffing cost which leads to decline in the profitability of the company. The company was not
focusing on its core activity as around 200 centers of the company were unprofitable.
Also, the accounts of the company were acomplete mess as the company share remains
suspended pending due to therelease of the company accounts which was to be released at the
end of the August. The auditor of the company Ernst and young made huge effort to unravel the
way company accounted for its revenue and the way compensation payment was treated as
revenue. Also, the company corporate governance was poor as the company has never cared
about the same and has entered into many related party transaction. The company during the year
2006 for the purpose of renovation and maintenance work has paid $74 million to Queensland
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maintenance service that was listed as brother in law in the document of the fiscal year 2007
(Barnes, 2007).
The Eddy Grover was energetic and has the good vision but the issue was that he took theeye
from the management of the company for the purpose of attaining growth and has paid highly for
US and British acquisition. It creates huge pressure over the company to grow but has lack of
focus over the company operation which was the prime reason of liquidation of the company
(Pretorius and Le Roux, 2011). The company was wound up during the first half of 2008 as the
creditor of the company voted for liquidation due to thefailure of the company to discharge their
liability. The creditor makes the decision to wind up the 39 companies as the group debt of the
company were $1.9 billion. The following are the few of the reason behind the failure of the
ABC learning
Accounting issue – The reason behind the failure of the ABC learning was due to large amount
of license fee and goodwill both if which were intangible assets. The goodwill of the company at
the beginning of the 2007/8 was $37.4 million $647 million in childcare license. The goodwill of
the company rose to $271 million and license to $2.4 billion till the end of the year which are
worthless when the company runs into trouble.
Debt – The company liability due to refinancing has risen to$1.1 billion including the current
and non-current liability. The company profit at the first half of the year ending 2007/8 fell by
42 percent as the debt amounting the $1.2 billion were breached.
Operating cash flow – The Company was unable to generate the enough cash flow to pay
interest, salary and dividend. The company has only concentrated over the business expansion
and has ignored the current operation which has led to increase in debt of the company.
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HIH insurance
The HIH insurance was one of the largest insurancecompaniesin the Australia and was liquidated
during the year 2001 as the member of the company has much charge in relation to fraud. It was
one of the tremendous events as the company was too big and has agood position in the market.
In the case of the HIH insurance, there were many stakeholders including government, auditor
and the regulator of the company which was thereason behind the failure of the company
(Mardjono, 2005).The company accounting was focusing on the quantity rather than the quality
and the technical issue was not only the factor of failure of the company. As reported by HIH
royal commission report there were six prime reasons for the failure of the company. In the case
of HIH insurance, the assets of the company were measured with overvalued and the liability of
the company was undervalued to create the company which was more profitable therefore
increasing the market value.
Also the internal, as well as external auditor of the company, has also the vital role in the
collapse of the company and the society has questioned the credential of the auditor who was in
play. In the words of Mellahi (2005), accountant of the company has provided with the
misleading information which has led to fraud. As reported by HIH Royal commission report
there was mismanagement in the corporate culture of the company. It was the corporate culture
of the HIH which force the director and the manager to commit the fraud. The company board of
director failed on thecertain transaction and lacked consideration of the certain issue to
emphasize on debt and outstanding claim. Also the CEO Of the company Ray Williams has
enormous influence over the operation decision of the company as his decision manipulates the
duties and the action the people working with the board of the director.
The CEO of the company has the intention of increasing the market value of the company due to
which the accountant who was working with honesty and integrity failed to adequately report the
company transaction (Mirshekary, et. al., 2005). Also, the managers and the director who was
aware of the situation should bring the issue to attention. Also, the auditor of the company should
have made abetter judgment with the information which they were provided by the company.
The Royal commission has found that the director of the company has breached their duties
under the corporation act which will lead to asustainablefinancial penalty. Also, the company
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aggressive strategy of growth at any cost and not revealing the negative position has created the
effect of the profit maximization and adherence to sound corporate governance procedure. Also,
the weak corporate culture of the company as the chairman and the CEO was engaged in the
high-risk practice in the competitive market (Mardjono, 2005). Also, the independent director
has misled the financial position of the company.
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One.Tel Phone Company
The company was the fourth largest and is the part of the growing list of the corporate failure as
the company financial position was weak which led to insolvency. The reason behind the failure
of the One.Tel was also of lack of corporate governance practice as the company annual sales
were AU$653 and operation in seven countries. The two CEO of the company Jodee Rich and
Brad Keeling has excessive influence over the board of director. The dominance of the corporate
governance was reflecting over the composition of the audit, corporate governance and the
remuneration committee (Avison and Wilson, 2002). The company failed due to corporate
structure failure as the two CEO has excessive control over the board of director which reduces
the capacity to provide effective oversight and control. Also, the company large investor was
misled with the company financial position as they completely relied on the reporting and
executive director of the company and has taken the little interest in the management of the
company (Avison and Wilson, 2005). The company was specially making money through stock
market speculation and the bonus paid was tied with the company rise in price rather than arise
in profitability. The few of the reason behind the failure of the company were inappropriate
compensation, lack of regulation, lack of independence and manipulation in accounting.
Also, the now- executive director of the company were ineffective due to their close relationship
with the CEO and the auditor were having aconflict of interest due to the provision of the non-
audit service. The boards of director of the company were not independent which was affecting
the behavior of the company. The company at the time of liquidation were having more than
3000 creditors who were demanding around $600 million for the company and was losing $12
million per weak (Habib and Azim, 2008). The company has aconnection in higher corporate
circle sow was controlling the media to create the positive image of the company. The company
failure was the major blow for the federal liberal government which was facing national election
later in the year and is struggling with the poor economic outcome.
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Conclusion
Thus the above report has provided us understanding about the reason for thefailure of the major
company in Australia and the reason why the company has done manipulation in the accounts to
mislead the users of the financial statement. The Report has provided us understanding that the
failure of the ABC learning was because the company was focusing on the expansion rather than
managing the cost of existing operation. On the other hand the HIH insurance and the One.Tel in
spite of the poor financial position has gone into liquidation as the company was not able to
discharge its liability in time.
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Recommendation
The report has assisted in obtaining the understanding of the causes of failure of the three big
companies the government and the company need to work on a certain area to present true and
fair value of a financial statement of the entity. Also, the government needs to create the policy
which reduces misstatement in the financial statement and promote adequate reporting over the
financial statement of the entity. Also, the company needs to work on their corporate governance
and should be responsible to the society for its operation. Also, the company needs to work over
ethics and moral which will ensure that the company survives in the long run.
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References
 Avison, D. and Wilson, D., 2002. IT failure and the collapse of One. Tel. In Information
Systems (pp. 31-46). Springer US.
 Avison, D. and Wilson, D., 2005. IT Failure and Professional Ethics: The One. Tel Case.
PACIS 2005 Proceedings, p.1.
 Barnes, A., 2007. Australian unions in 2006. Journal of Industrial Relations, 49(3),
pp.380-393.
 Habib, A. and Azim, I., 2008. Corporate governance and the value-relevance of
accounting information: Evidence from Australia. Accounting Research Journal, 21(2),
pp.167-194.
 Mardjono, A., 2005. A tale of corporate governance: lessons why firms fail. Managerial
Auditing Journal, 20(3), pp.272-283.
 Mellahi, K., 2005. The dynamics of boards of directors in failing organizations. Long
range planning, 38(3), pp.261-279.
 Mirshekary, S., Yaftian, A.M. and Cross, D., 2005. Australian corporate collapse: The
case of HIH Insurance. Journal of Financial Services Marketing, 9(3), pp.249-258.
 Pretorius, M. and Le Roux, I., 2011. Successive failure, repeat entrepreneurship, and no
learning: A case study. SA Journal of Human Resource Management, 9(1), pp.1-13.
 Ross, P., Sy, A. and Tinker, T., 2012. ABC Learning: accounting lessons never learned?.
International Journal of Critical Accounting, 4(1), pp.21-29.
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