Liquidation of Companies: Financial Accounting Assignment Report

This financial accounting report examines the process of company liquidation, exploring the various reasons that contribute to a company's closure, including financial mismanagement, unethical accounting practices, and poor corporate governance. The report uses case studies of prominent Australian companies—ABC Learning, One Tel, and HIH Insurance—to illustrate these points, detailing how factors such as unsustainable debt, fraudulent financial practices, and ineffective management led to their downfall. It emphasizes the roles of management and auditors in preventing liquidation, highlighting the importance of ethical and social accounting, and the necessity of strong corporate governance. The report concludes with recommendations to help companies avoid liquidation, offering insights into financial stability and responsible business practices.

FINANCIAL
ACCOUNTING
ASSIGNMENT

1
By student name
Professor
University
Date: 16 September 2017.
1 | P a g e

2
Executive Summary
The report has been prepared on the topic of liquidation of the companies where multiple reasons
attributable to liquidaytion has been discussed. Its not that only debt not being paid in time
leadsto liquidation or winding up of the companies, there can be several other reasons which
have been discussed and can be seen in the sample companies taken in the report. The report also
highlights the role of the management and the auditors of the company in avoiding the
liquidation and thereby losses to the investors and stakeholders. Ethical and social accounting
and corporate governance have assumed great importance in the past few years and it is
important for the companies to follow the same. At the end, conclusion has been drawn and
recommnedations have been given to help companies avoid such situation.
2 | P a g e

3
Contents
Introduction – Liquidation & its basics........................................................................................................4
Case studies on Liquidation.........................................................................................................................5
ABC Learning Company...........................................................................................................................5
One Tel Phone company..........................................................................................................................6
HIH Insurance company...........................................................................................................................7
Conclusion...............................................................................................................................................8
Recommendation....................................................................................................................................8
References...................................................................................................................................................9
3 | P a g e

4
Introduction – Liquidation & its basics
Liquidation is a procedure or process in which company has to close down all its operation and
sell off its assets and properties to pay off all its liabilities and debts. The amount realised from
sale of assets and property is given out to creditors in order of priority. The liquidation can either
be voluntary liquidation which is recommended by shareholders and director, or compulsory
liquidation which is ordered by court (Belton, 2017). The whole procedure of liquidation is
managed by independent practitioner or the official liquidator who have sole and whole right to
sell off all the assets and investment to pay off creditors and to distribute the remaining amount
to shareholders. It is an end of the going concern assumption of the company and ultimately
affects all the stakeholders who are connected with company (Bromwich & Scapens, 2016).
Hence, the company must try to avoid this situation in the interest of company and stakeholders.
It is just an alternative of formal winding up after that company is incapable to file annual return
or annual accounts and the name of company strike off from the register of company.
Sometime company not able to fullfill its objective and making loss continuously, then
the shareholders and director pass resolution the end of the company and can call for the
liquidation process to begin. In case of compulsory liquidation a petition may be lodged with the
court by the company itself, creditors, official receiver, secretary of state and contributories.
There are various reason because of which company might get liquidated (Alexander, 2016).
Some of these are the objective for which company got incorporated might have been fulfilled,
the company not getting certificate of incorporation within 12 month of incorporation, unable to
pay its debts with the time limit, inappropriate geographical location, the company may be
making the losses year on year or the company may be involved in the illegal business or the
working capital for continuation of the business might not be adequate, etc. the company may
also be wound up because of fraudulent financial practices or not following the ethical
accounting practices or for non compliance of rules and regulations. All the above mentioned
reasons have been explained with the help of the three major Australian companies which went
into liquidation for a number of reasons (Bizfluent, 2017).
4 | P a g e

5
Case studies on Liquidation
ABC Learning Company
ABC learning has been a renowned company in Australia in the past known for providing child
education services. It had a number of primary and secondary child education centres spread
across Australia. The margins as well as the profit for the company was high in the year 2000.
The new auditors came for the company in the year 2000 and the company was also listed on the
stock exchange in 2006 with a massive market value of $ 2.5 billion (Chron, 2017). The
company was going high but all of a sudden it was found to be involved in a number of
malpractices including unethical accounting and window dressing of the financial statements.
The company had a large reserves of debt which it was never able to pay and as a result the
company went into liquidation. As a result of this, a number of investors were affected and
employees of the company were rendered umeployed. The downfall of the company can also be
attributed to the deeds of the auditors as well as they were not able to identify the issues before
during detective control and did not highlight the same to the management, thereby bringing up
the official end to the identity of the company. In the year 2009, this company was being taken
up by another renowned company in Australia named Goodyear Early Learning, which has more
than 600 centres in total (Choy, 2018).
The liquidation of ABC learing happened as the company was unable to pay off its hue pile of
debts which have accumulated over time and thus there was no option to exist but liquidate. The
auditors of the company also did not agree to sign the audit report as the accounts were
materially misstated as per them and the management was asked by them to reinstate or re-
prepare the financial statement to which the company’s management did not pay attention and
the result was liquidation (Defond & Lennox, 2017). The company was doing exceeding well in
the early 2000 era when the company was expanding and it had more than 2300 centres in
Australia and it also succeded in gaining more than 1% market share in United States. The
company was also doing some of the major acquisitions during that period and was giving a
boost to ist profits in the form of non organic growth with margin ranging from 15-20% during
the next few years. But along with all this, the company also had its debt balances increasing
5 | P a g e

6
constantly and due to inability to pay so, the share prices fell by more than 40% in 2007. The
company was wound up amidst all this and it was also delisted from the stock exchange (Dichev,
2017).
It was not only for the above mentioned reason that the company had to liquidate but many other
reasons like the unethical business means, non compliance of corporate governance, incorrect
and reckless valuation of the acquisitions without any study and analysis (Werner, 2017). The
company also suffered from poor internal control and incomeptitive management which wasnot
concerned to do the proper due diligence of the companies and new entities being acquired. It
also came to notice that the difference of actual valuation and the consideration actually paid
were to the tune of million dollars. These numbers proved the fact that the acquisitions were
never being assessed on the basis of the future economic benefit arising from the acquistions but
it was just a stereotype rubber and stamping activity in which the management was involved. For
example, one of the acquisitions which was valued $ 70 Mn had a future economic benefit of
only $ 30 Mn, thereby giving excessive payments and increasing liability on the balance sheet
(Vieira, et al., 2017).
One Tel Phone company
One of the another examples which can be considered here is the One tel phone company which
again was a renowned brand in Australia known for its telecommunication and network services.
It was involved in constructing and maintaining networks, internet and mobile services, new
information system and marketing as well. Due to its products, the company had as many as 2
million customers in 8 countries (Visinescu, et al., 2017). The main reason for the liquidation of
this company was again unethical accounting practices, weak internal controls and non
competent management which hardly bothered to look into the giving correct, true and fair view
of the business to the stakeholders. The company was involved in flowing wrong information in
the market and expected revenues and profits based on past year trends which later on proved to
be too much for the company (Saeidi, 2012). The company made tremendous profist in the year
1997 to 2000 with sales growth ranging from 127%, 40%, 57% to 100% respoectivey for the 4
years. In the wake of emerging business, the company gave an estimation of 10 times increase in
sales which was never achieved. The company’s balance of liabilities and the debts kept on
6 | P a g e

7
increasing in the balance sheet and was additionally hit when the company decided to take the
spectrum licenses for huge consideration even though the same were not required then. In the
year 2000, the company suffered one of the biggest losses in Australia amounting to $ 293 Mn
and as a result the share prices fell to $ 1. Inspite of having the losses, the company pursued
giving its directors Rich and Keeling handsome pay in the form of million dollars in bonus
(Sithole, et al., 2017). All this added to the misery of the company, the debts multiplied and the
cash flow became negative, the company wasn’t able to pay and it had to sell off its properties
and assets and thereby undergo liquidation in 2001. The other reasons can be said to be non
adherence to the corporate governance standards, incorrect reporting in the financial statements,
inflated figures for the sales and receivables and also the profits,. Even the auditors missed
noting the same during testing the detection controls and therefore they can also be said to be
responsible for the same.
HIH Insurance company
The third company which has been considered here for discussion on liquidation is HIH
insurance company which was known in Australia as the 2nd largest insurer. However, the
compay suffered huge losses amounting to $ 5.3 Bn due to which the company had to liquidate.
It was one of the major collapse of business in Australia. Again the main reason for liquidation
here was the overvaluation of the acquired company FAI along with aggressive accounting
techniques being implemented by the company (Kangarluie & Aalizadeh, 2017). Bedies
suffering a huge loss, the company also paid the huge severance package to the tehn chief
executive office of the company who left the company one year ago before the liquidation. The
downfall of HIH insurance company also impact the housing and the construction industry as a
whole big time. The company mainly dealt in the perperty insurance and the underwriting
services but the aggressive accounting techniques led to wrong disclosure of the assets and
liabilities in the balance sheet (Raiborn, et al., 2016). One of such wrongly reported information
was with respect to CE health international where the liabilities and the reserves were under
reported. As with the other two companies, proper due diligence was also not being done in the
case of acquisitions in the case of HIH insurance as well and all the above mentioned factors
cumulatively led to winding up of the company. The losses were to the tune of $ 100 Mn to $
7 | P a g e

8
300 Mn and the same was not reported in the financials and therefore again the auditors are also
to be blamed for the liquidation and false reporting.
Conclusion
From the above discussion on the three major companies, we have found multiple factors which
can lead to liquidation of the company. Its not only the inability of the company to pay the debt
but many other factors which cumulatively lead to the liquidation or winding up of the company.
Some of them are ineffective, ineffiencient and incompetent management who are not being able
to highlight the accounting issues and risks of inability to oay off debts to the major stakeholders,
fraudulent means of accounting, unethical ways of valuation, lack of due diligence while making
acquisitions, weak internal controls and many more. Not onl the management, but the auditors of
the respective companies are also to be held accountable for the same as they were the one who
should have assumed the responsibility of finding out these accounting frauds and inefficiencies
and should have discussed the same with the management. It is for all these reasons that the
government has framed laws that are strict with respect to liquidation of the companies and they
need to be handled by an independent liquidator.
Recommendation
There are many recommendations and learnings which can be pulled out of above obsrvations
and discussion. Firstly, the companies and its management should understand the impact of
liquidation. It not only hurts the individual investors and employees, rendering them unemployed
but also affects the respective industry and economy as a whole. The investors take the decision
on the basis of the financial reports being published by the company, therefore the same should
be correctly reported so that the decision making can be enabled. Furthermore, in order to make
the system more reliable and stringent, the government has come out with several rules and
regulations on liquidation and that the same shouldbe done by appointing an official liquidator.
8 | P a g e

9
The analysis also helps us to understand the relevanvce of corporate governance, reporting, laws
and regulations. Finally, the auditor as well as the management of the company should be true
and fai in its approach so that it not only leads in development of the profession but also the
economy as well.
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
International ltd.
Bizfluent, 2017. Advantages & Disadvantages of Internal Control. [Online]
Available at: https://bizfluent.com/info-8064250-advantages-disadvantages-internal-control.html
[Accessed 07 december 2017].
Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management
Accounting Research, Volume 31, pp. 1-9.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.
Ecological Economics, p. 145.
Chron, 2017. five-common-features-internal-control-system-business. [Online]
Available at: http://smallbusiness.chron.com/five-common-features-internal-control-system-business-
430.html
[Accessed 07 december 2017].
Defond, M. & Lennox, C., 2017. Do PCAOB Inspections Improve the Quality of Internal Control Audits?.
Journal of Accounting Research, 55(3), pp. 591-627.
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), pp. 617-632.
Kangarluie, S. & Aalizadeh, A., 2017. 'The expectation gap in auditing. Accounting, 3(1), pp. 19-22.
Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good
Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.
9 | P a g e

10
Saeidi, F., 2012. Audit expectations gap and corporate fraud: Empirical evidence from Iran. African
Journal of Business Management, 6(23), pp. 7031-41.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention
on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
Vieira, R., O’Dwyer, B. & Schneider, R., 2017. Aligning Strategy and Performance Management Systems.
SAGE Journals, 30(1).
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business
Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.
Werner, M., 2017. Financial process mining - Accounting data structure dependent control flow
inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.
10 | P a g e