Financial Accounting: Analysis of Australian Company Failures

This financial accounting report investigates the liquidation of three major Australian companies: HIH Insurance, ABC Learning, and One Tel Phone. The report begins with an introduction to each company, followed by an analysis of the key events and reasons that led to their collapse, including acquisitions, accounting policy violations, and debt. The study then examines the ethical and corporate governance failures within each company, highlighting unethical practices and poor decision-making. Finally, the report assesses the role of liabilities in the companies' failures, emphasizing how excessive debt and financial mismanagement contributed to their insolvency. The report concludes by summarizing the key findings and implications of these corporate collapses.

Running head: FINANCIAL ACCOUNTING
Financial Accounting
Name of the Student
Name of the University
Author’s Note

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Executive Summary
The main aim of this repost is to conduct an investigation on the major reasons behind the
collapse of three major Australian companies; they are HIH Insurance, ABC Learning and One
Tel Phone. The first part of the report provides short introduction of these three companies. The
objective of the second company lies in the identification of major events responsible for the
collapse of these three companies. The next part explains the collapse of these companies from
ethical perspective. The last part of the report shows the role of liabilities in the collapse of these
three companies.

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Table of Contents
Introduction......................................................................................................................................3
Introduction of the Companies........................................................................................................3
Reasons for Liquidation...................................................................................................................3
Ethics and Corporate Governance...................................................................................................5
Role of the Liabilities......................................................................................................................6
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

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Introduction
The process of winding up is known as the procedure of liquidation in which a business
entity proceeds through the affairs of shut down the business permanently. In the process of
liquidation, all the rights and liabilities are recognized; and the liquidator settles the claim of the
creditors either completely or partially (Coad, 2014). It needs to be mentioned that certain
reasons contribute towards the liquidation of the business entities; some of them are the adoption
of aggressive accounting policies, fault in corporate governance, unethical reasons and others.
The main aim of this report is to analyze and evaluate different reasons for the liquidation of
three of the major companies of Australia; they are ABC Learning, One Tel Phone and HIH
Insurance.
Introduction of the Companies
ABC Learning: ABC Learning used to be considered as one of the lading entities in the
Australian educational sector. ABC Learning had a market capitalization of almost AUD$2.5
billion and was listed in Australian Stock Exchange (ASX). However, due to the effects of
mortgage crisis, the company went to managerial receivership and huge amount of debt was also
responsible for it. Established in the year 1988 in Queensland, ABC Learning established more
than 900 centers all over the Australia. In the year 2006, the company expanded into the market
of United States (US) and United Kingdom (UK) with the acquisition of Busy Bees Group for
US$330 million (Blythe, 2017).
One Tel Phone: One Tel Phone was an Australia based telecommunication company established
in the year of 1995. The major business strategy of One Tel Phone was to focusing towards the
needs of the customers so that better products and services can be provided to them. One Tel
Phone possessed the position of the fourth largest telecommunication company in Australia
before liquidation. The aim of the company was to establish a youth oriented image by selling
mobile phones and One Net services in Australia (Blythe 2017).
HIH Insurance: HIH Insurance was the largest insurance company in Australia. In the years
1997 and 1998, HIH Insurance made many acquisitions both in Australia and globally. The
company got listed in ASX in the year 1992. In the year 1995, HIH Insurance sold its stakes to
the company of Switzerland and changed its name. At the time of liquidation, the total amount of
loss of HIH Insurance was $5.3 billion. As a result of the cause of liquidation, many of the
members of the company were convicted to imprisonment. For this reason, the collapse of HIH
Insurance is considered as the large corporate collapse in Australia (Comino, 2015).
Reasons for Liquidation
Specific events or reasons lead to the collapse of these three companies and they are
discussed below:
HIH Insurance: The reasons are discussed below:

4FINANCIAL ACCOUNTING
 HIH Insurance’s acquisition of FAI Insurance was a wrong move as it did consist of large
amount of investment that was harmful for insurance business. The company had to face
major damage due to this event (Leung, et al., 2014).
 Another wrong decision of HIH Insurance was to enter into the business financing the
films that contributed towards more than hundred million dollars of loss to the company.
 The insurance form also had to face huge loss due to the natural disaster in Florida. This
incident led to the development of huge amount of debt and this debt led to the loss for
the company. This is considered as a major reason for the liquidation.
 The sudden or unexpected change in the accounting policy of the payment of
compensation for the employees of California can be considered as another major event
that led to the liquidation of HIH Insurance (Carnegie and O’Connell, 2014).
 As per the estimation of the liquidator, HIH Insurance lost approximately $800 million
over a time of six months due to the reason of quicker expansion, complex structure
reinsurance and the unsupervised delegation of authorities.
One Tel Phone: The following discussion shows the reasons:
 The strategy of One Tel Phone was to show superior amount of profit and to defer the
major business expenses over three years. This adopted accounting policy of One Tel
Phone was illegal as it was against the accounting standards and policies (Hill, 2013).
 In the year 2000, One Tel Phone reported a loss of $291 million due to the adoption of
illegal accounting standards and policies. It affected the share price of the company and
the share prices fall below $1.
 In the year 2001, the company faced shortage in the fund to run the business and the
director of One Tel Phone, Rodney Adler sold 5 million shares for $2.5 million. As per
the report of the administrator, One Tel Phone became insolvent and started to lay off
1400 employees (Goedeke, Mueller and Pankratz, 2017).
 Due to the process of liquidation, One Tel Phone was responsible for the compensation of
$92 million as the company did not exercise their power of due care and diligence.
ABC Learning: The reasons are shown below:
 In the second half of the year of 2007, ABC Learning had to face a fall of 42% in the
profit that is for $37.1 million. At the same time, the company incurred a debt of $1.8
billion. These two are the major reasons or the collapse of ABC Learning.
 The share prices of ABC Learning fell by 43% to $2.15 after a low trading of $1.15. At
the end of the period, the proprietor of ABC Learning was forced to sell the stakes of $20
million and $6 million at a sum of $2.7 million. Due to this, the company had to face
trade suspension as the company failed to release its earnings for the year 2007 to 2008
(Newberry and Brennan, 2013).
 In the year 2008, ABC Learning fell into receivership due to huge increase in debt and
the failure of the auditors to sign off the accounts.
 ABC Learning adopted incorrect method of intangible assets accounting. As per the
company, the goodwill value of licenses and other intangible assets was $2.4 billion and
only $8.4 million was charged for impairment. This aspect led to the wrong valuation of
future cash flow and the company lost 42% in profit. It is considered as the prime reason
for the collapse of ABC Learning (Brown and Davis, 2015).

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Ethics and Corporate Governance
In the business organizations, ethics concern the business’s judgment about the right and
wrong. The business decisions taken by the management of the companies are influenced by the
culture of the companies. All the business decision is required to be ethical and the managements
of the companies need to decide the right course of action (Hartman, DesJardins, and
MacDonald, 2014). Being ethical may involve the rejection of route that can lead to the biggest
short-term profits. At the same time, the implementation of effective corporate governance
policies leads to the controlled and directed ethical actions of the businesses. Business entities
can become majorly beneficial from ethical behavior and effective corporate governance.
Businesses can attract more customers towards their products and services that can increase the
sales and profitability. Ethical considerations help in the reduction of employee turnover that
leads to increased productivity. At the same time, it increases the goodwill that helps in attracting
more employees (Crane and Matten, 2016).
The following discussion shows the ethics and corporate governance failure in explaining
the collapse of the three companies.
HIH Insurance: The ethical issues are show below:
 HIH Insurance did the acquisition of FAI Insurance without obtaining the approval from
the Board of Directors. At the same time, the director abruptly resigned after the dispose
of his shares. This whole scenario indicates towards the poor corporate governance in the
company (Tricker and Tricker, 2015).
 Apart from the above, HIH Insurance made a poor decision by entering into the film
business that was highly risky. It also shows poor decision making as well as poor
corporate governance in HIH Insurance.
 HIH Insurance was involved in unethical business practice by not paying attention to
continue work with due diligence and it shows the lack of ethics in the business operation
of HIH Insurance.
 Improper management activities can be seen from Mr. Williams who issued prospectus
with material omission and did overstate the profit for the year 1998-1999 (Tricker and
Tricker, 2015).
One Tel Phone: Following are the unethical issues in One Tel Phone:
 One Tel Phone did not comply with the ethical code of conduct with the violation of the
accounting standards and principles.
 Major failure can be seen from the administration team of One Tel Phone in monitoring
the financial performance of the company. In addition, the management of One Tel
Phone ignored the investment areas with high risk. It shows the lack of corporate
governance in the company (Clarke and Dean, 2014).
 One Tel Phone failed in adopting strong pricing strategy that contributed to the
liquidation of the company as there was major loss of income for the entity. It shows the
lack of ethics from the directors in discharging their duties.

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ABC Learning: The ethical issue are shown below:
 The incorrect adoption of accounting policies is considered as the prime reason for the
liquidation of ABC Learning and it contributed towards the fraudulent activities in the
accounting practice of the company. In addition, the management of ABC Learning
unethical bookkeeping practices.
 Improper rendering of the services to the customers and government can be considered as
another major unethical issue in the collapse of ABC Learning (Baber, et al., 2015).
Role of the Liabilities
The above discussions show the reasons for liquidation of the three companies along with
the ethical and corporate governance issues. However, it needs to be mentioned that liabilities
had a major role to play in the collapse of these three companies (Abid and Ahmed, 2014). In
case of ABC Learning, the amount of liability was stable in 2007, but there was a reclassification
of AUD$1.1 billion of borrowings from current and non-current liabilities as a result of
refinancing. In the financial year 2007-08, there was 42% fall in the profit due to the increase in
liabilities and the company had to pay AUD$1.2 billion due to the breach in debt covenant. The
same type of scenario can also be seen in case of HIH Insurance. According to the internal report
of HIH Insurance, the company had high debt leverage and insurance liability and it led the
company towards insolvency (Abid and Ahmed, 2014). It needs to be mentioned that the
company did the acquisition of FAI for $300 million that was worth $100 million. It created high
debt for the company. In case of One Tel Phone, the management of the company was majorly
responsible for hiding the liabilities of the business. The earlier discussion states that the
company was responsible for the payment of $92 million as compensation that increased the
liability of the company and majorly contributed towards the collapse. Thus, the above
discussion indicates towards the role of liabilities to the collapse of these companies. For all the
three companies, wrong business decisions led to excess amount of liabilities and the presence of
these inabilities were major reason for the collapse of these three companies (Abid and Ahmed,
2014).
Conclusion
The above discussion indicates towards the fact that many events contributed towards the
collapse of HIH Insurance, ABC Leaning and One Tel Phone. In case of all the three companies,
the major reason for collapse was the wrong decision-making from the senior management like
wrong expansion plan, wrong investment plan, adoption of wrong accounting policies,
manipulation with the financial accounts and others. In addition, it can also be observed that the
lack of ethics and ineffective corporate governance were also hugely responsible for the
liquidation of these companies. Apart from all these, the increase in the liability of these three
companies was another major reason for the liquidation. All these reasons together contributed
towards the fall of HIH Insurance, ABC Learning and One Tel Phone.

7FINANCIAL ACCOUNTING
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