Financial Analysis: Liquidation of ABC Learning - ACC701 Accounting

This report provides an analysis of the liquidation of ABC Learning, an Australian company that was a major provider of early childhood education services. It examines the events leading up to the liquidation in 2008, including over complexity, poor decision-making, an aggressive growth strategy, and ineffective corporate governance. The report highlights accounting issues, debt management, and operating cash flow problems as contributing factors. It further discusses the ethical and governance failures that led to financial stress, such as inadequate monitoring, inappropriate strategic planning, and issues in accounting reporting. The report concludes that liabilities, combined with poor corporate governance, questionable accounting practices, and ineffective auditing, played significant roles in the collapse of ABC Learning. The analysis offers insights into managing finances and maintaining ethical standards during business expansion.

Accounting Financial ACC701
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Executive Summary
This report explains about the liquidation of ABC learning, Australia. There were various
reasons due to which the company was led to liquidate. The analysis of the company has been
done to evaluate the factors which led to the liquidation of the organization. With that the ethical
and governance factors are also highlighted by explaining the financial stress of ABC Learning.
The liability was not only the factor in the organization which led to the liquidation of the
organization but there were many other factors such as the prices of the product and its
expansion. These all factors equally contributed to liquidate the ABC Learning. The collapse of
the companies was incorporated with various deficiencies which are related to the weaknesses of
the internal control, quality of auditing, strategic mistakes and the policies of pricing. There were
various financial troubles that were faced by the ABC Learning while providing the childcare
services in all over the world.
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Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Events that led up to the liquidation............................................................................................................5
Ethics and governance in explaining company’s financial stress.................................................................6
Were liabilities a major factor in contributing to the liquidation of the company?......................................7
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10
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Introduction
ABC Learning was founded in 1988 in Brisbane, Australia. It is the Australian company which
was one of the largest company to provide the early childhood education services. This company
was listed in the Australian stock exchange with its market share reaching the $2.5 billion in
March 2006. The company was led to the liquidation once the fallout was done from the
subprime mortgage crisis which caused the repayment of the debt to overcome the company. The
ABC learning went into the liquidation which was brought by Goodstart Limited in 2008. It was
acquired by the Goodstart childcare in December 2009.
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Events that led up to the liquidation
The ABC Learning was led to the liquidation in 2008 due to various reasons. There was not only
one reason that led to the liquidation (Jones and Salo, 2017). The reason behind the liquidation
was over complexity, decision making was poor, aggressive growth strategy and ineffective
corporate governance. Despite selling of all the assets the company led to the receivership in
November 2008 as the debts were increased and the auditors of the company were unable to sign
off the final accounts of ABC Learning. The voting was done by the creditors to wind up the
company and it was wounded up in June 2010 (Jones and Salo, 2017). The ABC which manages
nearly 12000 centers in Australia was facing the various financial problems. ABC was also
trying to take a loan agreement from the Common Wealth Bank who believed to own $500
million but the ABC Board was rejected by the banking Syndicate. The first reason for the
collapse of the organization was that the Grover’s was with the strategy of achieving the
economies of scale by bringing together all the large number of the childcare centers. They have
the strategy of buying as many acquisitions as they could so from the 2001 to 2005 it took the
ABC Centres from 43 to that of the 697 (Jones and Salo, 2017). The strategy of taking the more
acquisition by less focusing on the cost termed to be the wrong decision for the organization. The
main issue about the collapse was its business model, accounting and the capital expenditure. It
was also seen that the operations of ABC Learning were run in an unclear way which led to
misunderstanding of their operations to the managers (Wehmeier and Raaz, 2012).
Accounting Issues
There were the accounting issues that was recognized as the profits of the ABC Learning were
increased which questioned about the valuation of the underlying assets that almost 70% of its
assets were intangibles. There was the risk involved with the valuation of the assets so as to pay
off its obligations (Jones and Salo, 2017). With this the ABC appointed three different auditors
all of which provided the different views about the financial statements. So by receiving the
unqualified opinions from the auditors held the organization to collapse as there involved the
accounting issues (Jones and Salo, 2017).
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Debt
The ABC Learning has loans from several leading banks. When the trouble was faced by the
organization, it tried to renegotiate the agreement of the loan from its various bankers but that
plan was rejected by the Syndicate (Moisello, 2012). So, the reliability on the bank loan for its
expansion was another wrong decision which was taken by the organization due to which the
organization led to the collapse.
Operating Cash Flows
The operating cash flow is another issue which led to the collapse of the organization which was
that the ABC was not able to generate the operating cash flows from the suppliers, payment of
the interest and the dividends and salaries. This was due to the unqualified operations and their
working (Moisello, 2012).
Ethics and governance in explaining company’s financial stress
The financial stress is the stress for the organizations related to availability of the finances
(Wehmeier and Raaz, 2012). The finances are less available with the ABC Learning which led to
the collapse of the organization by not having the maximum amount to pay back the debts from
its assets or the liquid cash. There was the lack of the corporate governance systems in the ABC
Learning before its collapse. The issues which are related to the ethics and the corporate
governance are very much important for the organization and the investors so that the company
can achieve the growth in the competitive environment (Moisello, 2012). The collapse of the
ABC Learning is somewhere affected by the ethics and the governance due to which the liquidity
has been attained by the organization. There are various ethics and governance factors which led
to the liquidation such as the failure in the monitoring strategy, planning for the strategy was
inappropriate and the issues in the accounting reporting (Wehmeier and Raaz, 2012).
The monitoring of the financial accounts was not maintained within the organization. The
effective monitoring should be done in all the organizations so that the liquidity in the
organization can be maintained (Lane, 2016). The operations of the organization was monitored
monthly as well as quarterly so that the discrepancies will be solved but while the evaluation
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auditors found that there were issues in the financial accounts and the operations of the business
(Fatoki, 2014). There were many mismatches of the transactions so the auditors failed to sign the
report (Wehmeier and Raaz, 2012).
The planning for preparing and implementing the strategy was should be done appropriately so
that the issues related to the ethics can be resolved. The corporate should make the strategies
which incorporates the unethical actions in their planning (Lane, 2016). The liquidation of the
ABC Learning was done as they do not have the proper corporate governance strategy in their
strategies (Moisello, 2012).
The accounting reporting of all the transactions should be done according to the Australian
Accounting Standards. Australian Accounting Standards ensures that all the information in the
financial accounts of the organization should be recorded in the true and the fair manner (Lang,
et. al., 2012). The accounting reporting was not done in the appropriate way by the ABC
Learning so the auditors failed to investigate their accounts (Lane, 2016). This was caused as
there were the frauds which were done by the directors of the organization.
These were the ethical and the governance which explains the financial stress of the
organization. These were less considered by the ABC Learning which was the biggest reason for
the collapse of the organization (Lane, 2016). The ethical and the compliance issues are to be
considered by the organization so that the healthy environment can be maintained which can
benefit the investors of the organization. With this the unethical behavior of the directors was
also one of the issues as the directors of the organization were less concerned about the ethical
responsibility (Fatoki, 2014). The ignorance of the ethical issues laid to the decrease in the
education centers which in turn decreased the revenues of the organization (Lane, 2016).
Were liabilities a major factor in contributing to the liquidation of the company?
ABC Learning was one of the largest child care company in Australia which winded up in 2008.
There were many reasons which led to the winding of the company one of which is the liability.
The ABC Learning took various loans from the bank for expanding its business and acquiring
more of the child care centers (Sumsion, 2012). But for the expansion the company was
moreover reliable on the loan agreement which increased the obligations of the organization. So,
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the situation of winding aroused when the organization was not able to pay back its liabilities
from the net assets. With this the ABC was also the victim of the debt-fuelled as it moved
beyond the native shores to convert the cottage childcare industry into the global business
(Sumsion, 2012). The liability was the factor but with this the poor corporate governance and the
accounting which was questionable is also involved in liquidation of the organization. In 2007
the company bearded the unexpected drop in the profits of 42% and was with the debt of $1.8
billion which led to the decline in the company’s price of shares (Sumsion, 2012). So, the shares
were suspended of the ABC Learning’s as it failed to release its earnings for the financial year
2007-08. There were other factors also which led to the liquidation of the organization with this
those are the pricing strategies, effectiveness in the auditing and the management of the ethics.
There was the lack of the effectiveness in the auditing of the organization as the auditors were
unqualified and the effectiveness was not maintained in the auditing of ABC Learning
(Wehmeier and Raaz, 2012). The auditors and the directors ensure that all the information is
provided in the fair and the true manner but this was not done by the organization which led the
organization to liquidate (Sumsion, 2012). The management of the ethics was also not
maintained in the organization as the management of the organization was not able to maintain
the healthy environment by looking for the ethical environment. The pricing strategy is another
factor for the liquidation of the organization. For the growth and the expansion of the
organization the cost is the important factor which has to be looked upon by the ABC Learning
(Sumsion, 2012). The ABC Learning did not focus on the pricing strategy it just laid emphasis
on the expansion of the business by increasing their debts. So, the expansion strategy laid the
organization to liquidate as the liabilities were more and the assets were less to pay off the
liabilities (Okpala, 2012).
The business of the ABC Learning was collapsed as the organizations were not having enough
amounts of the assets so that the obligations can be paid off (Sumsion, 2012). The auditors were
unable to sign off on the accounts of the company as there were many of the mistakes and the
mismatches in their accounts. For the winding of company the creditors were considered by
providing them the voting rights. The organization was given the signal by the auditors for its
liquidation but the management of the ABC Learning did not take it in the series sense (Sumsion,
2012).
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Conclusion
From the above discussion it can be concluded that the liability was the factor for the liquidation
of ABC Learning. The liquidation of the organization shows that there was no corporate
governance within the organization which leads to the failure or the collapse of the ABC
Learning. It also provided the insight to the organizations about how to manage the finances
while the expansion of business so that the cost can also be managed simultaneously. The
liquidation of the organisation shows that there were many factors which led to the liquidation
such as the strategy for pricing, the ethics which is followed in the organization and the planning
for the development of the strategy and there implementation. The management of the
organization laid less emphasis on its operations and more on the expansion. So, it can be said
that the liability is not only the reason for its liquidation but with it there are various other
factors.
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References
 Fatoki, O., 2014. The causes of the failure of new small and medium enterprises in South
Africa. Mediterranean Journal of Social Sciences, 5(20), p.922.
 Jones, K.M. and Salo, D., 2017. Learning Analytics and the Academic Library:
Professional Ethics Commitments at a Crossroads.
 Lane, R.J., 2016. Unexpected corporate failures in Australia through the decades:
commonality of causes (Doctoral dissertation, James Cook University).
 Lang, M., Lins, K.V. and Maffett, M., 2012. Transparency, liquidity, and valuation:
International evidence on when transparency matters most. Journal of Accounting
Research, 50(3), pp.729-774.
 Moisello, A.M., 2012. ABC: Evolution, problems of implementation and organizational
variables. American Journal of Industrial and Business Management, 2(2), p.55.
 Okpala, K.E., 2012. AUDIT COMMITTEE AND INTEGRITY OF FINANCIAL
STATEMENTS: A Preventive Mechanism for Corporate Failure. Australian journal of
business and management research, 2(8), p.32.
 Sumsion, J., 2012. ABC Learning and Australian early education and care: a
retrospective ethical audit of a radical experiment. Childcare markets local and global:
can they deliver an equitable service, pp.209-225.
 Wehmeier, S. and Raaz, O., 2012. Transparency matters: The concept of organizational
transparency in the academic discourse. Public Relations Inquiry, 1(3), pp.337-366.
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