Financial Analysis of Liquidated Firms: HIH, One-Tel, ABC Learning

This report provides a comprehensive financial analysis of the liquidation of three Australian firms: HIH Insurance, One-Tel, and ABC Learning. It begins with background information on each company, outlining their core business activities and market positions before their collapse. The analysis then delves into the specific events and factors that led to their financial distress and eventual liquidation. Key areas of focus include unsustainable business strategies, poor corporate governance, aggressive expansion fueled by excessive debt, unethical practices by directors and auditors, and ineffective working capital management. The report examines the role of opaque operations, staffing problems, inorganic expansion, poor risk management, and the practice of nepotism in contributing to ABC Learning's downfall. Similarly, it explores how aggressive acquisition tactics and deficiencies in governance procedures contributed to the collapse of One-Tel. The study also highlights the impact of poor auditing practices and questionable related transactions on the financial stability of these firms. The conclusion summarizes the major contributing factors to the liquidations, emphasizing the importance of sound corporate governance, prudent financial management, and ethical business practices in preventing such failures. Recommendations are provided to avoid similar situations in the future.

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ACCOUNTING FINANCIAL ACC70
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Executive Summary
This study presents analysis of the major events which led to these firms being liquidated. It
will start with background information about the three firms followed by analysis of the
events leading to their liquidation and then ethics and governance practices of these firms.
Based on the analysis of the three scenarios, it is clear that the collapse of the three firms
were mainly attributed by numerous aspect or events ranging from poor or failure in
corporate governance, aggressive expansion to unethical practices of the directors and
auditors. One overall, the collapse of HIH, One-Tel as well as ABC Learning were attributed
by unsustainable business strategies, poor auditing practices, potentially excessive
management compensations, weak corporate governance, ineffective working capital
management as well as questionable related transactions. In essence, the major event that
resulted in liquidation of HIH Insurance, One-Tel as well as ABC Learning is aggressive
expansion or excessive liabilities. This is mainly based on the fact that aggressive expansion
resulted in increased debt to equity margin or increased liabilities which in turn made the
firms risky since their leverage was far much beyond their capability of repaying the loan.

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Table of Contents
Executive Summary...................................................................................................................2
Introduction................................................................................................................................4
Background Information of these three firms............................................................................4
ABC Learning Collapse.........................................................................................................5
HIH Insurance Collapse.........................................................................................................7
One-Tel Collapse....................................................................................................................8
ABC Learning Ethics and Governance...............................................................................9
Ethics and governance practices of One-Tel......................................................................9
Ethic and Governance of HIH Insurance..........................................................................10
Conclusion and Recommendations..........................................................................................10
REFERENCES.........................................................................................................................12

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Introduction
In the past few years, a number of Australian firms have been liquidated as a result of their
failure to settle their liabilities once they turn due. Some of these firms include the ABC
Learning, One-Tel as well as HIH Insurance. As a result, this study aims to present analysis
of the major events which led to these firms being liquidated. It will start with background
information about the three firms followed by analysis of the events leading to their
liquidation and then ethics and governance practices of these firms.
Background Information of these three firms
ABC Learning was the Australian largest childcare provided established in 1988. It was once
the largest provider of the early childhood education services across the world. Within its first
operations, the company ran around 4,700 childcare centres and delivered child-care services
to over 110,000 children across New Zealand, UK, Australia and US. It main role was
operation of long day care centres across the globe (Rush & Downie 2006). It provided
childcare services for children ranging from six weeks to pre-school age. In addition, other
centres provided after and before school as well as vacation care. It had four building blocks
that were to ensure development of children such as learning curriculum, facilities and
environment, centre staff training and development as well as nutrition and physical
development (Teen 2012). Evaluated by its market share and turnover, ABC was one of the
largest childcare provide in Australia and one of the largest listed provider across the globe.
During the year 2005, ABC Learning had total revenue of around $300 million and controlled
in between 20%-25% of Australian childcare market. Despite its market size, ABC acquired
Learning Care Group in 2005 that operated 460 centres (Khan 2017).
After all it successful history back in 2008, the company had its distress of sever financial
stress and debt that forced it to go into receivership by November 2008. During this time 40%

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of its centres were a bit unprofitable and in April 2008, it CEO was forced to sell part of the
business in order to settle some of the debts. Despite of selling part of its assets, ABC feel
into receivership by November 2008 after it increased debt financing obligations. On other
hand, HIH Insurance is an Australian insurance company established in the year 1968. The
company was then acquired by a British firm known as British Company CE Health plc in the
year 1971. In 1996 the company which was currently known as Health International Holdings
transformed to HIH Winterthur and through 1997 to 1998, the company acquired numerous
firms both in Australia and across the globe (HIH Royal.Com 2003).
One-Tel was one of the Australian Telecommunication entity established in 1995 (Trute
2001). Before it liquidation, was one the fourth biggest telecommunication firm in Australia
and the fastest growing firm under ASX. It initial capital was contributed by Lachlan and
James (Reza 2009). After it success, the company was hoping to expand to the global market
particularly in US and Europe by putting on relatively low price tactics as well as customer-
driven technique. In addition, its customer base increased as from 1,000 clients to around
100,000 which were attributed to the fact that it was in a position to provide high quality
telecommunication service at significantly low price (Monem 2011). The company earned a
total of $3.723 million profit in the year 1997, and $6.965 million in 1999 making it the
fastest growing organization in Australia and second-highest ranked telecommunication firm
in the country. Nonetheless, despite the great expectations, the company’s good performance
was no longer achievable and in the year 2000, it reported a total loss of $291.1 million
which is said to send alarm to the top administration and the investors. In spite of the
shareholder’s effort of investing more cash in the firm to overcome this crisis, it was not
successful and on May 2001 the company collapsed (Allan 2006).
ABC Learning Collapse

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ABC is said to have collapsed in the year 2008 after numerous months of financial distress
that started on early 2008 after share value of the company decreased from $8.80 by
December 2006 to around 0.50 by August 2008 (Rush & Downie 2006). The reason behind
this collapse was its rocketing debt levels resulting from its rapid expansion acts overseas. To
be more specific, the main reason for ABC collapse is as follows; first, opaque operations.
Basically, business model of this company was not planned in the right manner. In addition,
the company did not have organizational hierarchy and its organization was not properly
decentralized (Khan 2017). Thus, there was not supervision for its subordinates. In other
word, there was no transparency in its operations.
Furthermore, due to its opaque operations, its income statement was generated via unusual
system of the liquidated damages as well as compensation from the developers of the new
centres. Another reason for the ABC Learning collapse was staffing problem where the
company is said to have relief staff provider who were named as 123 careers (Rush &
Downie 2006). Due to this issue the company made high turnover and lacked efficient
employees since these employees were unsure of their work security. Furthermore,
employment all through the centres were not properly distributed meaning that the ratio in
between the careers and children were not correctly managed. Inorganic expansion as well as
poor risk management is another reason for ABC Learning collapse. To be more specific,
expansion of the ABC was basically on debt and equity margin (Teen 2012).
The high loan made the firm risky since its leverage was far much beyond its capability of
repaying the loan. In addition, there was no proper risk management before and after the
mergers that led to the increased debt to around $1.7 billion within a period of 18 months
(Khan 2017). Further, there was no systematic accounting practice in place meaning that no
professional accountant was hired by this firm. In effective HR department is also another

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crucial reason for ABC Learning collapse. In this company there was absence of human
resource practices due to lack of proper HR planning process such as recruitment and
selection as well as proper training of the employees.
Practice of nepotism is another reason for the ABC Learning collapse. First, the ABC CEO
entertained nepotism by including his brother-in-law in major expenditures through provision
of refurbishment and maintenance of the childcare centres (Teen 2012). To be more specific,
the collapse of ABC Learning was mainly attributed by its unsustainable business strategies,
poor auditing practices, potentially excessive management compensations, weak corporate
governance, ineffective working capital management as well as questionable related
transactions.
HIH Insurance Collapse
HIH collapse or liquidation in March 2001 sent shocks across Australian commercial sector.
The nation’s second biggest business, HIH Insurance was at completion of key acquisition
spree. With a total of $8.1 billion asset at end of the financial year 2000, HIH Insurance was
perceived as a reliable and robust firm (HIH Royal.Com 2003). Nonetheless, private internal
information had already begun demonstrating that HIH Insurance’s debt weight and its
liabilities were relatively high resulting in real risks of liquidation. Eventually, in the early
2001, HIH Insurance’s unwarranted financial condition was indefensible and it tolerated the
prevalent liquidation in the Australian time immemorial with a loss of over $5 billion. The
collapse caused huge distress, uncertainty as well as loss to the taxpayers (Percy 2005).
The collapse is mainly attributed by its antagonistic expanded business strategies. The RC
provided some insights as to how the form with such ostensibly goo corporate governance
could fail or collapse in such an enormous manner. According to Buchanan, Arnold and Nail
(2003), the collapse of this firm is related to its inflated and vanity egos, lack of monitoring

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as well as poor systems instead of the systematic frauds. In this case, numerous executives
were said to have broken their tasks as executives and were barred from any other association
in the firm’s management for substantial terms and knockout with significant financial fines
(Percy 2005). Another event that could have led to HIH Insurance collapse is its aggressive
acquisition tactic, culture of not giving and growth-at-all cost notion that led to conflict in
between its profit maximisation and execution of sound governance practices.
In essence, In addition, the collapse of HIH was attributed by unsustainable business
strategies, poor auditing practices, potentially excessive management compensations, weak
corporate governance, ineffective working capital management as well as questionable
related transactions (HIH Royal.Com 2003). In essence, HIH failure is related to its zeal of
chasing low yielding practices and not saving adequate amount of cash in covering its
liabilities exacerbated by its management and executives’ failure to efficiently monitor and
enforce outstanding practices.
One-Tel Collapse
One-Tel Phone Company inception in the corporate world as one of the telecommunication
company was prominent (Trute 2001). With financial support off high flyers, the firm
appeared in the right track. Nonetheless, its collapse was very fast with the firm operating
only for 6 years. The collapse of this company is attributed by numerous factors with the key
aspect being it aggressive acquisition and deficiencies in it governance procedures (Monem
2011). Another event that resulted in One-Tel collapse was it failures in it governance. For
instance, its CEO has excessive power over instead of inept BOD, reducing its capability in
providing effective control and oversight (Carson 2005). Furthermore, lack of independent of
the auditor is also another event that resulted in it collapse since it resulted to conflict of

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interest between the auditor and the company’s executive due to provision of non-audit
services (Allan 2006).
ABC Learning Ethics and Governance
ABC collapse is linked with numerous ethical and governance issues. First, the collapse is
associated with poor governance practices where there was poor planning in the company’s
operations (Khan 2017). For instance, there was not organizational hierarchy leading to
absence of transparency in its operations; hence, liquidated damages. In addition, there was
poor governance practice resulting from inorganic or excessive expansion based on debt and
equity margin where the high amount of the loan made the firm risky since its leverage was
far much beyond its capability of repaying the loan (Rush & Downie 2006). There were also
some ethical issues such as entertainment of nepotism by the CEO including his brother-in-
law in major expenditures.
Ethics and governance practices of One-Tel
In One-Tel case there were some ethical issues that could be pointed out which could be
linked with it financial stress (Trute 2001). For instance, the auditor was not honest and
straightforward in conducting their duties whereas there were numerous unqualified reports
that were issued each year. In addition, the auditors failed to observe objectivity while
auditing the financial statement which is a key requirement for any auditor (Monem 2011).
This could be also linked with the current financial stress experienced by the company. In
spite of it ostensibly secure financial status; the company had dangerously insufficient
corporate governance procedures (Reza 2009). For instance, its two CEOs had excessive
power on its directors to an extent that it had regular, designated director in place. Basically,
its CEO as well as other executives were acting as directors while its non-executives have
insufficient oversight and monitoring of the administration (Allan 2006). These issues are

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said to have attributed to its recent financial stress. In essence, there were numerous ethical
issues pointed out in One-Tel scenario ranging from lack of independence from the auditors
to the non-executive which could have also attributed to the company’s financial stress
(Carson 2005).
Ethic and Governance of HIH Insurance
HIH Insurance is described of having some conservative corporate culture and some glaring
governance deficiencies that led to its collapse (Buchanan, Arnold & Nail 2003). In addition,
HIH governance was poor since the company lacked any independent director where three of
its directors were former partners at its auditors (HIH Royal.Com 2003).
Conclusion and Recommendations
In conclusion, based on the above analysis of the three scenarios, it is clear that the collapse
of the three firms were mainly attributed by numerous aspect or events ranging from poor or
failure in corporate governance, aggressive expansion to unethical practices of the directors
and auditors. One overall, the collapse of HIH, One-Tel as well as ABC Learning were
attributed by unsustainable business strategies, poor auditing practices, potentially excessive
management compensations, weak corporate governance, ineffective working capital
management as well as questionable related transactions. In spite of these aspects, their
failure was related to their enthusiasm of pursuing low yielding practices and not saving
adequate amount of cash in covering their liabilities. In essence, the major event that resulted
in liquidation of HIH Insurance, One-Tel as well as ABC Learning is aggressive expansion or
excessive liabilities. This is mainly based on the fact that aggressive expansion resulted in
increased debt to equity margin or increased liabilities which in turn made the firms risky
since their leverage was far much beyond their capability of repaying the loan. This means
that proper corporate governance is crucial in any organization in facilitating good financial

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management and practices to avoid any event where liabilities become more than the amount
of return being generated.

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REFERENCES
Allan, G 2006, The HIH collapse: A costly catalyst for reform. Deakin L. Rev., 11, 137.
Buchanan, B, Arnold, T & Nail, L 2003, Beware of the ides of March: The demise of HIH
Insurance.
Carson, V 2005, "One.Tel auditor denies conflict". The Australian (Canberra, A.C.T.) (1038-
8761), p. 22; Viewed at 5th September 2017 from; http://0-
global.factiva.com.library.ecu.edu.au/ha/default.aspx
HIH Royal.Com 2003, The failure of HIH insurance. Viewed at 5th September 2017 from;
http://www.hihroyalcom.gov.au/finalreport/Front%20Matter,%20critical%20assessment
%20and%20summary.HTML#_Toc37086537
Khan, IR 2017, Critically evaluate the main reasons for ABC Learning’s collapse; Viewed at
5th September 2017 from; https://supervmarketing.blogspot.co.ke/2017/05/critically-
evaluate-main-reasons-for.html
Monem, R 2011, ‘The One. Tel collapse: lessons for corporate governance,’ Australian
Accounting Review, 21(4), 340-351.
Percy, K 2005, Rodney Adler receives prison sentence; Viewed at 5th September 2017
from; http://www.abc.net.au/worldtoday/content/2005/s1345296.htm
Reza, M 2009, ‘The Life and Death of OneTel’, Griffith University. Paper presented at the
American Accounting Association Annual Meeting, 2009. Viewed at 5th September 2017
from; https://www.afaanz.org/openconf.../request.php?module

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Rush, E., & Downie, C. (2006). ABC Learning Centres. A case study.
Teen, YM 2012, The ABC of a corporate collapse; Viewed at 5th September 2017 from;
http://governanceforstakeholders.com/2012/12/28/the-abc-of-a-corporate-collapse/
Trute, P 2001, "One.Tel to close within 21 days", Daily Telegraph, 6 June. Viewed at 5th
September 2017 from; http://www.news.com.au