Financial Analysis Report: Examining Ethics in Company Failures

This report presents a financial analysis of the liquidation of three companies: ABC Learning, HIH Insurance, and One Tel. It investigates the causes leading to their financial stress and eventual collapse, with a particular focus on the role of ethical governance and accounting practices. The analysis examines the aggressive expansion strategies, poor accounting standards, and unethical practices that contributed to ABC Learning's downfall. It further explores the poor management, lack of corporate governance, and failures in transparency that led to the collapse of HIH Insurance. The report also discusses the impact of overconfidence, inadequate internal controls, and governance issues that contributed to the failure of One Tel. Ultimately, the report highlights the importance of ethical conduct, robust governance models, and sound financial reporting in preventing company failures and ensuring long-term sustainability. The report also emphasizes that liability is considered a major factor that led to the companies’ liquidation among other diverse factors such as poor ethics and governance among its management.

Accounting Financial Analysis Report 1
Accounting Financial Analysis Report
By Name
Course Title
Instructor’s name
Name of Institution
Name of Department

Accounting Financial Analysis Report 2
Table of content
Executive Summary………………………………………………………………….………..3
Introduction…………………………………………………………………………………....3
Role of ethical governance in financial stress companies……………………………………..3
The fall of ABC Learning Institution……………………………………………………….…3
Role of ethics and governance in ABC Learning Center……………………………………...4
The fall of HIH Insurance Company…………………………………………………………..4
Ethics and governance role in HIH Insurance Company collapse…………………………….5
The fall of One Tel Phone Company………………………………………………………..…5
Ethics and governance role in One Tel Phone Company………………………………….…..6
Conclusion and recommendation………………………………………………………..…….6
Bibliography…………………………………………………………………………………...7

Accounting Financial Analysis Report 3
Executive Summary
This particular report highlights the process of liquidation. The study focusses on the
liquidation of ABC Learning Company, One Tel Phone Company and HIH Insurance
Company that were highly affected by this aspect. The report also attempts to investigate the
main causes that these particular companies led up to liquidation (Ashley and Daniel, 2008).
The report also attempts to discuss the aspect of ethics and governance in explaining the
company’s financial stress that hit these companies in their entire operations. The report also
heightens that the aspect of liability is considered to be a major factor that led to the
companies’ liquidation among other diverse factors such as poor ethics and governance
among its management.
Introduction
Liquidation can be defined as an orderly process that is meant to shut down the company
operations. It is basically a process of winding up a company operation because the company
is considered to be unable to pay off its debt when due. The case arises when a particular
company is unable to survive in the competitive market, and the owners or the shareholders
decide to go for liquidation (Biondi, and Lapsley, 2014). In this case, after the company has
gone into liquidation, all the assets and properties that the company owned are sold and the
funds compensated to creditors, and if there are some surplus, the shareholders are entitled to
the share.
Liquidation can be classified into three types; creditors voluntarily, member voluntarily and
through court. When a particular creditor seeks court direction to liquidate the company, the
court may grant the creditor right to initiate the process of liquidation for the company
(Owen, 2003). A creditor voluntary winding up is considered to be the liquidation process in
which the company by itself decides to wind up its business operations while a voluntary
member liquidation is the winding up the process when members of the company feel that
there is no reason for the company to continue in its operations because of certain
circumstances.
Role of ethical governance in financial stress companies
According to CPA Australia, ethics and governance are considered to be a core element of
the skills and knowledge based on the contemporary professional accountants (Mills, and
Marjoribanks, 2011). Diverse professional accountants should basically contain the required
skills and knowledge of the content of regulatory regimes and how the governance tool is
being applied. In accounting, it is significantly vital for accountants to ensure that they are
performing their activities in accordance with the set rules and ethics. CPA Australia (2012),
suggests that when individuals combine the social ethics and moral norms with the standard
and principles of business, this aspect can be referred to as Ethics in Financial Accounting.
Furthermore, Clarke, Dean, and Oliver (2003 pp. 30) emphasize the significance of
governance and ethics by providing examples of World Com and Enron companies which are
often important in the day to day company operations.
The fall of ABC Learning Institution
ABC Learning is considered to be an institution that offers early childhood education services
in Brisbane, Australia and was established in 1988. The learning institution grew up steadily
in its first twelve years of business then after the child care benefit introduction in FY2000,
the basic demand for the child care blew up (ABC Learning Centers, 2016). During the same
year, the institution grew up to be the largest health care provider in the whole of Australia
and the world. The company share price increased by 300% in the market price and the
company made a profit of AU$50 Million in the financial period of 2004-2005.
In FY2001, the company stocks were floated on the Australia Stock Exchange at AU$2, and
by 2006, its shares had a significant increase to AU$8.60. This aspect was chiefly because of

Accounting Financial Analysis Report 4
the aggressive approach that the learning institution utilized to try to a dominant benefit in the
child care business (Paul, 2007). Conversely, this growth strategy initiated the learning
institution to pay extra for centers purchase thus resulted to huge debts from loans and other
fund advances. A combination of intricate financial reports and doubtful business decisions
for expansions were the key cause of the learning institution down fall (ABC Learning
Centers collapse case study, 2011).
Role of ethics and governance in ABC Learning Center
According to this aspect, quality of education offered by the center was another cause of
downfall because there were several students in the center than the number of teachers. The
key issue with the ABC Learning Center was the failure of the company accounting standards
such as assets treatment. When the learning institution purchased new centers, they were
prized at the value of the business and premises and the cost of the childcare authorization. In
FY2007, the acquired licenses were prized at AU$58.5 Million, and conversely, they were
basically reported to have worth AU$700 Million under the belief that these licenses would
generate more cash flow.
Another unethical aspect was that thee reported good will was valued at AU$2.8 Billion
while the actual value was AU$20.2 Million when purchasing other centers (Ashley and
Daniel, 2008). This huge over valuation of assets fetched several question if fair value was a
correct evaluation because the child care industry was already monopolized. Failure to
emphasize on the main business capability to earn revenues during its growth was another
problem. Proper ethics and governance should have been employed in this particular situation
so as to ensure that the company carries out its business as per the set rules and regulations.
The Government of Australian set up a directive on this aspect to ASIC. (Australian
Securities and Investment Commission). ABC firm claimed that these particular
authorizations were of high cost but in a real sense, the licenses had no value and when
investors realized the accounting malpractice done by the ABC Company, its share prices
decreased.
Figure 1: The graph showing the ABC learning institution rapid growth
Source: (Paul, 2014)
The fall of HIH Insurance Company
HIH Company was the largest insurance company in Australia that basically went bankrupt
in 2001 with a significant loss of approximately AU$5.3 Billion. The company was founded
in 1968 that introduced several types of insurance not only locally but also globally.
According to its financial statements (FY2000), the company claimed that they had reached
an approximately over AU$2.5 Billion in revenues and the value of its entire assets was about
AU$8 Billion. In this case, poor management was considered to be the main reason that
resulted in the downfall of the company where the company portfolio of about AU$8 Billion

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in assets was used to offset its debt and potential claims (Matten, and Moon, 2008). The
portfolio dropped to only AU$133 Million as it was basically anticipated that even 1%
variation in the assets cost would basically make the firm insolvent. HIH Insurance Company
liquidation of was the largest surprise collapse of any particular corporate business. In 2001,
NSW law court ordered for the interim insolvency of the firm so as a proper audit of the
company financial condition to determine its capability to continue in its operations.
Ethics and governance role in HIH Insurance Company collapse
HIH Insurance Company failure resulted in a Royal commission that was established so as to
determine the main reason that led to the collapse of the insurance company. The commission
found out that the company was basically not following corporate governance standards set
up so as to ensure that the company operations are done in accordance to the Australian
Cooperate governance (Rush, and Downie, 2016). According to the pointed out report, HIH
Insurance Company directors were not performing their ultimate duties in accordance with
the standard, and consequently, there was no balance check for the corporate governance
model system that basically indicates how the company is going on and offering proper
guidelines to the management. Because HIH Insurance Company was victimized by its
management, no system could check the aspect of corporate governance model if it is
working correctly or not so the management could control the condition.
In this case, the role of ethics and governance in the company was that it had a responsibility
to exercise their duties and powers with the diligence and care so all the resolutions must be
taken with concern and they could be agreed by any rational individual. HIH Insurance
Company culture was not that good because the senior management was unable to
communicate vital facts in front of the board of management. The company board was not
aware of the significant facts. Since the company initiation, it has been controlled by one
CEO and that no individual member in the company could basically challenge the decisions
of the CEO whether good or bad decisions were made (Tim, 2015). The company was not
following its sound corporate model that basically caused the company downfall.
HIH Insurance Company management performance failed to be monitored by the company
boards since the panels did not carry out its duties appropriately that had no enough
independence and capability to see the aspects that should be done. The aspect of
transparency was also not present at HIH Insurance Company. Customers and public
shareholders were deceived by the issues that HIH Insurance Company had grieved from
inability after inability in the US and UK operations besides FAI purchase. The facts were
also not confined to the general public because the financial statements drafted by the
company were not reliable as they did not show a true picture of the company financial
statements.
The fall of One Tel Phone Company
One Tel Phone Company was one of the largest telecommunication firm in Australia from
1995. The company operated as an Optus services reseller where Optus compensated One Tel
Phone Company AU$120 for each registered and signed up sim card. During the first year of
operation, the company signed up about 60,000 customers and basically posted a profit
before tax of about AU$65 Million (Daniel, 2010). In the FY1997, the company floated its
shares for AU$2 per stoke and a market value of AU$208 Million with this amount rising to
AU$3.8 Billion in the FY2000. Conversely, the aspect of over-confidence and an
unconcerned attitude towards internal control methods and corporate systems resulted in poor
accounting applications particularly the treatment of bad debts that accentuated the failure of
One Tel Phone Company to take profits from customers.

Accounting Financial Analysis Report 6
One Tel Phone Company downfall was as a result of its inappropriate practices in its
governance. When the company collapsed, its annual sales were about AU$650 and was
operating in more than seven countries. The company had severe problems in their corporate
governance structure since the company CEO had a significant influence on the company and
that the chairman could not control anything in its business operations. Further research
indicated that the other non-executive members did not have sufficient skills and knowledge
to monitor the management and thus the company collapsed because of the two most
influential CEOs who made wrong decisions.
The biggest issues that led to its demise was the fast growth that the company did not adjust
its internal control so as to satisfy for the increasing size (Westfield, 2015). It is apparent by
the company system of billing that was designed for at least 60,000 – 70,000 clients and
when the company customers grew up to about 760,000 clients, the company systems failed
because of overload. The GST introduction in the FY2000 meant for more composite
charging policy that was not adjusted for also led to the company down fall. Furthermore, the
conducted audit demonstrated that the company one-third of accounts receivables were over
330 days old and that only 20% of the customers were actually paying while the other 80%
were unaccounted for bad debts. In the end, the aspect of poor credit checking on the
customers was one major factor that led to poor cash flow and thus resulted in the fall of the
company.
Ethics and governance role in One Tel Phone Company
Basically the quality of the company financial statements usually enhances the credibility and
customer’s confidence (Natasha, 2012). If the company annual report is made in accordance
with the set guidelines, it can bring better facts and thus the report will be reliable as it shows
a true and fair view of its operations. One Tel Phone Company financial statements were no
doubts that it was full or malpractices, errors and contained a lot of missing core elements.
The company had significant problems in its operations, financial reporting and inappropriate
composition of board members. According to One Tel Phone Company financial statement
(1998), the company had four members and John Greaves, and Rodney Adler were the two
non-executive board members who ensured that no one challenged their authority and power
that made them being the CEOs till the end of the business (Hamilton, 2016). The company
collapsed because of its poor governance among its management team.
Conclusion and recommendation
Corporate governance and ethics were the key factors that basically resulted to the liquidation
of ABC Learning Company, One Tel Phone Company, and HIH Insurance Company. The
report indicates how significant the firms were before collapse because of not utilizing the set
rules and regulations on proper ethics and governance. With the support of this particular
research, I can simply recommend to all corporate operations that they must utilize the aspect
of Company Act and the country accounting standards so they can shun diverse ethical
concerns and thus improving the company culture and hence attains its targets and goals.

Accounting Financial Analysis Report 7
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