Financial Distress, Ethics, Governance, and Company Liquidation

This report delves into the critical intersection of ethics and governance within financially distressed companies, with a specific focus on how these factors contribute to company liquidation. The analysis begins with an overview of managerial governance and its impact on financial health, highlighting studies that link the composition of boards of directors to the likelihood of financial distress. The report then presents a literature review that explores factors affecting the liquidation process. A case study of One-Tel, an Australian telecommunications company that collapsed in 2001, is examined to illustrate how poor corporate governance, including failures in financial analysis, reporting, and internal controls, can lead to significant financial distress. The report also references other Australian companies that faced similar challenges due to governance failures. The report emphasizes the importance of adhering to the Australian Accounting Standards Board (AASB) guidelines and maintaining a strong code of conduct to prevent financial distress. The conclusion stresses the need for robust corporate governance models and ethical practices to ensure the long-term financial health of organizations. Finally, recommendations are provided to help companies avoid financial distress and liquidation, emphasizing the importance of financial analysis, management reporting, and internal controls.

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Assignment-Financial Accounting

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Table of Contents
Summary..........................................................................................................................................2
Topic: Discuss the ethics and governance in explaining the company’s financial stress. Were
liabilities a major factor contributing to the liquidation of the company........................................2
Literature Review: Factors affecting the Liquation Process............................................................3
Methodology/Case Study.................................................................................................................3
Recommendation.............................................................................................................................7
Conclusion.......................................................................................................................................7
References........................................................................................................................................8
Summary
The objective of this assignment is to provide a general idea about the managerial governance
and ethics related to the financially distress companies. According to a recent survey and study,
it came to light that the failure to achieve and monitor the duties of the management of the may
be one of the reasons for the financial distress and bankruptcy of the companies across the globe.
This essay includes the reasons, objectives and recommendation related to such financial distress
and bankruptcy of these companies.
Topic: Discuss the ethics and governance in explaining the company’s
financial stress and factor contributing to the liquidation of the company
Analysis of a recent study conducted in Lebanon revealed that the boards that have higher
proportion of the outside directors have fewer chances to financial distress as compared the
companies who have lower proportion of the outside directors. The study of this analysis
consists a sample of 178 non-listed companies. From this, it can be concluded that the financial

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distress and size of the board are inter related. The financial distress is mainly highlighted in the
European countries. The need of corporate governance is necessary to overcome the financial
distress. It overcome this problem the it provides the education to the investors on the short term
returns and help the management in making the policies and guidelines on the corporate
governance.
Let's take an example of the company to understand the topic in a particular way. One-Tel was
one of the largest telecommunication companies in Australia which collapsed in the year 2001.
The said company had its operational activities in more than 8 countries with a consumer of
more than 2 Millions.
Analysis of the aforesaid companies revealed that the company collapsed due to the wrong
policy system, less growth, overrated expectation and improper strategic planning. However, it
was later realized that the collapse occurred due the negligence of the corporate governance of
the company which includes negligence and wrong planning in financial analysis, reporting of
the management, weakness in quality of the audit, wrong management for internal control,
communication system of the management etc.
Literature Review: Factors affecting the Liquation Process
Apart from the aforesaid company a few other companies operating in Australia collapsed due to
the poor management of the corporate governance and financial distress. However, no academic
researches were conducted to find out the exact reason for such financial distress and collapse.
The evidences show that weakness in the corporate governance and ethics are one of the main
reasons for collapse.
Due to the collapse these companies the concept of the corporate governance are being focused
by the other companies. The companies are focusing on the development of the corporate
governance structure and ethics and making strategies for developing new bankruptcy policies
and models. In the recent days, every business is making strategies for implementation of the
corporate governance and ethics in an appropriate manner to make their business healthier in

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terms of business value, the compensation of the officials of the business, corporate performance
and corporate structure of the business.
Methodology/Case Study
Here, lets the case study of One-Tel which was already mentioned in the aforesaid essay above.
According the Annual report of the One-Tel for the financial year 1998, the company was
financially strong and the growth of the business was on its peak as the number of the consumers
of the company was increasing day by day. Despite the fact that the company was in profitable
position, the financial performance and growth of customers is different factors to be considered
for the financial distress. Analysis of the past data of the company revealed that the sales
turnover the company in the year 2000 was $653.4 which is a ten times higher amount as
compared to its sales turnover in the year 1996. According to the data published in the Australian
Securities and Investment Commission, the turnover of the company was increased by;
127% in the year 1997
40% in the year 1998
57% in the year 1999
100% in the year 2000
As explained above the corporate governance played an important role in the financial distress
and collapse of the aforesaid company. The term corporate governance can be defined as “the
manner in which suppliers of finance to the corporate assure themselves on getting returns from
their investments.” The proper and effective corporate governance of a business depends on the
working style of the directors, executives and non-executives of the company. The application of
the good standard of corporate governance is one of the important things that have to be
maintained in every organization. The collapse of the company One-Tel was due to the wrong
application of the corporate governance. The failure in corporate governance ultimately leads to
the failure of the company as a whole which led to its collision.

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The quality of the financial reports presented must be of accurate financial data according to the
current economic condition of the business. A faithful representation must be made. A faithful
representation includes complete, accurate and free from error financial data. This data reflects
the earning quality and capacity of the organization. The earning capacity of an organization
shows the features of a company how it is developing towards growth. In this case, One- Tel did
not have a faithful representation for the economic performance and growth of the company.
Analysis of the facts of the data of the company, it can be concluded that the financial data of the
company presented must have some discrepancy and error. The analysis shows that there were a
lot of errors in the financial statements of the company such as trial balance, account receivables,
outstanding balances etc. These types of discrepancy in the financial statements indicates that the
weakness of internal control of the company. These types of issues are related to the failure of
the corporate governance and ethics of an organization. In the aforesaid case there is a lot of flak
and weaknesses in the internal management and earning capacity of the company One-Tel. The
manipulation of the management of the company indicates the low earning quality of the
company.
Likewise, one of the other financial companies of Australia collapsed in the year 2001 due to the
same reason. The company was in insurance business and was a trading company with a track of
rapidly growing company in Australia. The reason of its collapse was due to the acquisition of
the company by another insurance company and the wrong accounting practices followed by the
company. These are two reasons which are considered as the main reasons for the collapse of
that insurance company. However, despite the collision of the company the Chief Executive
Officer of the company had received a multimillion dollar package from the company after
resigning form that company which was hardly a year after its collision. The collapse of the said
company impacted a lot in the insurance business not only in Australia but also across the globe.
The impact of the collapse was also felt by the construction companies operating in Australia.
The corporate governance system of Australia includes both internal and external control of the
company. The corporate governance structure of Australia mainly contains hybrid system of
working. Many Australian companies have a single board of directors which consists of both
inside and outside members. In Australian companies, directors are classified under three broad
category such as Executive, Non-Independent Non-Executive and Independent Non-Executives.

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The directors of the company play an important role in the day to day management of the
company whether it may be Executive, Non-Independent Non-Executive or Independent Non-
Executives. The directors are considered independent if they have a past relation with the
company which may be in terms of employee, advisor etc.
The Australian Accounting Standards Board (AASB) is the authorized body in Australia to set
accounting standards for the Australian companies. According to provisions and guidelines of
the Australian Accounting Standards Board, Companies operating in Australia are expected to
provide the financial statements of the company such as profit and loss statement, cash flow
statements, trial balance, trading account details, balance sheet etc. The standards also say that
the financial statements must indicate the faithful representation on the financial performance,
profitability and growth of the company.
Conclusion
As explained above in the essay, it can be concluded that the liquidation process of the insurance
company and One-Tel was occurred due to the failure of the corporate governance system, This
indicates that the failure of corporate governance systems depends on the corporate governance
models followed by the companies. The collisions of the aforesaid companies are considered as
one of the major collapses in the history of Australia. The reasons for such collision and financial
distress are fraudulent accounting practices, acquisition process, inflation in accounting data,
lack of communication between the board of directors and auditors, wrong auditing practices etc.
To overcome these type of financial stress and collision every organization operating in Australia
should follow the guidelines and policies provided in the Australian Accounting Standards Board
(AASB) and run their business according to its prescribed provisions.
From the above discussion and explanation it can be concluded that every company operating in
Australia must have a standard code of conduct that has to be followed during the day to day
operation of the business. The collision and financial distress are considered was one of the
reasons for the weakness of corporate governance and ethics of a company. The company must
follow the guidelines of Australian Accounting Standards Board, Companies which expects
every organization to provide the financial statements of the company such as profit and loss

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statement, cash flow statements, trial balance, trading account details, balance sheet etc. in
appropriate time so that there will be smooth flow of work in the organization. The aforesaid
guidelines helps the company to avoid any type of financial distress and collision. Analysis of
the case of One-Tel also revealed that the company faced collision due the poor and weak
management of the corporate governance of the company.
Recommendation
From the above explanation and discussion it can be said that it is necessary for every company
operating in Australia to maintain a proper code of conduct to implement the corporate
governance and ethics of the company. The failure or success of every business depends upon
the running and planning strategies of the management of the company. The collision and
financial distress are considered was one of the reasons for the weakness of corporate
governance and ethics of a company.
To overcome such type of issue, the companies must maintain their books of accounts and
financial statements according to the provisions of the Australian Accounting Standards Board
(AASB). The company also must focus on the financial analysis, reporting of the management,
audit quality, internal control, management communication, fair presentation of financial data
etc.

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References
Adegbie, Folajimi Festus1 & Fofah Evelyn Temitope2, 2016. Accounting and Finance Research.
Global
Role of International Financial Reporting, 5(1).
Anon., n.d.
Discuss The Ethics And Governance In Explaining The Company’s Financial Stress. Was
Liabilities Major Factor Contributing To The Liquidation Of The Company?. [Online]
Available at: https://essay-paper.com/discuss-the-ethics-and-governance-in-explaining-the-companys-
financial-stress-was-liabilities-major-factor-contributing-to-the-liquidation-of-the-company/
Australia, G. I. o., n.d.
Ethics & standards. [Online]
Available at: https://www.governanceinstitute.com.au/about-us/our-governance/ethics-and-standards/
Brédart, X., 2013.
Financial distress and corporate governance: the impact of the CEO, 8(4).
Charbel Salloum, Nehme Azoury, 2012. Corporate Governance and Firms in Financial Distress: Evidence
from a Middle Eastern Country..
International Journal of Business Governance and Ethics, March.