ACC701: Liquidation Analysis, Ethics, and Governance in Australia

This report examines the liquidation events of three Australian companies: ABC Learning, HIH Insurance, and One.Tel, detailing the circumstances leading to their financial collapse. It further discusses the ethical codes for professional accountants as outlined by APES 110, emphasizing integrity, objec...Read More

RUNNING HEAD: FINANCIAL ACCOUNTING
Liquidation

Financial accounting 2
Contents
Introduction.................................................................................................................................................4
Events that led to liquidation.......................................................................................................................5
ABC Learning.........................................................................................................................................5
HIH Insurance.........................................................................................................................................6
One.Tel....................................................................................................................................................6
Code of Ethics.............................................................................................................................................7
ASIC – Listing rules....................................................................................................................................8
Major contributing factor – Liabilities.........................................................................................................9
Conclusion.................................................................................................................................................10
References.................................................................................................................................................11

Financial accounting 3
Executive summary
The report explains about the events that had led to the liquidation of three Australian companies
in recent years. It discusses the concept of winding up by giving real examples and highlights the
fact that many organization have went into liquidation due to their failure in meeting financial
obligations. The examples discussed in the report are ABC Learning, HIH Insurance and One-
Tel Company. The first part of the report defines that what liquidation is and the reasons that led
to the same. Further, the circumstances that forces Australian companies to wind up their
business are explained in the report. In the later part, the report focuses on the ethical codes
required to be followed by professional accountants and the listing rules that govern publically
listed companies. In addition, the report also covers the explanation for the major factor
contributing to the situation of liquidation.

Financial accounting 4
Introduction
The process which is followed at time of eliminating business operations and activities by selling
out all of its assets and liabilities is known as liquidation. In other words, it deals with the
debacle of company’s existence from the market or industry due to its insolvency and inability to
meet its financial obligations. However, the main motive of every company is to run its business
for long run and enjoy success and growth in the same. In lieu of achieving this objective, the
corporations hire skilled and competent staff as well as employ strategic plans and policies in the
business (Ream, 2016). However, sometimes such planning proves to be ineffective and wrong
due to the unfavourable circumstances, uncertain environment and competitiveness within the
industry. All such conditions force the business to shut down their operations and eventually all
this lead to liquidation of the company. Once the business activities are eliminated, the assets and
other resources of the firm are distributed to its shareholders and creditors (Butler and Connelly,
2016).
There are several reasons which bring the situation of liquidation such as poor management of
available resources and assets, failure in making payments of liabilities, unfavourable market
conditions and many others. Primarily, the mismanagement of company’s assets results in unpaid
liabilities and if it continues in future, then company has to put an end to its operations and went
into liquidation. Apart from this imbalance of assets, the behaviour of employees and senior
executives also contributes to the winding up of the firm. The illegal and unethical practices done
by management of the firm may result in the debacle of its business from the perspective of law.
Furthermore, events like mergers, acquisitions, insufficient working capital, and unwanted
divisions also lead to the liquidation of the company. Sometimes, the entity wound up its
business due to the accomplishment of the objective for which it was incorporated. Therefore,

Financial accounting 5
apart from the failure on part of paying obligations, these are also the reasons which bring an
organization close to its liquidation.
Events that led to liquidation
The following section discusses the situations and circumstances faced by three Australian
companies which resulted in their liquidation and termination of business activities.
ABC Learning
It was Australia based company involved in providing child care services all over the country.
The entity was founded in 1988 and had numerous of child care centres in Australia as well as in
New Zealand. Before its liquidation, it was performing well from all the aspects as it has enjoyed
growth in its business due to the positive and upward trend in the child care and education
industry of Australia. Furthermore, ABC was paying more attention on expanding its business by
acquiring small day care centres and purchasing the properties in its targeted market. The
company got listed on Australia Securities Exchange in 2001 and during the same year, it had
market cap of AUD 25 million (BusinessWire. 2005). Along with this, it has also taken over an
American company which was operating in same industry named as Learning Care Group Inc.
The corporation had more than 400 childcare centres and acquisition of all them brought an
upsurge in the market capitalization of ABC Learning to AUD 2.5 billion in 2006. With all such
success and growth, ABC became the largest child care service provider in Australia. However,
the company started taking advantage of being a monopolistic and had ignored the policies
related to child safety. After the investigation done in this respect, ABC was found guilty and all
the allegations proved to be true. As a result, the financial position of the firm declines along
with the fall in its share prices. All such events force the company’s directors to declare the

Financial accounting 6
company insolvent and enable them to file a petition in the court for the purpose of voluntary
wind up. At time of liquidation, it was found that there were heavy debt obligations on ABC and
the firm had to sell 60 percent of its US and UK subsidiaries to pay its obligations. After the
voluntary winding up, ABC Learning got delisted from ASX in 2009 and was acquired or bought
by Goodstart Limited in the same year.
HIH Insurance
It was an Australian company engaged in offering insurance services to its customers across the
country. It had approximately 17 controlled entities in the group and assets amounted to $8
billion before its elimination from the market. The debacle of the firm has taken place in 2001
and before that it had liabilities worth AUD 7.1 billion against its total assets of $8 billion. This
represented a very critical position of the entity and moreover the acquisition of FAI Insurance in
2009 also resulted in the poor performance of the company. The directors accepted the fact they
spent a lot on FAI’s acquisition and purchased the company for $300 million. All such events led
the company towards liquidation and force it to wind up its operations and other business
activities (Insurance Journal. 2003).
One.Tel
It was a telecommunication company operating its business in Australia and was founded in
1995. The business got liquidated in 2001 after getting insolvent according to its auditors. As per
the auditor’s declaration, the firm was not able to meet its financial obligations due to lack of
cash in the business. Such lack created many problems in the functioning of company’s
operations which ultimately deteriorates its position and performance in financial terms. In its
initial years, it started as a reseller of OPTUS services and targeted the young generation market
(Elliott, 2010). Earlier, One.Tel was doing well and was considered as the fourth largest telecom

Financial accounting 7
company in Australia. However, in 2000 the position of the company declined because of the
huge expenditure incurred by it on purchasing the licenses for its business activities. It cost the
entity approximately $523 million to purchase the same. As a result, the financial statements of
the firm reported a loss of $291 million during the same year. Apart from this, the carelessness
on part of management also contributed to the winding up of One.Tel operations. It was also
found that the managers and executives manipulated the final accounts of the company for their
personal motives which enable OPTUS to take their investment back from One.Tel. Backing off
of the OPTUS resulted in many financial issues and ultimately it force the company to eliminate
its activities (Monem, 2016).
Code of Ethics
APES 110 Code of ethics are issued by Accounting Professional and Ethical Standards Board
(APESB) which are to be followed by professional accountants. The APESB was established by
The CPA Australia and Charted Accountants in New Zealand and Australia with a purpose to
issue ethical standards that must be followed by all the professional accountants in their course
of action (APESB. 2010). The codes developed by the board are very much similar to the one
issued by International Ethics Standards Board for Accountants (IESBA). All the members and
accounts have to follow the five codes of ethics explained by APES 110. They are as follows:
 Integrity: This principle allows the accounts to work with proper honesty and integrity
while making any kind of professional and business deals. The members are required to
deal with full integrity at time of conducting a particular business transaction. Moreover
as per the code, the accountants are not allowed to be involved in type of unethical

Financial accounting 8
practices or should not be associated with the reports that contain unfair and false
information. On a whole, they have to work with due diligence (IFAC. 2018).
 Objectivity: It allows the accountant to take decisions without getting influenced by
others. Their judgements should be free from biasness and should not change because of
any sort fo conflicts arising between the management and shareholders or other parties.
Furthermore, according the principle the member cannot conduct a practice in which the
judgement can be changed or influenced by others (CPA Australia. 2018).
 Professional Competence and Due Care: The accountant should have enough skills and
knowledge that justifies its practices and actions. The competence must be present in the
members so that they can provide quality work and services to the clients. Also they have
to perform their functions ad roles within a legal framework (CPA Australia. 2018).
 Confidentiality: According to this principle, the accounts have to keep confidentiality in
the process of their working and are not authorized to disclose all the information derived
during their course of action. They have to maintain secrecy and keep the data
confidential (IFAC. 2018).
 Professional behavior: While performing their duties, the accountant and members have
to be professional and should adopt the same in their attitude. They have to avoid the
practices or activities that are against the law and have to work professionally (CPA
Australia. 2018).
ASIC – Listing rules
All the ASX listed companies are required to comply with some listing rules that are issued by
Australian Securities & Investment Commission. They eventually help the companies to improve
and maintain their legal compliance with the Australian government. In terms of corporate

Financial accounting 9
governance, Listing Rule 4.10.3 applied to every ASX listed company under which they have to
amend their corporate governance structure as per the ASX CGC principles. There are eight
principles laid down by Corporate Governance Council which helps the entities to create a good
CG (PWC. 2018). They are as follows:
1. Laying down solid foundation for the management and board.
2. Structuring the board in a way to add value to the business.
3. Performing ethically and with full responsibility
4. Safeguarding integrity in corporate reporting
5. Making disclosures on time and balanced.
6. Protecting and respecting the rights of security holders
7. Recognition and management of risk
8. Providing fair remuneration (ASX. 2018).
All the above principles helps in guiding the company in terms of establish good corporate
governance. All the Australian companies are required to align with these principles so that their
business can experience future growth and success at good pace.
Major contributing factor – Liabilities
The companies that got into liquidation are majorly because of their insolvency and their
inability to meet financial obligations. Generally, most of the entities rely on external financing
that creates liabilities for them and is treated as financial debt in their books of accounts. The
failure to pay the same can create many problems for the company and will adversely affect its
operations. Several financial issues will arise and the entity will be forced to wind up their
activities and move towards liquidation. Declining position will also make shareholders to

Financial accounting 10
withdraw their money from the business. Overall, unpaid liabilities contribute to a great extent in
the process of liquidation. They are major reasons for which companies generally wound up their
operations.
Conclusion
The above report concludes that liabilities are the major factor for the winding up of the
companies. This situation arises from the improper management of assets and other resources. In
addition, unethical behaviour and violations of law also force the entities to go into liquidation. It
can be said that if the three Australian companies discussed above properly followed the
principles of corporate governance, then they can improve their position and avoid the situation
of the debacle. The accountants should also follow all the ethical codes so that proper evaluation
and examination of financial statements can be done and a true view of company’s financial
position can be presented. Furthermore, the report also concludes that proper compliance with
ethics and codes will allow the business to avoid uncertainty and the possibility of getting wound
up.

Financial accounting 11
References
APESB. (2010). APES 110 Code of Ethics for Professional Accountants. [Online]. Available at:
https://www.apesb.org.au/uploads/standards/apesb_standards/standard1.pdf [Accessed 10
September 2018].
ASX. (2018). Corporate Governance Council. [Online]. Available at:
https://www.asx.com.au/documents/asx-compliance/cgc-principles-and-recommendations-3rd-edn.pdf
[Accessed 10 September 2018].
BusinessWire. (2005). Learning Care Group, Inc. Announces Proposed Acquisition by A.B.C.
Learning Centres Limited. [Online]. Available at:
http://www.businesswire.com/news/home/20051115006409/en/Learning-Care-Group-
Announces-Proposed-Acquisition-A.B.C [Accessed 10 September 2018].
Butler, D. and Connelly, A. (2016). Practicalities of winding up trusts and realizing trust
assets. Australian Restructuring Insolvency & Turnaround Association Journal, 28(3), p. 24.
CPA Australia. (2018). APES 110 CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS.
[Online]. Available at: https://www.cpaaustralia.com.au/professional-resources/accounting-
professional-and-ethical-standards/apes-110-code-of-ethics-for-professional-accountants
[Accessed 10 September 2018].
Elliott, T. (2010). One.Tel one big debacle. [Online]. Available at:
http://www.abc.net.au/news/2009-11-20/28324 [Accessed 10 September 2018].

Financial accounting 12
IFAC. (2018). Revised Code of Ethics – Completed. [Online]. Available at:
https://www.ethicsboard.org/projects/revised-code-ethics-completed [Accessed 10 September
2018].
Insurance Journal. (2003). HIH Report Cites Mismanagement as Cause of Collapse. [Online].
Available at: http://www.insurancejournal.com/news/international/2003/04/21/28160.htm
[Accessed 10 September 2018].
Monem, R. (2016). The One-Tel Collapse: Lessons for Corporate Governance. [Online].
Available at: http://www98.griffith.edu.au/dspace/bitstream/handle/10072/42673/74746_1.pdf?
sequence=1 [Accessed 10 September 2018].
PWC. (2018). Listing a company on the Australian Securities Exchange. [Online]. Available at:
https://www.pwc.com.au/legal/assets/listing-company-asx.pdf [Accessed 10 September 2018].
Ream, P.G. (2016). Liquidation of constitutional meaning through use. Duke LJ, 66, p.1645.