Ethics and Governance in Explaining Financial Stress of Companies

This report explores the critical relationship between ethics, governance, and financial stress, focusing on the liquidation of several Australian companies: ABC Learning, HIH Insurance, and OneTel. The introduction establishes the importance of corporate governance and ethical practices in ensuring a company's long-term viability, highlighting how mismanagement and a lack of ethical values can lead to financial ruin. The report then examines specific events that resulted in the liquidation of these companies, detailing the poor governance and unethical decisions made by their management. The analysis delves into how these companies manipulated financial statements, engaged in aggressive expansion strategies, and disregarded warnings, ultimately leading to their downfall. The report emphasizes the crucial role of business ethics in guiding organizational behavior and ensuring transparency, especially in financial reporting. It underscores how weaknesses in corporate governance and a lack of ethical standards can foster fraudulent practices and jeopardize stakeholder trust. The conclusion reinforces the importance of ethical leadership and sound governance in preventing financial stress and ensuring the sustainability of businesses.

Running head: ETHICS AND GOVERNANCE AND FINANCIAL STRESS
Ethics and Governance in Explaining Financial Stress of Companies
Name of the University:
Name of the Student:
Authors Note:

1ETHICS AND GOVERNANCE AND FINANCIAL STRESS
Table of Contentss
1. Introduction................................................................................................................2
2. Events that Result in Liquidation of Companies.............................................................2
2.1. ABC Learning...........................................................................................................3
2.2. HIH Insurance...........................................................................................................4
2.3. OneTel Phone Company...........................................................................................5
3. Ethics and Governance in Explaining Financial Stress...................................................6
3.1 ABC Learning............................................................................................................9
3.2 HIH Insurance............................................................................................................9
3.3 OneTel.....................................................................................................................10
4. Conclusion.....................................................................................................................10
References..........................................................................................................................12

2ETHICS AND GOVERNANCE AND FINANCIAL STRESS
1. Introduction
The fundamental objective of an organization is profit-making or maximization of
shareholder’s wealth. An organization, being a going on concern has perpetual existence but with
a grave threat which is liquidation. This is considered most imperative as it may wipe the
company from existence irrespective of its size or nature of business. This situation has been
witnessed in various countries and numbers of firms got liquidated.1 However, as studies have
been conducted to learn the reason behind the same, mismanagement of resources and lack of
corporate governance contributed the most towards the failure of an organization. Hence, this
paper will shed light on a few Australian companies which got liquidated as a result of poor
governance and low ethical values.
2. Events that Result in Liquidation of Companies
ABC Learnings, HIH Insurance, and One.Tel Phone Company, which has enjoyed the
privilege of being one of the most valued companies in Australia had to face
liquidation on poor ethical grounds, wherein the management of the companies chose
wrong path of value maximization and suffered the consequences.2
1 Adegbie and Fofah Evelyn Temitope. "Ethics, Corporate Governance and Financial Reporting
in the Nigerian Banking Industry: Global Role of International Financial Reporting
Standards." Accounting and Finance Research 5.1 (2015): 50.
2 Adegbie, Folajimi Festus, and Fofah Evelyn Temitope. "Ethics, Corporate Governance and
Financial Reporting in the Nigerian Banking Industry: Global Role of International Financial
Reporting Standards." Accounting and Finance Research 5.1 (2015): 50.

3ETHICS AND GOVERNANCE AND FINANCIAL STRESS
2.1. ABC Learning
ABC Learning Ltd was into a business of providing early childhood education services.
Eddy Groves was the mind behind the business which has a few centers but started aggressively
acquiring rivals and started opening new centers in view of growing faster. In the process of
same, the organization spend a huge amount of money which were generally funded by investors
as well as by banks. However, declining profit in second half of 2017 has reflected that the
company was not in a position to meet its obligations and eventually the company went into
receivership.3
The management of the concerned corporation has been alleged to maintain a poor
governance as the financial position of the organization was misinterpreted and led the
shareholders believe in the false positive image created. Mr. Groves, the founder and CEO of
ABC Learning misguided the shareholders by keeping them from the actual financial position of
the company and even neglecting the warnings from the team who were employed to measure
the position of the company. He is said to be very much keen to expand his business by acquiring
new branches, increasing his debt. It is also claimed that he was dependent on the government
subsidy and reflected them as future profit in his financials.4 This could be considered as the
deceiving factor for the investors. He is alleged to follow his own ethics while taking business
3 Baldarelli, Maria-Gabriella, Mara Del Baldo, and Caterina Ferrone. "The relationships between
CSR, good governance and accountability in the Economy of Communion (EoC)
enterprises." Corporate Social Responsibility and Governance. Springer, Cham, 2015. 3-38.
4 Cerqueiro, Geraldo, Steven Ongena, and Kasper Roszbach. "Collateral Damaged? On
Liquidation Value, Credit Supply, and Firm Performance." (2018).

4ETHICS AND GOVERNANCE AND FINANCIAL STRESS
decision. The person has not only charged responsible for liquidation of business but also
slowing down the confidence of the investors.
2.2. HIH Insurance
Founded in 1968 by Ray Williams and Michael Payne and named as M W Payne
Underwriting Agency Pty Ltd, the organization got acquired by CE Health PLC and the former
partner was appointed to the boards and in 1996 its name was changed to HIH Winterthur. The
company had an aggressive approach towards growth and it acquired several organizations in
Australia and throughout the globe. However, in 1999 it acquired its biggest rival FAI Insurance
and with Winterthur Swiss selling majority of its share to public, the company got the name HIH
Insurance Ltd.
In March 2001, the company collapsed being perceived as one of the most reliable
organizations. The estimated asset base of the company was huge but on further investigation of
its internal reports, it has been seen that its high liabilities dragged it to insolvency. This came as
a huge blow to the stakeholders who were left stuck with unpaid claims. There are various claims
that HIH Insurance, in thirst of growth have acquired troublesome business at higher prices.
Moreover, it is also referred that the company entered into an overcrowded market by offering
services at lower prices than other while some say that it stepped into a sector which it did not
understand as such. In case of HIH Insurance, ethics was again compromised to gain
stakeholder’s confidence by reflecting false financial statement.5 In this case, the assets were
over-exaggerated while the liabilities were under-exaggerated to create a positive picture of the
5 Gray, Jerome. "The simultaneous application of section 424 (1) and section 22 (1)." Without
Prejudice 17.4 (2017): 14-15.

5ETHICS AND GOVERNANCE AND FINANCIAL STRESS
organization. It had fundamental issues and is even charged with negligence as its actuarial
adviser had warned the management of the same before the collapse.
2.3. OneTel Phone Company
OneTel was launched in 1995 which signed an agreement with the second largest telecom
company in Australia, Optus, for using Optus’s network services to serves its own customers.
However, the company further decided to offer cheap rates for calls in order to increase its
customer base. This step by OneTel has raised a dispute with its service provider Optus. Then in
1997, it signed another agreement with Global One in order to resume the growth it has dreamt
of. It stepped further when it launched ‘Global Strategy’ to expand its network worldwide.
Moreover, in 1998, OneTel purchased spectrums in various regions of Australia in order to
enhance their services. Further, some of the investors injected money in their system hoping to
gain out of it.6
Hence, it was seen that the company has invested a huge amount of money in agreement
and acquisitions while offering service at low cost. Moreover, in 1999 it went into agreement
with Lucent Technologies and even got its license at ten times higher cost than that of its rivals.
Eventually, in the year 2000, the company started reporting operating losses and was witnessed
supply crunch of cash. As predicted by Merrill Lynch, its cash reserves fell. And finally, the
creditors of the company voted to liquidate it the year 2001.7
6 Ho, Simon SM, et al. "Ethical image, corporate social responsibility, and R&D
valuation." Pacific-Basin Finance Journal 40 (2016): 335-348.
7

6ETHICS AND GOVERNANCE AND FINANCIAL STRESS
3. Ethics and Governance in Explaining Financial Stress
Business ethics is of utmost importance as it defines the principles as well as the norms
that guides the activity of an organizations while maintaining its conduct with all of its
stakeholders, be internal or external. Hence, ethics could be considered as the primary pillar of
corporate governance in an organization while ensuring its sustainability.8 Generally, the theory
of corporate governance demands transparency within the system which even includes the
financial movements within the corporation.9
Ethics is generally considered as the personal point of view which incorporates certain
rules as well as code of conduct and any organization which is bound by it has its members
bound within the same. However, differentiating between the ethical or unethical is difficult as it
varies from one culture, society or organization to another. Therefore, a sound ethical base is the
mandatory criteria for every industry in professional realm.10 A weakness in corporate
governance in an organization is a sign of poor ethics which might lead to fraudulent,
selfishness, as members might start ill practices. This may also corrupt the board members,
management as well as the staff of the organization.
8 Kaufman, G. G. "The Dodd-Frank Act: Systemic Risk, Enhanced Prudential Regulation, and
Orderly Liquidation." The First Great Financial Crisis of the 21st Century: A Retrospective.
2016. 249-266.
9 Manganelli, B. E. N. E. D. E. T. T. O., P. I. E. R. L. U. I. G. I. Morano, and F. R. A. N. C. E. S.
C. O. Tajani. "Companies in liquidation. a model for the assessment of the value of used
machinery." WSEAS Trans. Bus. Econ 11 (2014): 683-691.
10 Whincop, Michael J., ed. Bridging the entrepreneurial financing gap: Linking governance
with regulatory policy. Routledge, 2017.

7ETHICS AND GOVERNANCE AND FINANCIAL STRESS
When the financial reporting is taken into consideration, then the accountants are obliged
to disclose true and fair value to the stakeholders as their ethics demands. Generally, the decision
by any stakeholder of a particular firm is based on the financial position of that firm which is
totally dependent on how the accountants provide it.11 Therefore, any financial information that
is provided by the accountant needs to be realistic, unbiased as well as efficient, so that the user
of the same can rely on it. It can be further said that any lackluster of ethics while conducting
calculation for financial report could draw an unrealistic picture of the company which might be
deceiving and result in losses. Though the accounting standard and rules bind the accountants but
lack of professional ethics could lead him to manipulate the figures. Hence, a professional ethics
incorporated within the qualitative characteristics could provide a quality report.
The economic decision by the stakeholders are generally dependent financial reporting
which is supposed to contain the fundamental qualities. The concept of ethical accounting
standard is also a term which is being widely used. This notion is considered to be necessary for
the accountants in order to guide them to create reports without material misstatement.12
While narrowing the same, the corporate governance is another imperative impression as
organization with weak governance are witnessed to have collapsed. However, in contrast to the
same, a strong governance is a base of long-term sustainability. Corporate governance laid the
foundation of integrity as it imposes the responsibility of keeping the interest of stakeholders
away from risk.
11 Monti, Annamaria. "Form, Size,'Governance'. Remarks on Italian Late 19th-Century
Companies." (2015).
12 Urionabarrenetxea, Sara, Leire San-Jose, and Jose-Luis Retolaza. "Negative equity companies
in Europe: theory and evidence." Business: Theory and Practice 17 (2016): 307.

8ETHICS AND GOVERNANCE AND FINANCIAL STRESS
However, in the case of the abovementioned companies, none of them reflected integrity
and their greed clouded their judgement. The management of those companies were liable for the
collapse, as they manipulated their financial statement to show it positive and this resulted not
only in liquidation but also tarnished their image. Moreover, the stakeholders were at bigger lose
both materially as well as emotionally. 13
Liabilities in Explaining the Liquidation of the Companies
Liabilities are undoubtedly the most important factor which results in liquidation of a
company. In case of the companies concerned in this article, liabilities were higher than the
organization’s ability to pay.14
3.1 ABC Learning
Being on a spree of acquisition, ABC Learning invested a huge amount on opening new
centers and acquiring other firms in same business. It started to expand its wings outside
Australia and became an international brand. In process of doing the same, ABC learning took
huge credits and loans from banks. The organization also manipulated its financials and
presented it in such a way that it reflected the positive nature of the company. It had a net asset
of $4.5bn with obligation of $1.8bn, but on further investigation, the liquidators found that the
13 Van Niekerk, Bouwer. "Launching business rescue applications in liquidation proceedings-
(successfully) flogging a dead horse?: case note." De Rebus 2015.556 (2015): 50-51.
14 Nichha, Ashika Hasmukhlal. Moving towards a unified approach for the winding up of
companies in view of the" repealed" chapter 14 of the Companies Act 61 of 1973. Diss.
University of Pretoria, 2016.

9ETHICS AND GOVERNANCE AND FINANCIAL STRESS
net liability exceed the company’s assets by $800mn. It has been identified that the company had
most of its assets which were intangible in nature, while its tangible assets were hardly making
$1bn.
3.2 HIH Insurance
Starting as a small company, HIH Insurance witnessed huge growth in its early period.
This company started investing huge amounts in the highly competitive market and also were
providing service at low cost. In a decade, it had more than 200 subsidiaries all over the world
and also purchased troubled businesses. The organization also acquired its biggest rival FAI
Insurance paying $300mn while the actual value of the business was $100mn. By the end of
2000, the compony almost had an asset base of approximately $8.1bn but with high leverage
debt as well as insurance liabilities, the company collapsed with an estimate of $5bn in losses.15
3.3 OneTel
The company’s aggressive acquisition strategy turned out to be a bad decision. It had a
culture of growth-at-all cost which had its own consequences. Though during the collapse, the
company had an annual sale of $653mn but was low on profit as it had huge expenses to meet. It
had witnessed constant decrease in its return on assets and so its profits. The cashflow of the
organization was also positive in the beginning but while aggressively acquiring other businesses
and entering into agreements had created a cash crunch. Moreover, it also acquired the
telecommunication license with ten times higher than its rivals. Hence, with such huge liabilities
15 Swart, W. J. C. "Business rescue: do employees have better (reasonable) prospects of success?
Commentary on Employees of Solar Spectrum Trading 83 (Pty) Limited v AFGRI Operations
Limited (North Gauteng High Court, Pretoria (unreported) 2012-05-16 Case no 6418/2011;
18624/2011; 66226/2011; 66226A/11): cases." Obiter 35.2 (2014): 406-420.

10ETHICS AND GOVERNANCE AND FINANCIAL STRESS
and lowering income, the company was also predicted to be insolvent which later happen on
shareholder’s votes.16
4. Conclusion
The collapse of these huge companies turned out to the outcome of lack of governance
and corrupted ethics. In all the cases, the senior management of the company were responsible
for not keeping themselves transparent. Aggressive growth strategy that can also be termed as
greed, overtook the ethical values and the management did not allocate their resources tactfully
rather spend it on acquisition. Accounts manipulation is also seen to be one of the core reasons
for the fall of these organization. Hence, a strong ethics and corporate governance are the most
important element and is needed to be maintained within an organization.
16 Tykvová, Tereza. "When and Why Do Venture-Capital-Backed Companies Obtain
Venture Lending?." Journal of Financial and Quantitative Analysis 52.3 (2017): 1049-1080.

11ETHICS AND GOVERNANCE AND FINANCIAL STRESS
References
Adegbie and Fofah Evelyn Temitope. "Ethics, Corporate Governance and Financial Reporting in
the Nigerian Banking Industry: Global Role of International Financial Reporting
Standards." Accounting and Finance Research 5.1 (2015): 50.
Adegbie, Folajimi Festus, and Fofah Evelyn Temitope. "Ethics, Corporate Governance and
Financial Reporting in the Nigerian Banking Industry: Global Role of International Financial
Reporting Standards." Accounting and Finance Research 5.1 (2015): 50.
Baldarelli, Maria-Gabriella, Mara Del Baldo, and Caterina Ferrone. "The relationships between
CSR, good governance and accountability in the Economy of Communion (EoC)
enterprises." Corporate Social Responsibility and Governance. Springer, Cham, 2015. 3-38.
Cerqueiro, Geraldo, Steven Ongena, and Kasper Roszbach. "Collateral Damaged? On
Liquidation Value, Credit Supply, and Firm Performance." (2018).
Gray, Jerome. "The simultaneous application of section 424 (1) and section 22 (1)." Without
Prejudice 17.4 (2017): 14-15.
Ho, Simon SM, et al. "Ethical image, corporate social responsibility, and R&D
valuation." Pacific-Basin Finance Journal 40 (2016): 335-348.
Kaufman, G. G. "The Dodd-Frank Act: Systemic Risk, Enhanced Prudential Regulation, and
Orderly Liquidation." The First Great Financial Crisis of the 21st Century: A Retrospective.
2016. 249-266.

12ETHICS AND GOVERNANCE AND FINANCIAL STRESS
Kaufman, G. G., and R. W. Nelson. "The Dodd-Frank Act: Systemic Risk, Enhanced Prudential
Regulation, and Orderly Liquidation." The First Great Financial Crisis of the 21st Century: A
Retrospective. 2016. 249-266.
Manganelli, B. E. N. E. D. E. T. T. O., P. I. E. R. L. U. I. G. I. Morano, and F. R. A. N. C. E. S.
C. O. Tajani. "Companies in liquidation. a model for the assessment of the value of used
machinery." WSEAS Trans. Bus. Econ 11 (2014): 683-691.
Monti, Annamaria. "Form, Size,'Governance'. Remarks on Italian Late 19th-Century
Companies." (2015).
Nichha, Ashika Hasmukhlal. Moving towards a unified approach for the winding up of
companies in view of the" repealed" chapter 14 of the Companies Act 61 of 1973. Diss.
University of Pretoria, 2016.
Swart, W. J. C. "Business rescue: do employees have better (reasonable) prospects of success?
Commentary on Employees of Solar Spectrum Trading 83 (Pty) Limited v AFGRI Operations
Limited (North Gauteng High Court, Pretoria (unreported) 2012-05-16 Case no 6418/2011;
18624/2011; 66226/2011; 66226A/11): cases." Obiter 35.2 (2014): 406-420.
Tykvová, Tereza. "When and Why Do Venture-Capital-Backed Companies Obtain Venture
Lending?." Journal of Financial and Quantitative Analysis 52.3 (2017): 1049-1080.
Urionabarrenetxea, Sara, Leire San-Jose, and Jose-Luis Retolaza. "Negative equity companies in
Europe: theory and evidence." Business: Theory and Practice 17 (2016): 307.
Van Niekerk, Bouwer. "Launching business rescue applications in liquidation proceedings-
(successfully) flogging a dead horse?: case note." De Rebus 2015.556 (2015): 50-51.

13ETHICS AND GOVERNANCE AND FINANCIAL STRESS
Whincop, Michael J., ed. Bridging the entrepreneurial financing gap: Linking governance with
regulatory policy. Routledge, 2017.