Reasons for Collapse: HIH, One.Tel, ABC Learning Center Liquidation

This report provides an in-depth analysis of the corporate scandals and subsequent liquidations of HIH Insurance, One.Tel, and ABC Learning Centers, three prominent companies across different industries in Australia. It meticulously outlines the reasons behind their collapses, which include poor management practices, unsustainable debt levels, weak operating cash flows, and significant accounting irregularities. The report delves into the specific issues faced by each company, such as HIH Insurance's inadequate provisions for insurance claims, One.Tel's strategic missteps and flawed pricing policies, and ABC Learning's heavy reliance on debt and questionable asset valuations. Furthermore, it examines the consequences of these failures, emphasizing the importance of strong internal controls, transparent financial reporting, and effective corporate governance. The report concludes by highlighting the lessons learned from these corporate failures, offering insights into how other companies can avoid similar pitfalls and maintain financial stability.

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Accounting and Financial Management

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Executive Summary
This report emphasizes on the provision of the information related to the occurrence of the
corporate scandal and liquidation of three companies of three different industries such as HIH
Insurance, One.Tel and ABC Learning Center. In addition to this, it also provides information
related to the reasons behind the liquidation of the companies and different measures that could
be adopted by other companies to avoid the situation of liquidation. It is found out that the main
reasons for the occurrence of liquidation are poor management, increase in the ability for non
repayment of the liabilities, weak operating cash flows and accounting issues.

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Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Reasons for Collapse...................................................................................................................................4
Consequences of collapse of One.Tel, HIH insurance and ABC Learning Centers.....................................6
Conclusion...................................................................................................................................................6
References...................................................................................................................................................8

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Introduction
HIH group was the second largest general insurer in Australia with 217 subsidiaries. The
company was established in the year 1968 as MW Payne Liability Agencies Pty Ltd as an
underwriting insurance business in Australia. The mission of the company is to capture a large
market share in the general insurance industry of Australia and to adopt different channels for
distributing its products. The company has acquired different businesses in insurance industry.
The collapsed of HIH insurance is the largest failure in the history of Australian business. One.
Tel was a telecommunication company established in 1995 by Brad Keeling and Jodee Rich in
Australia. The company is expanding its business operations in USA and Europe by the adoption
of customer driven approach and low pricing strategy (Fleckner and Hopt, 2013).
One.Tel company is one of the fastest growing companies in Australia and got the second
highest ranking in the industry. The shareholders of the company has made substantial
investment in the company for the purpose of overcoming cash crisis and resulted in ceasing its
trading in 2001. It was the fourth largest telecommunication company in Australia. It had two
million customers and operations in eight countries (Fleckner and Hopt, 2013).
ABC Learning center was established in the year 1988 in Brisbane Australia. It is considered as
the dominant player in Australian long day care. The company has adopted a franchise model
and expanded the learning centers in different regions of Australia. In addition to this, ABC
Learning has become a leader due to which other companies in the industry follow the company
which results in the formation of corporate care provided by those companies whose shares are
traded on Australian stock exchange. Along with this, the child care centers in Australia were
not for profit organizations which are supported by government subsidies. The company has
managed 18 child care centers and considered as a major player in private childcare sector of
Australia. For the promotion and growth of the sector, the government has provided subsidy to
families through direct payments (Margret, 2011).
The company has expanded its business operations in different regions of Australia by acquiring
properties in prime locations and single day care centers and child care groups. The company has
listed on Australian stock exchange in the year 2001 which results in provision of the capital for
further growth. The company owned 2238 centers in Australia, US, New Zealand and UK in the
year 2008. There is a growth in the market capitalization of Aus $ 2.5 billion in the year 2006.
Besides this, in the year 2007, the after tax profit of A$ 143.1 million and revenues of Aus $ 1.7
billion. In the year 2008, the ABC Learning centers have collapsed and went into liquidation
(Huang, 2009).
Reasons for Collapse
The main reasons behind the collapse of the HIH Insurance is the presence of debts of Aus$ 5.3
billion. The company has liquidated in the year 2001. There was a decline in the share prices of
the company to Aus$ 0.175 in the year 2001 from Aus $ 1 in 2000. It has a direct negative
impact on the stakeholders of the company that were interested in taking protection from
unforeseen calamities. Besides this, the main reasons for the occurrence of collapse include
improper pricing of past claims on the policies and inadequate provisions for insurance claims.
There was an occurrence of the mismanagement of the core operations of the business. Besides
the other reason behind the collapse of HIH insurance was the self indulgence and corporate
expenditure which raised concern for risk management and corporate governance in the

Accounting and Financial Management 5
company. The company failed to provide transparent information and disclosure of the
deteriorating position of the financial statements (Mirshekary, Yaftian and Cross, 2005).
The main reasons for collapse of the telecommunication company named One.Tel include failure
of performance of the duties by the directors and management, lack of internal controls and
absence of independence in the audit function. Besides this, other reasons for the occurrence of
collapse of One.Tel company include strategic mistakes, unbridled growth, failed expectations
and wrong pricing policy. There is a presence of lack of involvement of directors and
management in the operations of the business (Jones, 2011). The company has adopted
management by crisis approach in place of forward planning. The company has misstated its
profits and cash flows generated from different activities to meet its obligations. Along with this,
the directors of the company failed to establish strong agency relationship with the shareholders
and get the approval of excessive loans for the expansion of the business without implementing
an appropriate system of audit and control. They have violated different sections of Corporation
Act 2001 i.e. 180, 181, 182 and 183 (Sievers, 2009).
Besides this, the actions of the directors are not in the good faith and best interests of the
company. In addition to this, the management and financial personnel has failed to exercise their
duties with diligence and due care because there is a lack of their involvement in day to day
operations of the company. Besides this, the company has failed to state the true financial
position to its shareholders due to which the company has collapsed and unable to recover from
it. Along with this, the financial statements of the company were audited by two different
accounting firms i.e. BDO and Ernst & Young. The auditing firms have not fulfilled their roles
and responsibilities in an effective manner (Campbell and Houghton, 2005).
BDO has issued unqualified reports which leads in material misstatement. The company has
purchased lot of non-audit services from its auditors which created conflict of interest between
individuals within the auditing firms. Out of five ethical principles which are followed by
auditors i.e. objectivity, due care, professional competence, integrity and confidentiality, the
auditors have breeched some of the ethical values i.e. integrity, professional behavior, and
objectivity. The auditors did not comply with different laws and regulations which result in the
breach of professional behavior (Kirby and Drury, 2012).
There is also a presence of some inherent risk such as increased outlays beyond the financial
capacity of the firm. In addition to this, the company is offering telecom services to subscribers
at low prices than the payments made by the company. Along with this, the billing system of the
company has failed as it lacks in providing the bills to customers in quick manner and take
receipts from them on time due to increase in the number of customer base of the company
(Gaylord, 2001).
The main reasons for the collapse of ABC Learning include debt repayments, weak operating
cash flow, business model, capital expenditure and accounting. In order to repay the debt, the
company has sold 60% of its US subsidiary due to which there is a decline in the share price
from Aus $ 8.62 to Aus $ 0.54. This is the reason that it has been delisted from Australian stock
exchange. In addition to this, in the financial statements of the company, there is a large amount
of intangible assets such as goodwill and childcare licenses as it has recognized large number of
licenses for operating the childcare centers (Kruger, 2011).
The company has shown increased amount of licenses and goodwill in the year 2007-2008 to
Aus $2.4 billion and Aus $ 271 million in a respective manner from Aus $647.6 million and Aus
$37.4 million respectively. Along with this, there was also an impairment charges for such
intangible assets amount to Aus $ 2 million and Aus $ 8.4 million for goodwill and childcare

Accounting and Financial Management 6
licenses in a respective manner for two years. Besides this, these intangible assets become
worthless in the year 2008 when a company faces crisis. Besides this, there is also a presence of
inherent risk related to valuation of the assets (Garvis and Manning, 2017).
In addition to this, the company has appointed three auditors namely KPMG, Ernst & Young and
Pitcher Partners who had provided unqualified opinions to the company. The company has total
liabilities of Aus $1.1 billion which has reclassified the current liabilities to non-current
liabilities. The main reason behind it is the refinancing of the funds. In the year 2007-2008, the
profit for the company has fell to 42% due to covenants for debt and one off charges. Along with
this, the company has not generated enough cash flow from operating activities for the purpose
of payment of salaries, interest, dividends and suppliers (Garvis and Manning, 2017).
Consequences of collapse of One.Tel, HIH insurance and ABC Learning Centers
There is a need for the senior managers to have a knowledge regarding the difference existed
between managing and directing. It is essential for the manager or director in board of directors
to act in the best interests of the company. There is a need to clearly communicate and delegate
roles and responsibilities to every member of the organization. This helps in effective
management and increased productivity of the organization. In addition to this, there is a need to
frame code of conduct which takes into consideration management and legal guidelines such as
culture, risk management programs and monitoring and review of the operational, project and
strategic activities (Cheng and Seeger, 2012).
There is also a requirement of understanding of the activities carried out by the organization by
directors which facilitates in the monitoring in a regular manner the attendance at board of
directors meetings and familiarity with the financial status of the company. Besides this, it is also
found out that it is ineffective to increase the customer base if it not result in an increase in the
profitability of the company (Clarke, 2017). There is also a need to establish and implement
strong internal controls, effective management scrutiny, financial reporting quality and full
disclosure of company affairs to its stakeholders (Caliyurt and Crowther, 2008). It is also
requisite for non executive members should interact with middle and lower level management to
provide transparency of the operations carried out by the firms. Besides this, the investors who
have large share in the company should take active participation in the management of the firm.
The board of directors should control the agenda and monitor the behavior of the management in
an effective manner (Ferran and Ho, 2014).
Conclusion
It can be concluded that the collapse of HIH Insurance, One.Tel and ABC Learning are the
largest corporate scandals in Australia. It can also be concluded that HIH Insurance was
established in the year 1968 and considered as a largest general insurer company in Australia.
Besides this, One.Tel was the fourth largest telecommunication company established in the year
1995. ABC Learning centers was the company that provides child care services in Australia and
established in the year 1988. It can also be summarized that One.Tel company has collapsed in
the year 2001. Along with this, HIH insurance has also liquidated in the year 2001. In addition to
this, ABC Learning centers has liquidated in the year 2008. The main reasons behind the
collapse of these companies include presence of large amount of liabilities which the companies
were unable to pay, improper pricing of previous claims, weak operating cash flows,
misrepresentation of the financial statements by auditors and so on. To avoid liquidation, there is

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a requirement for the companies to clear communicate and delegate roles and responsibilities to
members of the organization. Along with this, it is also required by the non executive directors to
communicate with the middle and low level management in order to bring transparency in the
operations of the business.

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