Major Liquidation Analysis: HIH Insurance, One Tel, ABC Learning Cases

This report provides an in-depth analysis of the major liquidations of HIH Insurance, One Tel, and ABC Learning, examining the underlying causes of their collapses. The analysis delves into the financial irregularities, ethical climate, and corporate governance practices that contributed to their downfall. The report identifies key events such as risky acquisitions, flawed accounting practices, and inadequate risk management, highlighting their impact on the companies' financial health. It assesses the role of liabilities in exacerbating financial stress and offers recommendations for improved corporate governance and risk management. The report underscores the importance of ethical conduct, transparency, and robust financial controls to prevent similar failures in the future. The study concludes by emphasizing the lessons learned from these liquidations and their implications for businesses operating in various industries.

MAJOR LIQUIDIATION ANALYSIS – HIH INSURANCE, ONE TEL AND ABC LEARNING
10/8/2017
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EXECUTIVE SUMMARY
The liquidation of companies have been at its pace during the years beginning from two
thousand and one till two thousand and thirteen. It has occurred not in only one country but
across the globe. These liquidations have not only led to the closure of the companies which are
renowned in the market but also led many major after effects which includes the unemployment
across the globe, recession in the market and similar activities. The major collapse that has been
listed in the history is of Lehman Brothers then HIH Insurance, ABC Learning and One Tel
Phone Company. In the study last three companies have been considered. The first objective of
the report is laid out the reason which has led these companies for liquidation. The second major
objective is to understand the working of the governance of the company and how the company
is operating each and every function in an efficient and effective manner. The last objective is to
consider the nature of interest of the stakeholders of the company. With these objectives being an
integral part of the report, the report has been made available in defined headings and sections.
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Contents
EXECUTIVE SUMMARY.................................................................................................................................2
INTRODUCTION...........................................................................................................................................4
REASONS FOR LIQUIDATION........................................................................................................................5
HIH Insurance..........................................................................................................................................5
One Tel Company....................................................................................................................................5
ABC Learning...........................................................................................................................................6
PRESENCE OF ETHICAL CLIMATE..................................................................................................................6
HIH Insurance..........................................................................................................................................6
One Tel Company....................................................................................................................................7
ABC Learning...........................................................................................................................................7
PRESENCE OF CORPORATE GOVERNANCE...................................................................................................7
HIH Insurance..........................................................................................................................................7
One Tel Company....................................................................................................................................8
ABC Learning...........................................................................................................................................8
LIABILITIES AND ITS LINK WITH FINANCIAL STRESS.....................................................................................8
RECOMMENDATION....................................................................................................................................8
CONCLUSION...............................................................................................................................................9
REFERENCES................................................................................................................................................9
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INTRODUCTION
The companies are required to operate in the best manner by effectively utilizing the assets of the
company and by efficiently operating the functions of the company. The basic premise of the
running the company is to earn profits on the one hand and cater to the needs of the various
stakeholders including the shareholders of the company on the other hand. The company may
work for two or three years more and can revive itself when first premise is not met but it cannot
function properly when the second premise is not met in any manner. There has been the cases in
which the second premise has not been fulfilled and thus leading the companies to go into the
liquidation of the companies. These are HIH Insurance, ABC Learning and the One Tel Phone
Company. Each of the company has its own listings of irregularities on the basis of which the
companies have faced the worst liquidation. Along with the two basic premises, the companies
shall have the effective corporate governance in place so as to ensure that in case any
rectification action is required then the company’s management will take that into consideration
and will also take the steps to reduce any kind of risks if any come into the notice of the
management of the company. The report has then ended up with the conclusion and the
recommendation.
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REASONS FOR LIQUIDATION
HIH Insurance –
Four events have been identified which has led to the liquidation of the companies. The company
has entered into the area which is connected with the high degree of risk. At first the event is
associated with the acquisition of the big insurance company of that time which is Fire and All
Risk Insurance (FARI). The company has incurred the huge liabilities because of this acquisition
in spite of the fact that then partner Winterthur has resigned only because he has projected the
downfall of the company with this acquisition. Then secondly the company has stepped its shoes
into the business of financing the films which again has made the company to suffer the losses of
approximately 100 million dollar. The both events are the beginning of the liquidation.
(O’Brien,2008).
The third event is the entrance into the major risky areas which has distorted the whole picture of
the financial status of the company and in actual the company has suffered a major loss. The area
is the insurance against any natural disasters and after that the typhoon at Florida has occurred.
The last event that the company has faced is the amendment in the regulations of the
government. The company has been forced to pay the higher compensation claims to the workers
at California. Next event is that gradually the company has entered into the insurance from the
damage caused by natural disasters and the company has suffered the major loss from the
Typhoon of Florida. (Mak, Deo and Cooper, 2005 and Mirshekary, Yaftian, and Cross, 2005).
One Tel Company –
The major event that has led the company into liquidation is the company has not adopted the
matching concept as per the accounting principles. The company shall match its revenue and
expense and account for in the same period. But in the given case the company is reporting the
revenue for the concerned period but has been booking the expenses in the near future years. Due
to this the financial health of the company in actual has been distorted and in future has been
forced to report the losses in big figures.
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The second event is that the company is in the move of paying the higher remuneration
irrespective of the fact that the company has been incurring losses. The third event is that the
company in order to become bigger and known in the market has been selling the services on the
credit of six months due to which the income has been blocked whereas the company is required
to pay its suppliers immediately (Reza, 2011). The next and the last cause is the unqualified audit
report issued by the auditors of the company.
ABC Learning
In this case, the major cause for the liquidation of the company is the financial irregularities. The
financial irregularity is the accounting practice that the company has followed for the licenses
and the intangible assets. The company has been in the urge of revaluing the intangibles assets of
the company due to which out of the total assets of the company 70% of the assets counts for the
intangibles that has been created with the revaluation. The company has been making the wrong
forecasts of future incomes and rather in actual the company has declared the decrease in the
profits to forty three percent approximately.
The other event is the low quality of service being provided to the children kept at their learning
centre and the same have been notified by the New South Wales Child Care.
PRESENCE OF ETHICAL CLIMATE
HIH Insurance
The ethical atmosphere shall be present in almost all the companies. In the given case two
defaults have been noticed and observed in ethics. These are related to the business and statutory
compliance (Cheng and Seeger, 2012). The former entails with the entrance of the companies in
the major business risky areas which has led to the huge losses ran over the span of two years.
The latter entails the event when the company has entered into the acquisition of the Fire and All
Risk Insurance Company and that too without the prior approval of the board of directors and
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without conducting the technical and feasibility of the company’s functions. (Lipton, 2013; UK
Essays, 2013).
One Tel Company
One of the major ethical issues is the wrong practice of accounting rule and procedures in the
sense that the company is not following the matching concept of the accounting principles. The
company has followed the method where the higher revenue is reported in the current years and
lesser in the future years (Brown and Caylor, 2009). Secondly the company has not been
preparing the sale bills in accordance with the Goods and service tax act 2000 and has been
remained unprepared for so many weeks and months. Thirdly the auditor has not mentioned any
note or clarification in its auditors report (Avison, 2012).
.
ABC Learning
One of the basic ethical issues is that the company has revalued the intangibles to the higher
values by wrongly estimating the future cash flows of the company. Due to revaluation the major
portion in the total assets is the intangible assets.
The other issue is that the company has not been made able to deliver the high quality services to
children at their centre and rather has kept focus on the business expansion only. The best case
noticed is that in the year of two thousand and five, one child have gone out of the centre at its
own and none of the security guard has done something.
PRESENCE OF CORPORATE GOVERNANCE
Low corporate governance practices have been observed in the cases of all three companies and
have been regarded as one of the major cause of the liquidation of the companies.
HIH Insurance
The chief executive officer of the company has played the dominant role by keeping the board of
directors of the company filled with the relatives and the friends of the company. By having the
board of its own in actual terms, he has engaged the company in transferring of funds to the
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company in which he has stake. Second instance is of the major acquisition of the company
made without the prior approval of the board of directors (Jiangbo, 2003).
One Tel Company
The company has adopted the bad pricing strategy in relation to the products of the company and
also has adopted the wrong accounting method. The strategy details that the goods are sold on
credit for seven months. Wrong accounting method has made the company as highly liquid and
profitable in current year and lower in future years (Morey, Gottesman, Baker and Godridge,
2009).
ABC Learning
The company has not formed any committee as defined in the listing rules of the Australian
Stock Exchange. Secondly the auditor has not issued the qualified audit report.
LIABILITIES AND ITS LINK WITH FINANCIAL STRESS
Liabilities are the amount which the company is required to pay in due time and if not possible
then in the event of liquidation of the company. These liabilities as outstanding in the financial
statements of the company are the obligations for the company and which if not cleared in due
time will become the financial stress for the companies. Covering all the three companies, there
has been the huge liability due to which the company has gone into liquidation. The liabilities
have been occurred due to the improper operation of the finance function, improper conduct of
the auditing as the auditors have issued the clean audit report in all the three cases, improper
execution and development of strategy. Thus, in this way the liabilities have the important role in
bringing the liquidation of companies.
RECOMMENDATION
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On the basis of the whole analysis, it is highly recommendable for every company to consider
the collapses made as the lessons for future and shall take into account all the considerations and
procedures that have come out of the report.
CONCLUSION
The three liquidations that have occurred have led the recession in the market across the globe
and also hampered the working and operations of the companies either operating in the same
industry or operating in the same country. The major liquidations that have been analyzed are the
HIH Insurance, One Tel Phone Company and ABC Learning. The reasons for all the collapses
are different but the basic premise of having the manipulated practices involved is the same.
Each company has entered into the financial irregularities by making wrong entries in the books
of accounts without considering the nature of the business of the company. In order to close the
report, it is concluded that the collapses have been majorly done because of the financial
irregularities and the improper attention of the management on the situations and the
circumstances which has led to the collapses.
REFERENCES
Avison, D. (2012): “IT Failure and the Collapse of One.Tel” in Traunmuller, R. (ed.):
Information Systems: The e-Business Challenge, Kluwer, pp 31-46.
Brown, L. and Caylor, M., 2009, ‘Corporate Governance and Firm Operating Performance’,
Review of Quantitative Finance and Accounting, 32, 2: 133-144.
Cheng S and Seeger M, (2012), “Lessons Learned from Organizational Crisis; Business Ethics
and Corporate Communication”, International Journal of Business Management, Vol. 7, No. 12,
74-86
Jiangbo X, (2003), “HIH Insurance Limited: Corporate Governance and Corporate Excesses”,
available at http://www.seiofbluemountain.com/upload /product/201010/2010jjfzh05a8.pdf
accessed on 08/10/2017.
Lipton P, (2013), “The Demise of HIH : Corporate Governance Lessons”, EY Journal, 27th, 273-
277.
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Mak, T., Deo, H. and Cooper, K. 2005, ‘Australia’s Major Corporate Collapse: Health
International Holdings (HIH) Insurance ‘May the Force Be with You’, Journal of American
Academy of Business, 6, 2: 101-110.
Mirshekary, S., Yaftian, A. and Cross, D. (2005), ‘Australian Corporate Collapse: The Case of
HIH Insurance’, Journal of Financial Services Marketing, 9, 3: 249-58.
Morey, M., Gottesman, A., Baker, E., Godridge, B., 2009, ‘Does Better Corporate Governance
Result in Higher Valuations in Emerging Markets? Another Examination Using a New Data Set’,
Journal of Banking and Finance, 33, 2: 254-71.
O’Brien, N. (2008), “Williams walks free today but HIH victims continue to pay the penalty”
The Australian, p. 5.
Reza M, (2011), “The One Tel Collapse: Lessons for Corporate Governance”, Journal of
Australian Accounting Review, pp 1-28
UK Essays. (2013), “Collapse Of HIH Insurance” available at:
https://www.ukessays.com/essays/business/collapse-of-hih-insurance.php?cref=1 Accessed
08/10/2017.
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