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Discuss the ethics and governance in explaining the Company’s Financial Stress

Whenever any business goes into financial trouble then it is important to look into the facts and get support as soon as possible. This would help the business to look into different options that are available. The bankruptcy or liquidation has to be the last option. In case the business struggles with the liabilities or debts then the business might feel that shutting down or bankruptcy is the single alternative available with it (Jones and Hensher, 2007). It is important that before doing anything, professional advice is sought and different approaches of repaying the debts are looked into.  Bankruptcy is a kind of approach wherein the business can deal with debts which cannot be repaid (Australian Debt Solvers, 2017). However, bankruptcy is applicable only to individuals and liquidation is applicable to the companies. If any company is unable to repay its debts then it liquidates and stops its operations. Herein, the business assets are sold out so that the debts can be paid off.

In past few years some of the companies have liquidated as they were unable to fulfil their liabilities when they were due (Delisted.com.au, 2017). This report considers the given examples of ABC Learning, One.tel Phone Company and HIH insurance etc. to find out the real cause of their liquidation.

Discuss the ethics and governance in explaining the Company’s Financial Stress.

 Three businesses have one thing in common which is the major corporate collapse. The downfall of One-Tel was in year 2001 and at that point of time it had been the biggest telecommunication business in Australia with about 2 million clients and it was operating in around eight nations. As per the quantitative and qualitative statistics, this downfall of the business was classical case linked to the failed desires, in appropriate pricing strategies, un-sustained development and strategic errors (Beatty, Liao and Yu, 2013).  In reality, the downfall of the businesses has been linked to the critical deficiencies in the business' governance which involves the weaknesses of inner controls, fiscal reports, kind of audits, and communication of Management with the board, poor executive pay- to-performance risks, and splendid scrutiny of the management.

One more case of such liquidation is of ABC Learning, which are an Australian business and the biggest provider of early childhood education. For HIH Insurance, the liquidation was held in March 2001 when and it had a loss of around AU$5.3 billion.

The downfall of these big businesses in Australia was a shock to the corporate business. There have been studies with respect to the downfall of HIH Insurance and One-Tel.  Looking at different proof of the business statements, News articles and other documents, it can be established that the causes of the staff all included weak ethical practices and corporate governance with respect to inner control aspects, financial reporting, communication of management and quality of audits (Brown and Caylor, 2006). 

For the year 1998, the annual report of One-Tel stated that there were adequate number of clients which are needed for maintaining the profitability and financial development. In spite of this, the sales revenues of the business showed that there would be highly development and the business would reach AU$653.4 million for the year 2000 which was around 10 times the sales of the year 1996 (Gaylord, 2017). This was based on the past experiences of the rise in the sales revenue which was 127%, 40%, 57% and hundred percent in respective years from 1997 to 2000. Even though the growth for so phenomenal, still this revenue could not be translated to huge profits (Business.gov.au, 2017).  This is where the analysis had to be carried out.

Factors which Contributed to the Liquidations

Also the corporate governance had a huge role in downfall of this business because it was important for directors, non-executive members or executive members to ask the awkward questions and insured that there was proper flow of information to the board of directors (Kedia and Philippon, 2005). The corporate governance is termed as "the approach in which suppliers of finance to their business guarantee the sales of achieving profits from their investments." For corporate governance to be effective there is a need of a situation where factor of authority is practised with complete probity (Astari Ayuningtyas, 2013). Using the principles of high-quality governance at One-Tel, it is obvious that the majority of the acts did not adhere to the corporate governance. Additionally, the corporate governance failure showed the indication and situation wherein One-Tel was bound to fail.

The quality of financial reports is seen to be great when the financial reports have trustworthy depiction of the basic economic situation. For this trustworthy depiction, it is important that the financial details are complete, non-bias and completely correct. There is an explanation which links with the factor of earning quality (Monem, 2011). By high earning quality, it means that there is trustworthy depiction of the attributes of the businesses key earnings procedures. Usually, One-Tel still had financial reports which did not show the trustworthy depiction of economic performances. 

 It is a high probability that there are some faults in the financial reports of the business. There had been discrepancies in different accounts, reports and documentations, for example the monthly trial balances, account receivables, accounts payable, their outstanding balances, description of data, accounting of EBITDA (Lawler, 2010). There had been no immediate or instantaneous data linked with total debtors, receivables are ageing. These concerns showed that the company’s internal control system was very weak. It was also evident that the integrity and accuracy of the fiscal statements did not get the preference from the senior management of the company. These problems were linked to the ethics and corporate governance. One day still had high element of accruals for its revenues with respect to the competitors of same size. Usually the accruals have a tendency to be manipulated by the management therefore high ratio of accruals show poor quality of earnings. 

The reviews of ABC Learning show that the major cause of concern was high staffing expenditure which was around 80 to 90% of operational revenue (Kruger, 2017). ABC Learning add forecasted the revenues of hundred and AU$15 million for the year and the EBIT was AU$17 million however the speed of development sure that it was difficult to keep a track of growth that is being internally created and what was being achieved.  This business went into voluntary liquidation in the year 2008 and was acquired by Goodstart limited in the year 2009.  By the reports chewed for ABC Learning, it was stated that it was you revenues as the cost of Australian taxpayers and it was also getting subsidy for childcare. Still the company showed that there were huge expenses towards the business operations. The business utilised its huge financial resources towards enforcement of the vicarious liability of the business.  In the year 2006 there was a fine of AU$200 in post on the company by Victorian magistrate because the staff members of ABC Learning were unable to supervise a two year old kid who had got out from the premises and never had taken him back (Smh.com.au, 2017). So this company challenged this fine because as per them this legal liability was of the staff members Involved.  Also this company was unable to release its earnings for the financial year 2007-2008.

Looking at HIH Insurance, which had a downfall in March 2001, prior to its downfall, this company was the second-biggest insuring company. It hardly know publicly traded business with past of a decade of possessing skilled and quick growth by different acquisitions. Usually this collapse has been highly linked to the latest bit acquisition of FAI insurance and the company’s aggressive strategies of accounting. In spite of this downfall, the CEO of HIH insurance got multimillion dollars of dismissal package after his resignation year ahead of the business closure.

Also, the consequences after the fall of this company were huge because it had affected the growth in worldwide re-insurance premiums. Inside Australian Insurance sector, this downfall had huge effect on housing and constructions business also.

Were liabilities a major factor contributing to the liquidation of the company?

Australia has a corporate governance approach of internal and external control factors. The major corporate Australia's corporate governance arrangement has a tendency to be an amalgamation of various models. Looking at the three companies, all these had sole board of directors that had external and internal members. The directors are turned into three various divisions which are non-executive non independent, non-executive dependent and executives.  The directors are seen to be independent in case they don't possess any existing or past relationship with the company as a worker, expert advisor or holds any contractual relationship with the business. 

Towards the end of year 2001, HIH Insurance group had 217 of affiliates and different locations where it operated (McCarthy, 2001). For this group, the biggest licensed insurance businesses has been  HIH casualty, general insurance Limited, FAI General insurance Co Ltd and CIC insurance Limited.  The whole group was headed by holding company known as HIH Insurance Limited. Prior to its downfall and closure, the major activities of the group, which were there in the national and overseas operations, included  underwriting agencies, and General underwriting, investment financing, financial services and property dealings. 

There had been proofs of this group having aggressive strategy for accounting of CIC holdings and there were some discussions regarding the merger with CE health International.  It was seen that the liabilities were understated by around AU$18 million along with the under reserve of around AU$41 million (Allan, 2006). This contains the “prudential margin” also. In spite of this there was aggressive accounting system and some key agency problems with respect to the auditing. Therefore it can be said that the mix of these factors led to the end of HIH which began after focused acquisition in 1998 (Rendon, Freedman and Reinhardt, 2014). In this year, HIH started out the expansion with acquisition of an insurance firm known as FAI insurance Limited and this acquisition was accomplished by the beginning of 1999.

It is seen that the Australian accounting standards board (AASB) at laid down the accounting principles for the businesses and companies of which country. As per the standard, the companies are liable to give annual statements of balance sheet, profit and loss accounts and cash flows (Corporations, Rights of Stockholders., 2009). As per the standards, the financial statements must debate the fear and true picture of the fiscal position of the company. Looking at the case of HIH insurance, it can be seen that the auditors must be independent from the clients.  The board of directors of this company had three past partners of author Anderson which was targeting company of HIH. In the year 2000 from there was a declaration given by the auditing firm that HIH had financial assets of AU$8.32 billion and its liabilities were accounted to be AU$7.38 billion therefore the net assets of the company were shown to be 940 million billion dollar and financial assets of AU$8.32 billion and its liabilities were accounted to be AU$7.38 billion therefore the net assets of the company were shown to be AU$940 million (Insurance Australia Ltd v HIH Casualty & General Insurance Ltd (In liq) and Another, 2007). For this task of auditing, the auditors were remunerated around AU$1.7 million as payment. Also there are different elements in this group's balance sheet that also needed to be checked. A few of these can be the shareholders fund of the year 2000 which was  recorded as nine AU$39 million but the evidence documents did not match this value. Also the assets had AU$500 million as intangible assets with huge amount to words FAI could well. Alternatively the liabilities were assessed to be AU$500 million through the borrowings. So it can be said that huge amount of debt and liabilities of the company was troublesome. 

 In reality the insurance company investment portfolio has premiums when the business has to take money from the policyholders and should be capable of generating investment revenues which is an inner source of capital. Therefore there was no clarity to company seeking huge amounts of external debts. This liability or debt level of HIH Insurance had risen by one AU$70 million which was around 50% of hike. The acquisition of FAI was not the single contributory factor to the downfall of the business. As per the reports, HIH Insurance had also come to an end of free insurance coverage which led to having in adequate prudential margin and inadequate assets for covering the claims. Moreover, development of HIH Insurance to Lloyd’s market and US labour reimbursement was one more probable cause. 

Conclusion

The liquidation of firms shows that various corporate governance failures are the main factors and these are highly seen in wearing corporate governance models. These three had been examples of the biggest corporate collapse in Australia and all the aspects which led to the collapse were quiet linked with each other like:

  • quick acquisition procedures,
  • aggressive and deceptive accounting practices,
  • high level of leverage sourcing as per inflated accounting amounts and
  • Dependability of board of directors and auditing teams. 

References

Australian Debt Solvers. (2017). 7 of Australia’s Most Notable Business Collapses in 2015. [online] Available at: https://australiandebtsolvers.com.au/research-centre/7-of-australias-most-notable-business-collapses-in-2015/ [Accessed 8 Sep. 2017].

Allan, G. (2006). The HIH Collapse: A Costly Catalyst for Reform. Deakin Law Review, 11(2), p.137.

Astari Ayuningtyas, A. (2013). Perception of student and alumni of accounting department toward fraudulent practices. The Indonesian Accounting Review, 3(02), p.133.

Beatty, A., Liao, S. and Yu, J. (2013). The spillover effect of fraudulent financial reporting on peer firms' investments. Journal of Accounting and Economics, 55(2-3), pp.183-205.

Brown, L. and Caylor, M. (2006). Corporate governance and firm valuation. Journal of Accounting and Public Policy, 25(4), pp.409-434.

Business.gov.au. (2017). Bankruptcy. [online] Available at: https://www.business.gov.au/info/exit/bankruptcy [Accessed 8 Sep. 2017].

Corporations. Rights of Stockholders. Payments to Preferred Stockholders in Liquidation under Public Utility Holding Company Act Not Limited to Amount of Liquidation Preference. (2009). Harvard Law Review, 59(7), p.1159.

Delisted.com.au. (2017). Australian companies in liquidation | deListed Australia. [online] Available at: https://www.delisted.com.au/failed-companies/in-liquidation [Accessed 8 Sep. 2017].

Gaylord, B. (2017). Liquidation of One.Tel of Australia Is Outlined. [online] Nytimes.com. Available at: https://www.nytimes.com/2001/06/06/business/liquidation-of-onetel-of-australia-is-outlined.html?mcubz=1 [Accessed 8 Sep. 2017].

Insurance Australia Ltd v HIH Casualty & General Insurance Ltd (In liq) and Another. (2007). Victorian Reports, 18 VR, pp.528-561.

Jones, S. and Hensher, D. (2007). Modelling corporate failure: A multinomial nested logit analysis for unordered outcomes. The British Accounting Review, 39(1), pp.89-107.

Kedia, S. and Philippon, T. (2005). The economics of fraudulent accounting. Cambridge, Mass.: National Bureau of Economic Research.

Kruger, C. (2017). Numbers finally start to add up as operators go back to basics. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/numbers-finally-start-to-add-up-as-operators-go-back-to-basics-20110121-19zy6.html [Accessed 8 Sep. 2017].

Lawler, A. (2010). Collapse? What Collapse? Societal Change Revisited. Science, 330(6006), pp.907-909.

McCarthy, G. (2001). The HIH Royal Commission and the Tangled Web of Truth. Australian Journal of Public Administration, 60(3), pp.110-112.

Monem, R. (2011). The One.Tel Collapse: Lessons for Corporate Governance. Australian Accounting Review, 21(4), pp.340-351.

Rendon, V., Freedman, J. and Reinhardt, A. (2014). Supreme Court reaffirms “fraud-on-the-market” presumption in securities fraud class actions. Journal of Investment Compliance, 15(4), pp.37-40.

Smh.com.au. (2017). Behemoth poised to tighten nationwide grip - National - smh.com.au. [online] Available at: https://www.smh.com.au/news/national/behemoth-poised-to-tighten-nationwide-grip/2006/03/13/1142098404572.html [Accessed 8 Sep. 2017].

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