In recent years a number of companies have gone into liquidation (been 'wound up) because they have not been able to meet their liabilities when they fell due. In Australia, there are some well-publicised examples such as ABC Learning, HIH Insurance and One. Tel phone company
Discuss all three companies above and find (via electronic journals) the events that led up to the liquidation. Visit the CPA website; discuss APES 110 Code of Ethics for Professional Accountants. Highlight 5 codes of ethics. Visit the ASX website and discuss the Listing Rules ( 8 principles) governing listed companies in terms of corporate governance. Were liabilities a major factor contributing to the liquidation of individual companies?
Discussion of events which lead to liquidation of companies
Monetary management is the priority of any company operating for profit purpose. Financials lead to both the up rise and downfall of the firm. It can be stated that due to the use of effective management system companies manage their financial in order to ensure that there are no financial failures that cause problems in the operations activities of the firm. Although there are some instance when the liabilities of a company grows at rapid pace due to which the company cannot meet the liabilities causing there liquidation. In the current assessment, there will be discussion over the liquidation of the company its causes and what are principles set by some governing bodies to prevent sudden liquidation of company.
Liquidation is the process of ending up a business or closing down of a company by ending the assets. It can also be referred to a process of closing down an insolvent company due to various reasons. The main reason for this liquidation is insolvency as when a company cannot pay its due it becomes a bankrupt and it has to close down. In financial terms, liquidation is also termed with winding up of assets or selling them simply and the aftermath is the closing of a company. Liquidation can be voluntary as well as compulsory (Robson et al. 2017). A voluntary liquidation occurs when there happens a joint decision by the members of shareholders and a compulsory liquidation happens when the court’s order is given.
Too begin with we have the ABC Learning which was an Australian based company which was founded in 1988 in Queensland, Australia And it used to provide all sorts of educational services especially childhood educational services. It made huge profit initially and the market capitalization reached A$2.5 billion in 2006. But soon after this it was placed in the administrative receivership and it took voluntary liquidation. During the initial stage the net profit was $52.3 million and the revenues were as high as $292.7 million. But soon after it started becoming insolvent and in 2005 it sold some of its shares and finally it had taken into receivership and the investors fled and the company had to take voluntary liquidation (Beatty and Liao, 2014).
HIH insurance was another company which was the second largest insurance company in Australia which was set up in 1968. It was placed in the provisional liquidation in 2001. This company started gaining profit after it merged with the Swiss owned CIC insurance company. This company soon became insolvent because of many reasons, the first being the fraudulent cases of many employees starting from stock market manipulation to dissemination of false information to a journalist which was a major controversy (Lev, 2018). Liquidation of this company occurred because of several other problems such as under-pricing and reserve problems. The company had acquired many customers as they offered insurance at a low price but failed to keep enough profit to keep its future liabilities intact and enough fund to prevent itself from getting liquidated in future. The company also failed to keep in mind the risk analysis warning and kept running behind profit. For preventing liquidation a proper management committee is also required which was present in this HIH insurance company, but according to reports the management was a reckless one which disobeyed orders and curtailed all the capital without a proper future vision of the company’s future (Henderson et al. 2015). A Royal Investigation Committee was set up to investigate the cause and it was found that there was a serious lack of independence for non-executive directors and proper resources which were supposed to be present, and overall there was a dominance of the head which was troublesome.
One Tel was another Australian based telecommunication company founded in 1995 and liquidated in 2001. The company initially started with pomp and enthusiasm with the three core products of internet services, mobile services and the fixing of wire long distance. Soon the revenue became $653 million and the company was at its height. It started its global business and attracted many customers worldwide and its profits quadrupled but soon after it fell due to inefficiency and there was a low financial reporting quality. Just like the other cases of liquidation, this company also faced more or less the same problems of low pricing qualities (Renz, 2016). A proper management and accounting team was not employed or may be if they were employed, they proved to be inefficient. Experts say that there was also a serious lack of strategic planning and the risk analysis was not done accurately. There was a problem of budgeting also which made the company unaware of the future budgeting plans and the resources were not efficient enough to meet with the initial crisis which could have been solved if there were enough resources present. There are also certain code of ethics in every profession which are known as professional ethics, which every member of a particular profession is bound to follow and in the case of One Tel, certain lack of pursuing of professional ethics rather IT ethics was also responsible for the insolvency (Macve, 2015). The ACS code of ethics was not properly followed which led to a downfall. To sum up we can say that serious tactical errors and the overlooking of managerial procedures pushed the company to doomsday. There was also a problem in the billing computation of this company which the experts have later discovered which was also a cause for the failure (Khan, 2015).
APES 110 Code of ethics for accountants is basic fundamental ethics framework created for the operations that are conducted by accountants. It can be said that the code creates a effective framework for guiding the accountants in the ethical conduction of the operations activities (Mullinova, 2016). It can be said that through the use of this framework the accountants can easily conduct there operation following the ethics of the accounting profession. The code introduces the concept that the distinctive mark that can be seen on profession of accountancy is the acceptance of working for the public or stakeholders interest (Hoskin et al. 2014). Hence, the code suggest that that in order to comply with this Code of ethics the accountant must not only satisfy the client or employer but also to satisfy the general public interest. The codes can be divided further into 3 parts in which Part A consist of a conceptual framework which the members have to follow in order to comply with code guideline. This includes:
- Identification of possible problems which can occur in complying to fundamental principles which are suggest in the code of ethics
- Evaluation regarding the significance which the current problem has
- Safeguarding the or eradication of such threat or problem to maintain the compliance of the members towards the fundamental principles as suggest under the Code of ethics.
The other parts such as Part A and Part B are concerned with the description of how the framework suggested under the guidelines would help the organization to comply with the framework under different and diverse scenario. They also help in identifying the scenarios under which the safeguard to ethical problem cannot be applied avoiding which it's the members highest priority (Dutta and Patatoukas, 2016). Part B is applicant to Members associated in Public practice and Part C applies to the Members in business practice. The Fundamental principle of Code of ethics are as follows:
- Integrity: The member accountant would be very straightforward and honest in any scenario of operation regardless of the present situation (Board, 2016).
- Objectivity: The accountant should avoid any sense of bias behavior at workplace which can influence the business judgments made by the same
- Professional competence and Due care: The accounts have to be competent enough as well as maintain their level; of competence at work place to ensure that, they are able to perform their duties to their fullest (Warren and Jones, 2018).
There are 8 principles of Listing Rules in context of corporate governance for the listed companies under ASX for better corporate governance and they are as follows:
Principle 1: Laying a solid foundation for management and oversight: This principles emphasizes on proper and solid foundation of boards and senior executives the power of board are effectively delegated to lay proper bedrock of governance in the company (Maskell et al. 2016).
Principle 2: Structure the board to add value: The principle states that the companies should have board of proper composition and size and commitments in order set up a proper governing structure in the company.
Principle 3: Promote ethical and responsible decision-making: The company should promote ethical and responsible decision making process which is based of authentic information for the benefits of the company's future operations activities.
Principle 4: Safeguard integrity in financial reporting: The board should be honest and straightforward in terms of making financial statement which should display a true and fair value of the company’s financials position to their respective stakeholders.
Principle 5: Make timely and balanced disclosure: The governing body should ensure proper and timely disclosure of information to stakeholders.
Principle 6: Respect the rights of shareholders:: The board should ensure that proper respect of shareholders rights are maintained by them
Principle 7: Recognise and manage risk: The board should be able recognize and mitigate risk at proper times to ensure efficient operation (Campbell et al. 2017).
Principle 8: Remunerate fairly and responsibly: The remuneration process should be unbiased and responsible to ensure effective remuneration body within the firm.
Liquidation is process of losing capital, bankrupting company’s capital, in able to pay company dues, repay creditors. Liquidation of a company can be of two types, solvent and insolvent liquidation. If a company closes due to the product type does sales anymore or there is no demand for the product hence no option except to close the company, this type of liquation is termed as solvent liquidation (Schipper et al. 2017). In the other hand, if the company closes because of insufficient funds to pay company bills, unable to clear liabilities is called insolvent liquidation. There we will find out the reasons of the insolvent liquidation for the companies. Liabilities are the major cause for a company’s liquidation but it cannot be said that it is the only cause for company’s liquidation, as because the liquidation of the company may refer to many aspects; it cannot be blamed only on liabilities. The other factor may include turning assets into cash, in order to pay to the investment parties the company broke assets into cash, the product is no longer attracting the market ( the product is repetitive from long duration and other company the better version of it). Weak financial skills, lack of planning, poor marketing, the location of the business place, marketing not being adequate are some of the main reasons except for liabilities in which the business can shut down in the long run. Some new entrepreneurs start new companies as hobbies and end up taking liabilities from the market and at end unable to establish their business ending their company breaking their assets in order to pay depts. (Elliott, 2017). These companies mainly consist of textile industries or food ones. In the above text of reference, it cannot be said liabilities are only the cause of company’s liquidation but it is one of the major cause for the company’s liquidation.
The recommendation which can be given the current case is that companies should have proper governing bodies and Account follow APES 110 Code of Ethics to ensure that there are proper disclosure of financial operation gre daun bf the firm. This will help the company to identify financial stress at an early stage helping the management to make sure that the company does not goes into liquidation.
Concluding in the light of above context it can be said that the liquidation of companies happen due their own negligence early detection of financial stress would help in mitigation of such situation. Hence it can be said that the company should have proper governance as well as accountant to help the firm in identification and eradication of financial stress.
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