Accounting And Financial Management Essay: Reasons For Collapse Of HIH, One.Tel, And ABC Learning.

Reasons for Collapse of HIH Insurance

Discuss about the Accounting and Financial Management for HIH Group.

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 of One.Tel

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 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).

Reasons for Collapse of ABC Learning

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 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).

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 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.

References 

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