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Management Inefficiencies

Question:

Discuss about the Corporate Governance Policies and Environment.

In relation to One.Tel, it can be observed that the company to establish its position in the market used several strategies and within a minimal amount of time; it became a massive company with an immense base of customers. However, in relation to the longer-run, the company was unable to sustain its position and therefore, it collapsed. Several factors would have contributed to an enhanced inherent risk assessment of the company at its financial report level.

Firstly, it is notable that the management of One.Tel was completely incapable in performing their duties efficiently. There were major loopholes and the management was incapable of addressing the issue properly. Besides, if the management cannot assist in enhancing the company’s affairs, it cannot progress until some corrective action is implemented. However, the management of One.Tel did not operate effectively, thereby contributing to an increase in the inherent risk of the company together with an inefficient internal control. Moreover, this incapability on the part of the management can also be witnessed from the company’s financial statements, as they followed a strategy of ‘management by crisis’ that was nowhere leading towards progress (Kaplan, 2011). In addition, the management also made sure to the company stakeholders that they had sufficient amount of resources to make the company run, but the scenario was completely the opposite.

Secondly, despite suffering immense losses of approximately $291 million, the company took steps to pay dividends and bonuses to its shareholders. This gives rise to the fact that the company’s Board of Directors were not operating in the best of the company’s interest. In addition, this also concludes that the directors lacked efficiency and integrity that is very vital for the smooth running of a business (Bhasin, 2008). Therefore, since the directors were not effectively engaged with the management, various misleading information was provided to the stakeholders, thereby creating a massive havoc for the company. Hence, there appeared a bottleneck and a proper communication was missing that led to the issues. Besides, it was also proved in the year 1999 that the financial reports of the company incorporated around 48 flaws that clearly gives weight to the previously mentioned scenario. Deficiency in the financial report clearly indicates that the company has not performed to the best of the ability that calls for major attention by the management (Manoharan, 2011).

Thirdly, it can be observed from the financial reports of the company that it was encountering the problem of lesser balance of cash and aging debtors, which proves that it was not operating appropriately. Moreover, such responsibility lies upon the company’s chartered accountant, but in this case, he failed to indicate the company about such happening, thereby leading towards a more dreadful condition (Brown et. al, 2006). As a chartered accountant, a proper guidance should have been provided whereby the deviation should have been intimated and the same should have been addressed. However, the faulty planning and lack of attention made the condition worse.

Misleading Information to Stakeholders

Fourthly, the true cash position of the company was not highlighted by the finance director of the company and was constantly influenced to portray a favorable image of the company in the eyes of the stakeholders. Moreover, the company was bound to implement proper due diligence process in order to encounter any such falsification of relevant information but it did not do so, thereby resulting in an increased inherent risk within the company (Elder et. al, 2010). In addition, the deferred expenses of the company were drastically enhanced that in reality was not needed at that point in time.

Lastly, the board often attempted to publish an unqualified report to the stakeholders of the company that was a clear-cut fraudulent representation on the company’s part. This is because after taking into account several inappropriate practices prevailing within the company, the opinion of auditors regarding the financial statements can never be an unqualified judgment. Besides, in the prevalence of a qualified report, it has an advantage of being reasonable. This factor clearly gives rise to a fact that the role of auditors within the company was completely questionable as they failed to perform their part of the duties in an effective manner. It is expected that the auditor will provide a true and fair view of the business and will spot any frailties in the organization (Goodstein, 2011). However, the same was absent. Moreover, their incapability to provide an independent judgment regarding the financial statements of the company played a key role in increasing the inherent risks of the company. Besides, the stakeholders highly rely upon such auditors judgment so that they can determine whether the company is performing effectively in the market and whether the financial statements of the company are true to the best of their knowledge or not. Therefore, when such reports are misleading or misguiding in nature, the stakeholders are also misguided, and hence, they make inappropriate decisions based on such judgment, thereby creating a complication for the long run. It even reflects the ethical violation of the company and the failure of the internal control of the company to look into such issues (Kruger, 2009).

In relation to the previously mentioned factors, some of them can be observed by examining the financial statements of the company. This process of examination refers to strategic business risk assessment wherein the flaws and pitfalls prevalent in the company’s financial statements can be easily taken into due consideration. These factors are as follows:

Firstly, deterioration in the profits of the company could have been easily noticed and corrective actions could be implemented in respect of the same, but the company failed to examine such factor, thereby making the problem increase to an infinite stage.


Secondly, even after encountering an immense loss of $291 million, payments of bonuses and dividends came out as a shock, and it was the duty of the management to implement appropriate mechanisms to take care of such a problem but no corrective action was implemented and as a result, the company had to tackle disintegration in the long run.

Financial Reporting Deficiencies

Lastly, the ineffective operation on the part of the management was required to be altered immediately so that the stakeholders can obtain effective information and results, but here again, there was no such step. The management contained huge frailties and failed to cope up with the scenarios that ultimately led to a huge downfall (Bhasin, 2008). In any scenario, the management must be well versed with the external and internal environment and a failure to cope up with the same leads to a decline in the functioning of the company.

In relation to One.Tel, several factors contributed towards an increased assessment of inherent risk in their account balance level. They are as follows:

Tel offered various services to its customers at casual prices that conclude the fact that the subscribers procured the services at a price, which was lesser than what the company was supposed to expend.

Secondly, the company was already aware of the fact that there were around six competitors in the telecommunication industry, which gave strict competition to it, but still, it implemented an approach wherein high-quality services were provided to the subscribers at minimal prices (Heeler, 2009). Although such approach could be beneficial in the short run for the company, yet it could not play a relevant part in the end and therefore, the company failed to establish a dominant position in the Australian market.

Thirdly, most of the strategies and measures of the company relied on Optus and Telstra who were the key competitors in the telecommunication business. This is because the company brought phones from such companies and sold to subscribers in wholesale quantities. Besides, the prices charged was lesser than what the company was supposed to pay. In contrast to this, both Optus and Telstra implemented ways for minimizing their operating expenses that provided them an added advantage.


Lastly, the expenditures made by One.Tel was immense in nature in comparison to its financial abilities. The expenses were huge and became a burden on the company. The company failed to realize revenue and the expenses became huge on their part calling for necessary action. Therefore, this generated a huge risk for the company in terms of financial obligations in the future. In addition, the company also did not procure access fees from their subscribers that played a key role in enhancing the risks. This is because there was no surety that the subscribers would utilize the services offered by the company and expends resources for the same.

In relation to the above-mentioned factors, the factors that can be observed during the assessment of strategic risks are as follows:

Firstly, the credit checks procedure implemented by the company was very slow because most of the subscribers either did not pay their bill or paid their bills very late. As a result, this contributed towards a deterioration of the company’s revenues, thereby creating various complications for the company to carry on its affairs in a smooth manner (Cook, 2001). It created a dent in the system and therefore, the company failed to realize the amount that ultimately affected the operations.

Inherent Risk Assessment

Secondly, in order to enhance the prices of shares, the company provided dividends and bonuses to their stakeholders, thereby resulting towards an increase in the sale of the shares. However, such an approach could not be regarded an effective one because it was not generating profits for the company, as revenues came on one hand while it slipped out of the other. Besides, this can be proved by the fact that the operating profits of the company minimized from $11.3 million in 1999 to a negative amount of $262.4 million in the year 2000 (Cook, 2001). The company fabricated the entire matter so as to retain the investors. The dividends were declared and provided out of nowhere. The internal control mechanism was weak that failed to keep a check on the fabrications.

Lastly, the retained profits of the company deteriorated on an immense level that concludes the fact that the same could have been easily observed but still, the company failed to do so. Moreover, both the figures of dividend and retained earnings depicted a huge fall on the part of the company, thereby proving the fact that the company’s financial condition constantly deteriorated (Kruger, 2009). On a whole, all such factors could have been identified during the assessment of strategic risks within the company.

After taking into account the financial statements of the company, it can be stated that it is very problematic for One.Tel to continue its activities in the end. This is because the situation of the company relating to its revenues is in a very bad position. The aging of debtors proves that the company will encounter problems to meet its debt obligations in the upcoming period. Moreover, an effective financial structure is needed to continue a business in the end and in this case, the management of One.Tel has provided misleading information to its stakeholders regarding their financials (Gilbert et. al, 2005). In addition, the reserves and parent equity funds have also been utilized by the company and are in negative figures in the current scenario. Therefore, all these factors conclude that the future of One.Tel is dark and it will surely encounter massive complications to continue its operations. Besides, in a going concern concept, a company concentrates on their short-term operation that is generally one year.


In relation to One.Tel, it can also be observed that even though it publishes an unqualified auditor’s  report to its stakeholders, yet it is dubious whether it can continue its affairs or not. This is because the company’s statement of cash flow depicts that the share issues have immensely enhanced but this has been done through attachment of several benefits that altogether cannot be regarded as authentic in nature. Furthermore, in relation to the intangible assets of a company, these are very significant from the financial point of view because they are generated through innovation and possess an organizational influence on the Human Resource practices (Cappelleto, 2010). In addition, such intangibles also enhance the company’s value even though these are non-material in nature. However, around 6% to 30% value of One.Tel is generated through its tangible assets while 40% of its assets are intangible. This proves that the company’s structure is kept according to the wishes of the management so that they can utilize it based on their requirements to attain core competencies (Cook, 2001).

Nonetheless, the affairs of One.Tel was effective because it endeavored to operate on a broader scale in the market in the prevalence of major rivals like Optus and Telstra. For such motive, the company offered enhanced facilities to its subscribers through the implementation of measures like low costs, internet services, etc (Kruger, 2009). The company aimed to procure the best outcomes through the provision of such facilities to their customers. However, because of the inefficiency on the part of the management, the company had to witness a drastic decline in terms of reputation and financial aspects as a whole (Fernando, 2009). In addition, the inappropriate financial statements of the company made its internal control measures questionable to everyone (Black, 2010). On a whole, based on the financial statements of the company, it can be clearly witnessed that the company is no longer in a position to carry on its affairs in the upcoming period, as its reserves are empty and profits depict a negative figure. Therefore, in lieu of faulty planning and management, together with improper due diligence processes, governance, and ethical standards, the company may soon be disregarded from the listing segment because it has not implemented any corrective actions as of now. Moreover, in the absence of inadequate resources, it may surely be very difficult to gain a competitive advantage in the business, that too in the presence of huge rivals.

References

Bhasin, M. L 2008, ‘Corporate Governance and Role of the Forensic Accountant’, The Chartered Secretary Journal, vol. 38, no. 10, pp. 1361-1368.

Black, W. K 2010, Epidemics of “Control Fraud” lead to Recurrent, Intensifying Bubbles and Crises, Working paper, University of Missouri-Kansas City.

Brown, J.W, Chasek, P. & Downie, D.L 2006,  Global Environmental Politics,  Boulder, CO:Westview Press.

Cappelleto, G. 2010, Challenges Facing Accounting Education in Australia, AFAANZ,

Cook, T 2001, Collapse of Australia's fourth largest telco adds to growing list of corporate failures viewed 12 May 2017  https://www.wsws.org/en/articles/2001/06/onte-j08.html

Elder, J. R, Beasley S. M.& Arens A. A 2010,  Auditing and Assurance Services, Person Education, New Jersey: USA

Fernando, A C 2009, Corporate Governance Policies and Principles, Prentice Hall.

Gilbert, W,  Joseph J & Terry J. E 2005, The Use of Control Self-Assessment by Independent Auditors, The CPA Journal, vol.3, pp. 66-92

Goodstein, E 2011, Ethics and Economics, Economics and the Environment, Wiley

Heeler, D 2009, Audit Principles, Risk Assessment & Effective Reporting, Pearson Press

Kaplan, R.S., 2011, Accounting scholarship that advances professional knowledge and practice, The Accounting Review, vol. 86, no. 2, pp.  367–383.

Kruger, C 2009, Numbers finally start to add up as operators go back to basics, viewed 12 May 2017   https://www.smh.com.au/business/numbers-finally-start-to-add-up-as-operators-go-back-to-basics-20110121-19zy6.html

Kruger, P., 2015, ‘Corporate goodness and shareholder wealth’, Journal of Financial economics, pp. 304-329

Manoharan, T.N., 2011, Financial Statement Fraud and Corporate Governance, The George Washington University.

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