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Evaluation Of The Collapse Of ABC Learning

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Questions:

1. What was the Purpose of the Audit, and was it achieved? Discuss.

2. Provide an Evaluation of the Collapse of ABC Learning with respect to Corporate Social Responsibility, Common Good and Stewardship.

3. Identify Ethical Issues which Contributed to the downfall of ABC Learning by Stating the Underlying Ethical theories.

4. How did Unethical Practices affect Stakeholders? Discuss. Critically Evaluate the role of Auditors in detecting Unethical Conduct?
 
 

Answers:

Introduction:

The current report aims to conduct an audit evaluation for gaining an understanding of the problems related to real life auditing and linking between theory and practice. ABC Learning has been selected as the organisation, which liquidated in 2008 due to certain ethical issues. Therefore, the collapse of ABC Learning has been analysed in relation to common good, corporate social responsibility and stewardship. In addition, relevant ethical theories have been discussed along with the effect of unethical practices on stakeholders. Finally, the report sheds light on evaluating the role of the audit or to detect such unethical conduct.

1.Purpose of the audit:

The basic objective of this audit is to assess the ABC Learning collapse, which went public in 2001 having a market capitalisation of $25,000,000. However, it liquidated in 2008 after a period of aggressive diversification, in which the market capitalisation had reached $2,500,000,000. Specifically, this audit aims to investigate the following and the ways through which they have been achieved are discussed as follows:

  • Evaluation of the collapse of ABC Learning in relation to common good, stewardship and corporate social responsibility
  • Identifying the ethical issues leading to the downfall of the organisation and it has been achieved by linking the issues with the relevant academic theories
  • Assessing the impact of such unethical practices on the associated stakeholders of ABC Learning

2.Evaluation of collapse of ABC Learning with respect to corporate social responsibility, common good and stewardship:

The collapse of ABC Learning has been an instance of the ineffectiveness of an organisation in complying with the principles of sound accounting. Apart from the accounting principles, there are certain other principles that lead to the collapse of ABC Learning in 2008. These principles are briefly summarised as follows:

 

Corporate social responsibility:

In the words of Birkey et al. (2016), corporate social responsibility audit is a formal strategic technique to gauge the actual social performance of an organisation in contrast to the set objectives. According to the corporate social responsibility objective of ABC Learning, the organisation has intended to provide content with diligence, integrity and transparency to ensure the interests of citizens. In addition, the organisation aims to provide products and services for satisfying

However, the owner of ABC Learning has not provided adequate importance to corporate governance by entering into numerous related-party transactions. In 2006, ABC had paid Austock, a broking stock and the owner of the organisation had owned a sizeable stake of $27 million in transaction fees. In addition, ABC had paid $74 million to Queensland maintenance services in 2006 for maintenance work and untendered renovation on ABC centres. This has dissatisfied the investors of the organisation largely, as it did not follow its set corporate governance objectives. As a result, it has damaged its reputation and investor confidence (Carson et al. 2014). This has been one of the reasons behind the fall of ABC Learning.

Common good:

As commented by Hardy (2014), common good is an artistic term, which aims to share and benefit majority of the members of a particular community achieved through collective action and citizenship. The owner of ABC Learning has been visionary, energetic and aggressive; however, his drive had consumed him. The person had taken of his vision from the management of the organisation to focus on the growth strategy. In addition, the person had failed to provide desired benefits to the community members, instead, he had focused on overpaying for the US and UK acquisitions.

 


This has resulted in increased amount of pressure exerted on the part of public market in the growth of ABC Learning (Logan, Sumsion and Press 2015). The owner of ABC Learning has thought he was the best person to run the business operations. However, this thought was wrong, as recruiting an efficient manager would have saved the collapse of ABC Learning.

Stewardship:

As pointed out by Hay, Stewart and Botica Redmayne (2016), stewardship is an ethic, which depicts the sound planning and management of resources. In case of ABC Learning, the owner has commenced global push with acquisitions in the US in 2005. However, the acquisitions have been followed later in UK. As the owner of the organisation has been engaged in diversifying the business operations, the person has ignored the childcare operation in Australia, which includes cash cow and generator of major profit (Jones 2016). In addition, such diversion of focus has resulted in appointment of agencies for finding staffs. As a result, it has increased cost of recruitment, which has resulted in profit slump. Due to this inefficient management of resources, 200 Australian centres of ABC Learning had incurred huge losses leading to the downfall of ABC Learning.

3.Identification of ethical issues that lead to the downfall of ABC Learning and discussion of those issues with respect to relevant ethical theories:

The main ethical issues that have lead to the downfall of ABC Learning are briefly described as follows:

  • The absence of regularities related to accounting and margin of loan for funding
  • ABC Learning has not allotted considerable amount of time to increase its profit generation capacity
  • The increase in value of intangible assets has lead to inflated firm value
  • The organisation has provided inaccurate information to the different users of the financial statements, which has lead to loss of shareholder trust and eventually, the collapse of ABC Learning.

The above-mentioned ethical issues have been associated with the utilitarianism theory of ethics. According to this theory, the benefit of each individual is provided equal priority and there is absence of inequality (Singh et al. 2014) In this case, ABC Learning has conducted accounting irregularities by inflating its value of inflated assets. According to the utilitarianism ethical theory, there is need of some kind of tallying or computation of likely pains and pleasures for the stakeholders. In this case, the organisation has provided incorrect information to the stakeholders, which has minimised the trust and confidence of the stakeholders on the organisation. As a result, it has violated this specific ethical theory, which has resulted in collapse of ABC Learning.

 

4.Effect of unethical practices on stakeholders and evaluation of the auditor’s role:

The following are the major effects of the unethical practices on the stakeholders of ABC Learning:

  • Due to the inflated firm value, the users of the financial statements of ABC Learning have lost trust within the organisation. Due to such unethical misconduct, the investors have experienced significant losses and as a result, ABC Learning has struggled to accumulate funds.
  • As the owner of ABC Learning has been involved in global expansion, the childcare centres in Australia have been ignored, which has reduced the quality of services provided to the customers and the overall community.
  • With the decline in net profits, many staffs of ABC Learning have lost their jobs, after it liquidated in 2008. As a result, the state of unemployment has increased in the nation.

Role of an auditor in detecting unethical conduct:

The auditor is responsible for rendering an opinion on whether there has been fair presentation of financial statements in all material respects in complying with the framework of financial reporting. In addition, the auditor provides the users with an increased degree of confidence in the financial statements. In order to develop the opinion, the auditor accumulates effective and adequate evidence along with observing, testing, contrasting and confirming until reasonable assurance has been achieved. Thus, the auditor develops an opinion to check whether any material misstatement exists in the financial statements due to error or fraud (Varughese, Janda and Obermair 2014).

 

Conclusion:

From the above discussion, it has been found that ABC Learning has collapsed in 2008 due to certain ethical issues. The collapse of ABC Learning has been evaluated in terms of corporate social responsibility, common good and stewardship. However, the owner of ABC Learning has not provided adequate importance to corporate governance by entering into numerous related-party transactions. As the owner of the organisation has been engaged in diversifying the business operations, the person has ignored the childcare operation in Australia. Due to the inflated firm value, the users of the financial statements of ABC Learning have lost trust within the organisation. Finally, it has been found that the auditor develops an opinion to check whether any material misstatement exists in the financial statements due to error or fraud.

 

References:

Birkey, R.N., Michelon, G., Patten, D.M. and Sankara, J., 2016, September. Does assurance on CSR reporting enhance environmental reputation? An examination in the US context. In Accounting Forum (Vol. 40, No. 3, pp. 143-152). Elsevier.

Carson, E., Simnett, R., Trompeter, G. and Vanstraelen, A., 2014. The impact of group audit arrangements on audit quality and pricing.

Ge, Q., Simnett, R. and Zhou, S., 2016. Ethical and Quality Control Requirements When Undertaking Assurance Engagements.

Hardy, C.A., 2014. The messy matters of continuous assurance: Findings from exploratory research in Australia. Journal of Information Systems, 28(2), pp.357-377.

Hay, D., Stewart, J. and Botica Redmayne, N., 2016. The Role of Auditing in Corporate Governance in Australia and New Zealand: A Research Synthesis.

Jones, P., 2016. Internal audit: An integrated approach. Company Director, 32(5), p.50.

Knechel, W.R. and Salterio, S.E., 2016. Auditing: assurance and risk. Routledge.

Logan, H., Sumsion, J. and Press, F., 2015. The Council of Australian Government Reforms [2007–2013]: a critical juncture in Australian early childhood education and care (ECEC) policy?. International Journal of Child Care and Education Policy, 9(1), pp.1-16.

Singh, H., Woodliff, D., Sultana, N. and Newby, R., 2014. Additional evidence on the relationship between an internal audit function and external audit fees in Australia. International Journal of Auditing, 18(1), pp.27-39.

Varughese, E., Janda, M. and Obermair, A., 2014. Can the use of quality assurance tools reduce the impact of surgical complications on the well?being of obstetricians and gynaecologists in Australia and New Zealand?. Australian and New Zealand Journal of Obstetrics and Gynaecology, 54(1), pp.30-35.

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