Lessons From ABC Learning's Fall - An Essay On Spectacular Downfall.

Introduction to ABC Learning

Discuss About The Five Lesson Spectacular Fall Of Eddy Groves.

Once upon a time ABC Learning of Australia was considered to be one of the largest childhood education service provider. It had the market capital of $2.5 billion in March 2006. It rapidly expanded from few childhood centers to 697 centres in Australia and New Zealand. During its life span it acquired and merged with many other company. It purchased Learning Care Group Inc. and Busy Bees Group, Ltd., through this it entered the United States and United Kingdom market. ABC Learning provided services like child care services, training and supervision for preschool children as well those suffering from any disability. (Daycare, n.d.) The company recorded a profit of $52.4 million on total revenue of $292.7 million.  

A combination of many issues was the reason for the downfall of ABC Learning, it began before the management realized that it was going to hit the bottom. The quality was hampering due large number of day care centers. The method the were following previously could not keep up with the increasing number of day care centers which lead to fall in the quality of service. The number of staff was not adequate to keep up with the students also the staffs required for disabled students were not enough.

The increase in the market share was not the main reason for the fall of ABC Learning, misrepresentation of financial statement and mismanagement of funds was also one of the factors.  The financial Statement showed high amount of debts and acquisition. The asset side of the balance sheet constituted of huge amount of intangible asset which mainly had operating lease as the main component. These operating Lease was of main concern. ABC claimed it of high value which in actual had no value, the committee of ASIC was set to understand the value of those operating lease. (ABC Learning Centers, 2009)

Revaluation of intangible asset as per the previous law was permitted, while as per the new law it was permitted only under certain circumstances, these were applied only where it has a material impact, ASIC concluded that revaluation of license done by ABC Learning was not material at that time. This confirmed the malpractice followed by the company to manipulate the books which is more like accounting ethical issues.

Over statement of the lease lead to increase in share price, which fell badly when the above actions were taken. The founders of the company had to resign in September 2008.

Reasons behind ABC Learning's downfall

Management group approval, the group looking for the center purchase done by the ABC was not very uptight as stated by Matthew Horton. Valuation done by KPMG for the purchase price of 123 Careers, was overstated, later on Matthew Horton cancelled the deal once he became a director of ABC. (Key Corporate Governance systems, 2010)

Related Party Transaction done in ABC Learning was also one of the reason for the fall. The transaction of related party during the leadership of Mr. Grooves which were not following the corporate governance rule, as to be followed by the company. Basketball team owned by Mr. Grooves was sponsored by ABC Learning, Quinsland Maintenance Service, whose director is the brother in law of Mr. Grooves was paid $74 million on the works on the center and some more of such transactions. These were referred as of no interest to the company. Which in fact was very much material.

HIH Insurance company was considered to be the 2^nd largest insurance company of Australia, it was founded on 1968 by Ray Williams and Michael Payne. Till 1998 HIH insurance acquired many company throughout the world such as CIC Insurance Ltd., Colonial Mutual and General Insurance Ltd. And FAI Insurance Ltd. These acquisitions changed the business profile of the company.

There were many factors which lead to the fall of HIH Insurance, one of the many facts were related to the bad decision making and absences of proper management. The managements failed to act and consider the shareholders interest on many instants. For Example, the acquisition of FAI Insurance Ltd., the takeover was mostly followed on the basis information obtained by the management publicly. Out of the 12 board members, only 7 were present for the meeting as the notice was received late by the rest of the members. Since the information related to FAI Insurance were not much available they failed to notice that FAI had a problem regarding the excessive reserve deficit. The cost paid by the HIH Insurance was over and above for the acquisition of FAI Insurance. (HIH Insurance The failure, 2015)

On the liability side of general insurer’s financial statement, Outstanding Claim Provision is one of the important components. The main business of HIH insurance happens to be general insurance, which showed an OCP of half of its liability. OCP level is to ensure that the insurance company will be able to meet with policy holders claim in future.  Due to increase in acquisition the business was rapidly increasing as well. For such increase the company was showing under provision, which lead to poor growth of the organization. The management failed to notice such problems and controlling them. The board relied on the external reports provided by the specialist. They failed notice certain important aspects such as discount rates and claim handling cost, which are related to actuarial reserves. The company being and insurance company failed to notice such issues. (HIH Insurance Group Collapse, n.d.)

Impact of government policies on ABC Learning

The model presented in the annual report of HIH Insurance, the examination of the given model was not done frequently by the board members.

One.Tel Company is a telecommunication company of Australia; the founder of the company was Jodee Rich and Brad Keeling. Its main dealing was related to creating a mobile phone which was more youth friendly and provide internet service. It was considered to be 4^th largest company in the telecommunication industry. It was reaching globally across Australia, London, Paris, Zurich, Amsterdam and Hong Kong. It was growing rapidly in Europe. It had directors of high profile and was known for its ways of advertisement. The growth of the company was rapid in nature. In 2001 a meeting was held which confirmed that the company was out of funds, to manage the crisis the board formed a plan of $132, which was later cancelled and lead to complete shutdown of the company.

The representation of Financial reports of the company decides the quality of the financial statement and the reliability of the share holders on the management, also the management are supposed to look at the reports generated and the all other underlying documents which lead to the formation of such reports. Apparently, the Founder of the company relied on other directors to look over the matter related to financial statement, as well as the finance director. Discrepancies were found in the documents related to financial statement such as trial balance, accounts receivable, outstanding balance of accounts receivable. It made changes in two of its accounting policies which lead to an increase in its operating profit before tax. It is more like absence of ethical and corporate governance.

The disclosure on Management and Disclosure Analysis, focused mainly on earnings before interest, depreciation, amortization and taxes rather the one that should be focused as per GAAP. Earnings before interest, depreciation, amortization and taxes is focused by start ups which are going through a time of loss.

The audit Committee of One.Tel failed to ensure the compliance of accounting standard as the non-compliance was made in 1998-1999 financial statement. The members of the board were not always presided for the meeting. Full disclosure of the corporate affairs was not made by the company, for instance the flash reports failed to provide the details on cash, it generally held only data related to revenue, net profit. The bi-monthly reports provided the cash balance, but it failed to provide the exact number of cheques outstanding.

The role of mismanagement in ABC Learning's collapse

Non-executive director of One.Tel, if properly checked would not even qualified for the position as they had invested in the company substantially. Such non-compliance lead to failed expertise required for proper decision making. (OneTel..one big debacle, 2010)

Conclusion

The above three company ABC Learning, HIH insurance and One.Tel company were from three different field. ABC Learning was from childhood day care sector, HIH insurance company was from general insurance sector and One.Tel coming from telecommunication sector, all of them went through liquidation for reason more or less related to failed corporate governance, financial discrepancies and unable to meet the debtor’s expenses.

The given description of ABC Learning’s fall clearly states that the management was unable to control the company. The lack of proper decision making and creating strength of the company at the time of its rapid growth lead to the fall. Along with the financial discrepancies and change in government policy lead to further collapse. It would have better if the company focused more on the management side then on the expansion. It was more focused on taking over as much child care service organization as possible. (Five Lesson, 2008)

HIH Insurance’s reason for the fall is mainly due to mismanagement and failed governance of the management. They failed to keep up the compliance policy itself being an insurance company. The company’s management regarding the risk, policies to be maintained. Senior management had a great deal of influence on the directors which resulted in biased decision making. Lack of due diligence was seen during the FAI acquisition. All these were also affecting the other factors which lead to a further collapse. (HIH Insurance, n.d.)

The main reason behind the fall of One.Tel was more related to Jodee Rich who mislead some of the situation of the company. Further, no controls were made to stop the problems, as well as the board members never questioned any shortage on disclosure made or any cash flow problems. Everyone was more concerned with the big picture, but the scene behind picture which lead to such downfall.

In a way, all the above company was going through a failure of proper management. Had a proper steps and controls were taken or made this would not have resulted in liquidation. Big organization like the above-mentioned ones might not fail if they still remain focused on their objectives, as well as if the higher management focus on the management as well. To achieve the confidence of the share holders and customer it should focus more on maintaining the quality of their service and providing a true picture of its financial statement then to falsify the accounts. It should have board members with expertise as well as those who know the organization well so that a mix of members would help control and initiate better management plans to the board. They should also ensure that proper examination of boards effectiveness is done also whether all the board members are participating in the decision making. Strong actions should be taken if anyone is found not taking ethical actions.

References

ABC Learning Centers, (2009). Parliament of Australia. Available at: https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Education_Employment_and_Workplace_Relations/Completed_inquiries/2008-10/child_care/report/index [Accessed 8th May, 2018]

Daycare, (n.d.). com. Available at: https://www.answers.com/topic/day-care [Accessed 8th May, 2018]

Five Lesson from the spectacular fall of Eddy Groves, (2008). Smartcompany, Available at: https://www.smartcompany.com.au/finance/five-lessons-from-the-spectacular-fall-of-eddy-groves/ [Accessed 8th May, 2018]

HIH Insurance Group Collapse, (n.d.). Parliament of Australia. Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/Publications_Archive/archive/hihinsurance [Accessed 8th May, 2018]

HIH Insurance The failure in corporate governance, (2015). Essays. Available at: https://essays.pw/essay/hih-insurance-the-failure-in-corporate-governance-6166 [Accessed 8th May, 2018]

HIH Insurance, (n.d.). Big bad bookkeeper. Available at: https://bigbadbookeeper.wordpress.com/whatreallyhappenedtohihinsurance/ [Accessed 8th May, 2018]

Key Corporate Governance systems missing from ABC, (2010). com. Available at: https://www.couriermail.com.au/news/key-corporate-governance-systems-missing-from-abc/news-story/f601d3e4242f16efbc70610f9707de05?sv=96f188f44e8845619b7d48fa7cf73f91 [Accessed 8th May, 2018]

one big debacle, (2010). Abc.net. Available at: https://www.abc.net.au/news/2009-11-20/28324 [Accessed 8th May, 2018]