Use the companies above and find (via electronic journals) the events that led up to the liquidation. Discuss the ethics and governance in explaining the company’s financial stress. Were liabilities a major factor contributing to the liquidation of the company?
Companies operate as artificial person and are ongoing concern. A company life is deemed to be forever unless it liquidated. Liquidation is the process of bringing a company to closure voluntarily. Liquidation is as a result of a company inability to settle it liabilities as they fall due (Tricker, and Tricker, 2015). The company result to selling the assets with an objective of settling company’s debts. Companies exist to meet shareholders objectives of maximizing their wealth. Companies get funding from shareholders equity and borrowing to fund investments and operations. Maximization of shareholder’s wealth therefore involves investments and financial decisions that ensure the company achieves its objective. Failure to make appropriate investment and financial decision lead to a situation where the company cannot recover it invested funds and cannot settle debts when they fall due (Ahmed, and Ndayisaba, 2016). The company board then resolves to liquidate the company’s asset and settle the liabilities that the company owes its creditors.
A company management is responsible to company liquidation. According to Brennan, (2016) lack of ethics and poor corporate governance lead to non compliance of conceptual frameworks of financial reporting that lead to poorly informed financial decisions. Ethics and governance influence quality and faithfulness of financial reports that are used for financial decisions making. The following report analysis three companies ABC Learning, One.Tel phone Company and HOIH Insurance cause of liquidation and discussion on how ethics and governance lead to financial stress of the companies. The report also establishes if liabilities were the major contributing factors to the companies’ liquidation.
The following section analyses ABC Learning, One.Telphoine Company and HOIH Insurance companies cause of liquidation. The discussion will use ethics and corporate governance to explain the companies’ financial stress and conclude if liabilities were the major cause of liquidation.
ABC was once the largest early childhood education provider in Australia. The company started in 1988 in Brisbane Queensland as a developmental learning center that expanded 697 centers in Australia and New Zealand. The ABC Learning purchased childcare operators in United States and acquired several educational centers in south east Asia that made the company the world largest early childhood educational provider. The company was led by Eddy Groves as the CEO to the date of being dissolved. The company was listed in ASX and traded as ABS. The company had it financial success in 2006 where it had market capitalization of A$2.5 billion. ABC was unable to service its debts in 2008 where it fell into receivership. The company’s creditors voted it liquidation in June 2010.
Liquidation of ABC Learning
ABC learning liquidation was caused by several factors. The causes gradually exploded leading to a situation where the company could not recover even after being handled to receivership. The ABC learning causes of liquation were ineffective corporate governance, aggressive growth strategy, poor decision making, over complexity, questionable accounting practices and individual abuse of power (Garvis, and Manning, 2017). These factors affected the company’s ability to make sound financial decisions. The company was unable to keep accurate financial records or report the true situation of the company’s financial performance. First, the company becomes very complex. The ABC Learning grew very fast to acquire subsidiaries in US and UK within a short duration of time. The company bought one of the largest childcare operators in US that had 467 centers. The company was able to acquire more than 120000 licenses of childcare operations that made the company the largest in childhood education services provider in the world. The financial transactions and structures become over complex (Brotchie, and Morrison, 2017). Secondly, the ABC Learning applied accounting practices that were questionable. The company financial reports did not reflect the true financial performance of the company. For instance, the company valuation was based on future expected value instead of the using historical cost or fair value to account for it assets. This practice is against accounting practices where assets cannot be valued based on expected future value (Garvis, and Manning, 2017). This led to the company overvaluing it assets of future benefits can fail to be actualized. Thirdly, the ABC Learning had ineffective corporate governance led by Eddy Groves. The ABC lacked a well system of rules, process, and practices that were supposed to control and direct it operations. The CEO was never worried by the company’s governance and company was involved in several activities that were not well evaluated to match its objectives. The ABC corporate governance failed to balance the interest of company’s stakeholders. Therefore, ABC Learning liquidation was caused by factors that undermined financial reporting.
The ABC learning financial stress can be attributed to lack of ethics and poor governance. The company financial information was false. The company was unethical to providing false information about the company’s financial health. Providing false information led to the company losing public trust. The public lost trust on the company’s education and care that had impact on the company’s customer base and shareholders. The company share value declined from $8.62 to $0.54 in the stock market. The company was then unable to access funding that led to financial stress. The ABC Learning also had poor corporate governance that led to financial stress. The company failed to be transparent, fair, and accountable. The ABC Learning governance allowed the use of unrecognized accounting practices that lead to accounting irregularities. The financial reports of ABC Learning contained unreliable facts that did not represent the financial health of the company. The company was then unable to make important and informed financial decisions that could have saved the company’s financial stress. Therefore ABC liquidation was stimulated by unethical practices and poor governance that undermined informed financial decisions.
The ABC Learning liquidation was therefore majorly caused by inability to settle its liabilities as they fell due.
The HIH Insurance was the second biggest Australia home-building market insurers. The company was started in 1968 by Michael Payne and Ray Williams. The company was acquired by British Company CE Health PLC and Ray Williams was given the role of the company CEO. The company was listed on ASX and trade name was HIH. The company entered into a merger with Winterhur insurance that made the company the second largest insurance company in Australia. The HIH insurance limited was declared for provisional liquidation in 2001 with about $5.3 billion in debts.
Liquidation of HIH Insurance
The HIH Insurance limited Liquidation was caused by fraud and embezzlement that were aimed at covering widening cracks in the company’s financial performance. The company implemented aggressive expansion strategies that destabilized the company’s financial health (Harris, 2015). The company focused on increasing its market share by entering both the US and UK markets and having more than 200 subsidiaries. The HIH Insurance subsidiaries operated in diverse insurance segments that increase the company risks. The US market was competitive and overcrowded and the company charged low prices to penetrate the market while the UK market had issues of misunderstanding the market and legal (Lane, 2016). The company also overpaid FAI acquisition by A$200million. The HIH Insurance Limited liquidation was therefore caused by under pricing, insufficient capital, reinsurance cover running out and poor risk reporting, compromised auditing and poor corporate governance.
The HIH insurance Limited liquidation causes can be attributed to lack ethics and poor governance. The company cases of fraud were as a result of unethical behaviors in the company. The company manipulated stock markets. Rodney Adler together with the CEO was dishonest and manipulated stock that aimed to fraud Pacific Eagles Equities. The company also disseminated false information that induced investors to buy shares. The company lied to media on the valuation of HIH stock value that undermined integrity and professionalism of practice (Mintz, 2018). The HIH Insurance financial stress can also be explained by poor corporate governance that undermined independence, accountability, and transparency. The Company interfered with external auditors’ independence. The HIH insurance management had a close relationship with the auditors who were former colleagues, remunerated auditors and shared the company office space and secretary. The company CEO had no defined boundaries that led to the company being governed on manager’s interests. The HIH Insurance corporate governance also lacked adequate risk management. The management made decisions with insufficient information that led poor decisions that amounted to company’s financial stress (Jones, 2016).
The HIH Insurance liquidation was as a result of inability to settle debts amounting to $5.3 billion. This shows that the company financial stress from unethical behavior and poor corporate governance led to financial stress and cumulating liabilities (Clarke, and Dean, 2014). The company was unable to settle it liabilities leading to liquidation.
One.Tel Phone Company
The One.Tel phone was the fourth biggest telecommunication company in Australia. The company was founded in 1995 by Brad Keeling and Jodee Rich. The company plan was expansion to USA and Europe market. The One.Tel increased it customers from 1000 to 100000 in a year. The company reached it financial success in 1999 when it reported a profit of $6.956 million after tax. The company was the fastest growing in late 1990. The company reported $291.1 million losses in 2000.
Liquidation of One.Tel Company
The One.Tel company liquidation was caused by several factors that undermined it financial performance. First the company lacked a solid management and oversight foundation. The company’s board structure was unable to add value. The company failed to responsibly and fairly remunerate it employees that led to inefficiency in the company (Annabi, Breton, and François, 2010). Another cause of One.Tel liquidation was lack of risk management and recognition. These factors led to poor management that compromise financial reporting and financial decision leading to liquidation of the company.
The One.Tel Company financial stress that led to liquation was as a result of poor corporate governance and unethical practices in the company. The company was led by joint maintaining CEOs and Directors. The corporate structure lacked remuneration, audit, and corporate governance committees. The structure also lacked board chair which led to a situation when the company structure failed to add value to the company performance (Jones, 2016). The company was faced with inherent risk where expenses grew while revenues were decreasing. The company operated in high risk approach that yield low returns. The company internal control structure was a failure. It had an insufficient design, lacked checks and balances, and failed to plan forward on significant contributors of the company success (Pearson, 2016). The company also had inadequate accounting systems as the company grew. This created loopholes for inaccurate financial data. The One.Tel had unethical practices and was accused of unfair remuneration and disrespect to shareholders’ rights. The company has did not safeguard the integrity of financial records and shareholders were forced to rely on board of directors or CEO opinion on financial performance. The One.Tel ended in a situation where it exceeded it overdraft limit, got financial support withdrawn, major shareholders stopped funding, and the company was unable to pay its creditors.
The One.Tel Company major cause of liquidation was withdrawal of funding that led to inability to meet its liabilities.
Companies are deemed going concern and operate to maximize shareholders wealth. A company is liquidated because it cannot meet it liabilities as they fall due. Before a company is unable to settle it debts, it experiences financial stress that emerge from unethical practices and poor governance in the company’s management. Unethical practices and poor governance undermine accurate presentation of company’s financial performance on the financial reports. This misleads company’s financial and investment decisions worsening financial stress. From the report, the ABC Learning liquation was caused by over complex and questionable accounting practices, poor governance and poor decision making in it aggressive global growth strategy. The HIH Insurance Company liquidation was stimulated by fraud and embezzlements where the management was not honest and interfered with independence of financial reporting. The One.Tel company main cause of liquidation was poor governance that involved lack a structure that could add value to the company, lacked functional internal control and lack of independent financial reporting. The company was also unethical by compromising financial information integrity, unfair remuneration, and disrespect to shareholders right. The report concludes that companies should institute effective corporate governance and adhere to ethical practices to avoid financial distress. The report concludes that companies’ liquidation is caused by poor governance and unethical practices that undermine informed financial decisions leading to financial stress and inability to meet liabilities as they fall due.
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