The report is prepared for analyzing the causes of liquidation of major Australian giants such as ABC learning, One Tel Company and HIH Insurance. All three organizations went into liquidation because of their ineffective practices of corporate governance. During the liquidation of organization, there is partial or full meeting of the claims of creditors and realization of liabilities and rights. However, the reasons associated with the liquidation are inherent to business. Report also incorporate the discussion on code of ethics and the listing requirement of listing companies concerning corporate governance.
Events that led up to the liquidation of ABC learning, HIH Insurance and One Tel phone company:
ABC learning was one of the largest early childhood education services providers operating in Australia. Exponential growth of ABC learning was spectacular and their massive downfall was attributable to internal faults within the company. ABC became a highly leveraged company due to rapid international expansion. The lack of transparency and manipulation of accounts were the fundamental flaws in the books of account along with liquidated damages contributed to the downfall of organization. Some of the actual issues experienced by ABC at stake were not considered due to excess involvement of management into the operation expansion. Therefore, the crashing of childcare giant has been due to lack of supervision, planning and proper administration (Adams and Borsellino, 2015).
Collapse of HIH Insurance is attributable to the inability of company to make payment of claims of insurance policy holders and debt. Several firms in Australia were acquired by HIH Insurance in year 1997 and 1998. It was found that the changing market conditions were mismanaged that massively increased the liabilities of HIH. It was revealed by investigation that on the total balance sheet of $ 7 billion, total amount of asset deficit over liabilities reported stood at $ 5 billion. A loss of amount $ 5.3 billion was suffered by the firm when it when into liquidation. Expansion of business of HIH Insurance increased the total amount of liabilities borne by company. Board members of HIH were imprisoned as they were found guilty of their involvement into such scandal. The reason responsible for collapse of corporate was attributable to bad management, failure of recognizing accounting abnormalities, failure of strategic team and self interest of management (Damiani, Bourne and Foo, 2015).
One Tel company was the fourth largest company incorporated on 1st may, 1995 that witnessed major corporate collapse in Australia. In early year, there was rapid growth that leads to increase in customer base. The main objective of organization was to provide customers with superior services and products for meeting their requirements. It was ascertained that organization did not comply with many of the practices of corporate governance and the collapse of One Tel was because of failure of governance that exacerbated the conditions (Haines, 2014). However, it was warned by merchant banker that company bears the risk of running out of cash. Case of One Tel is classic because of its strategic mistakes, failed expectations, and unbridled growth and wrong pricing policy.
Evaluation of liabilities as major factor contributing to liquidation of such companies:
A decline of 42% of profit was encountered by ABC learning and the expansion of business seeking increased amount of debt burden resulted in eventual collapse of such a giant education service provider in Australian market. The poor condition of stocks compelled the shareholders to sell their shares as they were trading low. Increased debt burden made it difficult for auditors to sign off the accounts. It was also ascertained that some of the accounting treated relating to intangible assets was flawed. Impairment charge and other accounting values were not truly represented in the financial statements and books of accounts (Brennan, 2016).
The acquisition of FAI by HIH Insurance was not a sound move because of the large amount of investment which is not appropriate for insurance business. Business of HIH Insurance had to incur loss of hundreds of millions of dollars because of their wrong decision of entering into funding. Their non conservative policy of accounting resulted in reporting of small positive earnings along with their discrepancies in record keeping and week internal control system. One of the significant causes of liquidation that has been identified is obtaining of heavy amount of debt. Such increased debt amount was due to the Florida natural disaster that further triggered the loss generated by HIH. A heavy loss of $ 800 million was incurred because of reinsurance, rapid diversification, complicated structure and allocation by unsupervised authority (Crockett and Ali, 2015).
Over the three years, One Tel Company generated greater amount of profit by way of deferring considerable amount of profits. There was breach in the standards and accounting policies as they were not legal. Therefore, the failure of One Tel Company is attributable to several corporate governance practices such as poor audit quality, weaker internal control system, and ineffective scrutiny by management, poor link between the firm performance and pay performance and incomplete disclosure of affairs of company.
APES Code of ethics for professional accountant:
The accounting professional and ethical standard board has issued code of ethics in the public interest that is applicable to accounting bodies of Australia and members of CPA Australia. It is required by members to comply with such ethical code. There are five fundamental principles concerning code of ethics for professional accountants that are outlined below:
Objectivity- Ethical code of objectivity requires that the business and professional judgment should not be overridden by any undue influence of other, conflict of interest along with not allowing any bias.
Integrity- Integrity requires members to be honest and straightforward in all business and professional relationships (Lessambo, 2014).
Confidentiality- The information confidentiality of entities that has been acquired as a result of business and professional relationship should be respected and therefore such information should not be disclosed to the third parties without the consent of specific or proper authority and not using such information for the personal advantage (Carnegie and O’Connell, 2014). However, such confidential information can be disclosed if there exists a professional and legal right or duty to make disclosure.
Professional competence and due care- This particular ethical code ensures that competent professional services are received by employer or client that helps in maintaining skills and professional knowledge at all levels. In addition to this, such services should be received according to professional and applicable technical standards and should be based on current developments in legislation, practice and techniques (Finney, 2017).
Professional behavior- Professional behavior requires members to avoid any activities that lead to disregarding the profession and to comply with the relevant and applicable regulations and law.
Listing rules governing listed companies in terms of corporate governance:
Listing of company make them access to public capital where they are entrusted with the responsibility to become more transparent with the shareholders. Corporate governance is regarded as the driver of company’s performance. The expectation of periodic and continuous disclosure for a listed company is higher compared to unlisted company. Te Australian securities and investment commission presents view on several aspects of corporate governance including issuing of regulatory guidance. Companies ahead of the transformation for listing need to review their areas of corporate governance and financial reporting system. The policy of corporate governance needs to be revised to comply with the post listing requirement (Phillipson, Garvis and Richards, 2018). Listed entities are required to benchmark their practices of corporate governance against the recommendation made by council. The listing entity is required to
- Lay solid foundation for insight and management- Listed entity should disclose and establish the respective responsibilities and roles for management and board along with evaluating and monitoring their performance (gov.au, 2018).
- Safeguarding of integrity in corporate reporting- There should be a rigorous and formal process adopted by listed entity that helps in safeguarding of integrity.
- Respecting security holder’s right- The rights of security holder should be respected by listed entity by providing them with appropriate facilities and information that would allow them to effectively exercise their rights.
- Managing and recognizing risk- A framework of sound risk management should be established by listed entity along with effectively reviewing the framework on periodical basis (org.au, 2018).
- Remunerating responsibly and fairly- Remuneration to director should be paid by listed entity that helps in retaining and attracting high quality directors. Executive remuneration should be designed in a way that aligns with the value creation for security holders.
- Making balanced and timely disclosure- Listed entity should make balanced and timely disclosure of all matters so that material effect is created by the reasonable person on the value and securities price (Susmelj, Agustsson and Timofte, 2017).
From the analysis of the case of three corporate giants, it can be inferred that the main reason attributable to the insolvency is their flawed practices of corporate governance. The direct collapse of HIH Insurance, One Tel Company and ABC learning constitutes of factors such as inappropriate accounting policies, poor quality of audit, misrepresentation of financial data and poor corporate governance principles and lack of ethical practices. In addition to all such identified factors, it can be concluded that increasing liabilities burden has been one of the significant contributory factors for liquidation
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