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?
Liquidation takes place when an organization decides to sell of its significant amount of assets and the inventory held by it at a discount to any other organization for cash or any other consideration. The liabilities and the rights of the third parties are met by way of paying of the amount due to them in cash either fully or partially by the liquidating company. There can be wide range of reasons for the organization being forced to liquidate itself (Hoyle et al. 2015). In the present report, an effort has been made to determine the factors that lead to the liquidation of three major player’s ion the corporate world of Australia. The entities chosen are HIGH insurance, ABC Learning and One Tel.
ABC Learning:
ABC Learning was an influential player in the educational sector of the country and lead the market often times. The company had a market capitalisation of around $2.5 Billion and was a listed entity I the Australian Stock Exchange. The downfall started when the company shifted towards the policy of managerial receivership and took huge debts and mortgages to conduct its operations. The company was engaged in the operations of more than 900 centres all across Australia and was established in the year 1988 in Queensland. For expanding its current business portfolio in the UK and the US the company took over the operations of Bees Group for a consideration of $600 million in the year 2006 (Warren et al. 2018).
HIGH Insurance:
The company was one of the biggest players in the insurance market of Australia. During the period of 1997 and 1998, the company engaged itself in the acquisition FO several entities within Australia and several other nations across the globe. The company got its listing in the Australian Stock exchange in the year 1922. However, in the year, the company decided to sell its shares to a Swiss firm and the name of the entity was changed accordingly. At the time of the liquidation of the company, it was suffering from a net loss of around $5.3 billion (Beatty and Liao 2014). Subsequent to the liquidation of the company many Board members FO the company were guilty and faced imprisonment. The downfall of the company is termed as one of the biggest downfall of a corporate entity that has been faced by the corporates in the country of Australia.
One Tel:
It was one of the most significant entities operating in the communication sector of the country. The company from the beginning had the objective of providing premium quality products and services to its customers for the purpose meeting their requirements and desires inn the most effective and the efficient manner possible. One of the most interesting fact is that prior to being liquidated the company was ranked as the fourth most significant entities operating in the communication sector of the industry. The primary focus was given by the company was on attracting the youth of the country to avail the services of the company (Martin and Roychowdhury 2015).
The accumulation of the various factors both external and internal led to the downfall of these entities. The primary reason for the downfall of these companies has been listed out below:
ABC Learning:
With respect to its operational results, the company experienced a downfall of around 42% in the profits earned by the company. The decline in the profit due to this amounted to $37.1 million. To further aggravate the woes of the company in that very year the company had availed a debt borrowing amounting to $1.8 million. This was further followed by a crash of the capital market of Australia. Some of the other reasons that worsened the situation were the collapsing o the Australians market, the inability of the auditor judge the presence of materiality of the downfall in the revenues generated by the company during that period and the sudden decline in the stock prices of the company (Martin and Roychowdhury 2015). The prices of the shares of the company experienced a decline in the value by around 43%, which led to the trading of the shares of the company at $2.15, and it was observed that the lowest price at which the shares of the company were being traded amounted to $1.15. the ever decreasing value of the shares of the company compelled the management of the company to sell the shares of the company that were worth $6 million to $20 million at a huge discounted price that amounted to $2.7 million. This resulted in the company suspending the returns generated by its operations. The reason being that the company was unable to accumulate any positive earnings for the stakeholders of the company for the year 2007 and 2008.
In the year 2008, the company had to face the situation of receivership as the debt burden of the company had become immense and the auditors of the company could not sign the annual reports of the company. In addition to that, it was found later that the treatment of the company in respect of the intangible assets of the company was incorrect. The annual report of the entity revealed that the value of the goodwill of the company, that had accrued in respect of the licenses of the company and various other intangibles of the company, were having a total value of around 2.4 billion; and in respect of such huge valuation of these assets the value of the impairment charges put on by the company amounted to just $8.4 million. This inaccurate valuation led to incorrect determination of the future cash flows of the company and the result was the downfall of around 42% in the net profits of the company. The accumulation of all these factors led to the downfall of the company (Wheeler and Cereola 2015).
HIGH Insurance:
One of the most unsound move made by the company was the acquisition of the FAI insurance. The reason it was considered an unsound move by the company was that the amount that was being involved in the transaction was huge and this led to severe operational deficiency within the organisation. The company also undertook the activities of funding various business entities and this bled the company out of hundreds of millions of dollars over the years (Cortesi et al. 2015). The impact of these decisions was father worsened by the natural disaster that occurred in Florida. The calamities that happened in Florida resulted in the heavy loss of the clients of the entity and the result was the payment of the insurance amount by the company (Lin et al. 2017). This huge sudden payment liability led to the increase in the borrowing amount of the entity. The huge borrowing is generally seen as the prime reason that led to the liquidation of the company.
For paying its staff that was, being posted in California the company made a sudden change in its accounting policy. This constituted another significant decision that led to the downfall of the company (Hurst 2017). As per the facts that were being given out by the liquidator of the company, the loss of the company amounted to $800 million during the period of last half years. The primary reasons for the same included diversification, reinsurance, the complicated structure adopted by the company and the unsupervised authority allocation entered into by the company.
One Tel:
The company ensured that it becomes capable enough to portray higher amounts of profits for the period by differing several significant business expenditure for over a period of more than 3 years. This policy adopted by the company was against the various statutory requirements and the standards that have been issued by the statute of Australia and the various guidelines of the International Financial Reporting Standards (Givoly et al. 2017). The company had to face a loss of around $291 million because of the malpractices that were being employed by it in its operations. The stock prices FO the entity even fell below $1. In the year, 2011 the director of fete company, Rodney Adler was forced to sell 5 million shares of the company for just $2.5 million. Due to the involvement of the company, around 1400 individuals lost their jobs. The prosecution against the company compelled it to pay a sum of around $92 million as no diligence or due care was exercised by it.
Ethics refers to the adoption of such policies and procedures that are being adopted by the entity for carrying out its business operations. The culture that is present within the entity plays a vital role in determining the kind and the quality of the decisions to be taken up by the management of the company. In case of the three companies the corporate culture prevalent in the entity was not, conducive to the cultivation of an ethical and moral decision making process and this ultimately resulted in the downfall of the company (Cooper 2015).
ABC Learning:
The adoption of the wrong accounting policies by the company can be attributed as the sale significant reason that led to its insolvency. The accounting policies adopted by it led directly to the adoption of the fraudulent practices within the organisation. It was also discovered that the company team members were engaging themselves in unscrupulous book keeping practices. One of the other issues was the inappropriate services provided to the government and the customers (Kwok 2017).
HIGH Insurance:
No approval was being received from the Board of Directors of the company in respect of the acquisition of the FAI insurance. The most significant action taken by the manger was that he resigned just after he received his due for the shares held by him (Trucco 2015). This is the indicator of the absence of the sound internal control within the organisation. In addition to that the decision of investing in the film industry was wrong altogether as the industry involves high amount of risk.
One Tel:
In the case of the company the breach of the principles and the guidelines issued by several accounting bodies. The overall management in respect of the operations of the entity was very faulty and this resulted in gaps within the operations of the organisation. In addition to that the management failed to give due attention to the appraisal of the investments that were of high risk in nature. Most importantly the adoption of the strategy of extremely lower price by the management (Biddle et al. 2016). The reason being that it resulted in high amount of debts for the company.
The roles and the responsibilities that were being entrusted on the management led to the insolvency along with the increase in the liability of the entity. The reason being that had the management exercised due care and diligence it could have been avoided.
ABC Learning:
It was observed that the liabilities of the company till the period of 2007 was constant or stable but the increase in the amount of both current and non-current liabilities to the tune of $1.1 billion due to the reason of refunding. The company experienced a downfall in the profits to the tune of 42% due to the increase in the liabilities of the entity and the amount of $1.2 billion by way of debt covenant because of the violation (Jaggi et al. 2016).
HIGH Insurance:
The condition of the HIGH Insurance can be related with the ABC Learning. As per the data available from the internal report of the entity there was a huge burden of insurance liability on the entity and the usage of extensive debt leverage led to the insolvency of the firm. In addition to that, the acquisition of the FAI also played a major role in its liquidation, as the amount of $300 million was huge (Bryer 2015). This amount was being paid despite the fact that the actual amount to be paid was around $100 million. This led to the generation of huge debt on the part of the company
One Tel:
In case of the company the compensation to be paid by, it that amounted to around $92 million and the resultant increase in the debt of the company led to its final downfall. The above discussions concluded that the liabilities of the entity played a major role in its downfall.
From the above it is seen that the incorrect decision making of the management FO the company led to the increase for liability of the companies and these liabilities led to the downfall of the companies (Feinstein 2017).
Conclusion:
One of the most significant factors that contributed towards this is the various inappropriate decisions taken up by the management of the company. It is expected from the management of each of the entities that are carrying out the operations within Australia adhere to ethical principles and guidelines. After this, the liability base of the entity had increased significantly over the years and this rise resulted in the downfall of the entities. It was evident that the accumulation of all these factors will lead to the downfall of the entities gradually and evidently
References:
Beatty, A. and Liao, S., 2014. Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics, 58(2-3), pp.339-383.
Biddle, G.C., Ma, M.L. and Song, F.M., 2016. Accounting conservatism and bankruptcy risk.
Bryer, R., 2015. For Marx: A critique of Jacques Richard’s ‘The dangerous dynamics of modern capitalism (From static to IFRS’futuristic accounting)’. Critical Perspectives on Accounting, 30, pp.35-43.
Cooper, C., 2015. Accounting for the fictitious: a Marxist contribution to understanding accounting’s roles in the financial crisis. Critical Perspectives on Accounting, 30, pp.63-82.
Cortesi, A., Tettamanzi, P., Scaccabarozzi, U., Spertini, I. and Castoldi, S., 2015. Advanced Financial Accounting: Financial Statement Analysis–Accounting Issues–Group Accounts. EGEA spa.
Feinstein, Z., 2017. Financial contagion and asset liquidation strategies. Operations Research Letters, 45(2), pp.109-114.
Givoly, D., Hayn, C. and Katz, S., 2017. The changing relevance of accounting information to debt holders over time. Review of Accounting Studies, 22(1), pp.64-108.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Hurst, M.S., 2017. Analysis of Financial Accounting Procedures and Applications (Doctoral dissertation, The University of Mississippi).
Jaggi, B., Allini, A., Rossi, F.M. and Caldarelli, A., 2016. Impact of accounting traditions, ownership and governance structures on financial reporting by Italian firms. Review of Pacific Basin Financial Markets and Policies, 19(01), p.1650001.
Kwok, B.K., 2017. Accounting irregularities in financial statements: A definitive guide for litigators, auditors and fraud investigators. Routledge.
Lin, S., Pfeiffer, G. and Porter, D., 2017. Accounting Standards and Financial Market Stability: An Experimental Examination. The Economic Journal, 127(605).
Martin, X. and Roychowdhury, S., 2015. Do financial market developments influence accounting practices? Credit default swaps and borrowers? reporting conservatism. Journal of Accounting and Economics, 59(1), pp.80-104.
Trucco, S., 2015. Financial accounting: development paths and alignment to management accounting in the italian context. Springer.
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.
Wheeler, S. and Cereola, S.J., 2015. Auditor scrutiny of unaudited client disclosure outlets: Recognized vs. disclosed financial statement items also appearing in the MD&A. Advances in Accounting, 31(1), pp.91-95.
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