The whole Australian business society was in a state of upset when they saw the crumple of HIH Insurance in March 2001. Since 1997 it was visible enough that the second biggest employer, HIH was at the border of a huge achievement according to which the company was to buy important insurance operation in Argentina, New Zealand, Switzerland, and the US. It was in the year 1999 that the company was successful in buying one of its major competitors, FAI Insurance. With this action, they also gave Rodney Alder the throne of the throne of corporate directors. HIH earned the title of a perfectly reliable and successful company with an estimated asset of $8.1 billion. But according to the internal reports, it was found that the debt power and insurance liabilities were so high that it really has the huge threat of bankruptcy. Finally, it was in 2001 that the company went defenseless against its shaky financial situations, and the Australian business society saw the biggest corporate downfall with losses of $5 billion and higher. The Australian Financial Regulators finally stood up with a series of processes that led to the downfall of HIH due to the fact that the company was only servicing its old claims and has no new business transactions onboard.
OneTel appeared to be the fourth biggest telecommunication company based in Australia. However, it failed miserably due to ineffective pricing strategies and feeble developments along with the failure of anticipations. Moreover, the company even failed in terms of corporate governance practices like financial reporting, improper audit, and weak mechanism of internal control with poor communication. All the incidents happened within the company leading to the downfall (Mock, 2013).
Similar liquidation issue was noted in the case of HIH. Going the enormous asset base of $8.1 billion in the year 2000, the investors tagged it as dependable and proper. Nevertheless, in the year 2001, the company failed to owe to the debt and insurance liabilities. It is common that too much reliance on debt burdens the company and mars the smooth performance. As per the evaluation, it is observed that the failure of the company happened due to improper interpretation and knowledge in terms of business risks (Cook, 2001). The acquisition of assets was done at a huge price. On the contrary other issues even played a major part in the downfall like weak management, fraud, etc. In short, the company failed due to the immoral and unethical practices.
Both the companies had issues concerning the point of liability. The liquidity position of both the company weakened as the liabilities grew immensely and the resources were less to meet the obligations. The same has been studied in the report below where the exact causes and a detailed explanation of the causes of liquidation have been provided.
When it comes to OneTel it can be observed that the financial reporting were highly inappropriate as there were many reports such as trial balance, reports, debtors report, etc were checked in an unprofessional manner. As per the investigation, it can be stated that the finance director failed to evaluate the trial balance, journal, ledgers, etc. Such a laggard clearly hints that the authorities were bothered regarding the functioning of the company (Teen, 2012). Moreover, such a practice portrays the ineffectiveness in terms of internal reporting and control mechanism. The chief reason for the low earning of OneTel is due to the utilization of the accrual method in a very orthodox manner (CPA, 2012). The system was outdated and failed to create an impact. Further, changes were introduced in the accounting policy. The intangibles were not accounted for and in the coming year, the policy that concerns with expenditures that are differed was altered.
Another deteriorating factor for HIH was to provide for the future claims. This was seen as the main root of all the other minor factors. It is very important for a company to have proper defining for the future claims as it is the main mode of survival. Due to this weak move, a negative shift of just 1.7% also led to the Collapse of HIH. It was seen that the major issue of the HIH downfall was the unhealthy management of the altering market circumstances. This situation led to a huge increase in the liabilities of the company as no other strategic methods were followed to suppress and control the worsening situation (Wood, 2011). It is obvious that the market will change at times and so simultaneously affect the management of the insurance companies, but records prove that most of the companies take an utter safety in following planned processes, minimizing the effect of such changes on their assets (Parker et. al, 2011). Fast take over and dominance of the company in the insurance market created the loophole for the company’s drastic exposure to threats.
As explained above, the company’s downfall was due to its large takeover. Taking into vision, the move of expanding over large scale was warmly invited by HIH, but also keeping the doors open for liabilities to grow. The company possessed the thought that the ratio of its takeover to its liabilities was almost negligible, which was not the actual case (Heeler, 2009). Seemingly, the company made no efforts to alter the extra provision as per the changes in the market. This major factor could have been controlled if attention was paid. All this clearly proves that the management of HIH was weak in nature, and had no planned checking programs to rectify whether the company’s move was in proper association with its financial conditions.
It is defined that HIH was to take more safety while taking over the market. It was necessary to have accurate plans to suppress the topic of liability with its dominance. The company was seen to enter the market against which it has minimal information and experience. Above all this, the company made no efforts to limit itself within a boundary to make provisions with the changing market (Brown et. al, 2006). All this can be seen as a simple fact of weak management and over-confidence at the time of dominatingly taking over. The situations went worse when Rodney Alder made attempts to secure stash assets aligned with false statements.
It was a golden opportunity for HIH to follow major cost-cutting programs when the increased liability was first visible. This could have provided them a chance to make up for the losses in the future. But Rodney Alder chose to fulfill the losses in a short interval by setting up false statements thinking that these statements would prove to be a boon on the future providing a stronghold to the company. All this was planned to just prevent the financial secrets from becoming public in nature. Also, Alder thought that this would take care of the situation of massive take over and would provide relief, but this plan went opposite and increased the problem aligned with a new threat (Westfield, 2003). The regulatory authorities had no idea of what was going on. This situation is very natural because when a company faces serious problems leading to its insolvency then there is a massive chance that they will cross the boundary of rules in any case. Keeping in mind all the serious situations aroused, lessons can be learned about the point of huge power allotment in the hands of Alder. It is also clear that every regulatory authority has its boundary with which they can help a company with the circumstances where the company is n the surge of insolvency and the directors are determined to follow the fraudulent path to survive in the market (Fernando, 2009). But the authority has full powers to put up punishments for Alder and others which stoop up with fraudulent ideas during the downfall, which would be an admonition for others in the market as well.
Taking the example of OnTel, it was clear that the value of the financial documents of the company was very much mishandled. Reports like trial balance, monthly reports, debtors aging, etc was not at all maintained and no security check was enrolled on them by the appointed executives of the company (Pilbeam, 2009). Analyzing the records provide evidence that the financial documents such as trial balances, journals, ledgers and other accounting books were not at all paid any heed by the managing authority of the company. This shows the level of attention that the higher authorities paid towards the most important documents of the company. The most dominating factor which led to the low earning of the OneTel Company was the accumulation or growth idea in a very conservative way (Baldwin, 2010). Above all this, the company enacted two changes in its base policy. Firstly, No accounts to be put up against its intangible assets and secondly, that immediately in the next year, the policy associated with deferred expenditures was changed. This was the major reason of the incomes being earned before the year 2000 was because of non-conservative accounting policies adopted by the company and immediately opting to write-off some of its subscriber acquisition costs and business operations resulted in its loss. Above all this, it was seen that the auditors of the company issued a fraud report without depicting the depleting financial conditions of the company (Goodstein, 2011). This unethical means followed by the auditors is punishable under any conditions. It was because of the report submitting to ASC that it was revealed that there were millions of deferred costs and hidden losses in the company as per the reports of the year 1998-1999. The pervasiveness of purchaser billion and money billing issues made the in force money flows of the company very poor. Massive pricing policy aligned with suspicious priced gains also led the company towards a deviation from the dreams of the company (Gilbert et. al, 2005).
All the above situations formed the base for the ABC Learning Company to grow in the market. But this company too had a flaw in the managing authority and so this company also saw a downfall in a short age of five years. Though the company achieved respect in the field of development and growth but was unable to keep itself stable (CPA, 2012). All the above factors prove that major flaw in government policies led to the downfall of a company which was once a kingmaker in the daily market of Australia.
ABC Learning was insolvent in the year 2007 going by the loss it bore in the year 2008. As per the financial statement draft in the year 2008, the auditor included impairment charges that amounted to $1.168 billion and a whopping $364 million loss on the majority stake disposal. The loss exceeded more than the expectations more than $1.2 million as compared to the estimates. The liabilities ran huge and the debts were written down that were owed by childcare developer. There was a huge loss and the debt created a liquidity crunch that reduced the net assets of the balance sheet from $2.22 billion in the previous year to $284.5 million that led to the major issue (Kruger, 2010). The problem ran large when the creditors as well as the administrators witnessed that ABC had 30c and 40c individually, of current assets for each dollar of current liabilities. This brings a current ratio of 0.3 and 0.4 and the report of the administrator clearly indicated in the balance sheet that a current ratio less than one is a sign of major liquidity crisis (Kruger, 2010).
Conclusion
From the above discussion, it is clear that HIH, OneTel and ABC learning lacked effective corporate governance and risk management policies were weak in nature that failed to solve the issue of liquidation. The above study clearly indicates the deficiency on the part of the management. The situation kept on worsening however, the management instead of taking any accurate step concealed the facts to present a rosy picture. The downfall of both the companies happened by dint of liquidation issues and it was imperative for the management to effectively handle such situation. The directors did not follow the corporate governance and a regular assessment was altogether missing leading to the downfall. The presence of practices like voluntary self-regulatory practices and CLERP 9 might have provided a better cushion to the company.
References
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