Liquidation refers to the process of selling up the unpledged assets of the firm or company, so that the claimants or the creditors can be repaid what is owed to them. In simpler terms, liquidation is basically putting the business to an end, when the company is unable to meet its payments as and when they fall due. It can be voluntary or compulsory depending on the events that lead to the liquidation (Alexander, 2016).
In this assignment, we will be reviewing three companies that went for liquidation and the underlying reasons behind it. In spite of being among the biggest names of the industry, the three companies failed miserably and went for liquidation.
Followed by a lot of internal faults, ABC learning went into liquidation in the year 2008. The possible reasons are as follows:
Lack Of transparency in accounts: The facts and figures stated in the books of accounts were highly manipulated, which lead to misleading results. When Ernst & Young were appointed as the new statutory auditors of the company, they informed the stakeholders that the financial statements did not represent a true and d fair view.
Transactions with related parties: Further investigation led by the auditors revealed that the volume of transactions entered into with the related parties were abnormally high. It was discovered that the CEO Mr. Groves had appointed Queensland Maintenance Services (QMS) for maintenance services of the learning centers (Arnott, et al., 2017). This QMS belonged to Frank Zullo who was the former brother in law of the CEO. The company also paid a whopping 74 million dollars to QMS for their service. Apart from this, the Company also sponsored a basketball team called ‘Brisbane Bullets’ which was owned by the CEO Groves himself.
Unsound strategic planning & expansion plans: ABC learning expanded with a terrific speed. The expansion strategies adopted by the company were mainly acquisitions and mergers. The risk analysis procedures adopted prior to these expansions were poor and were not backed by proper estimates and forecasts. The company went international by acquiring daycare and childcare facilities in New Zealand, U.S. and U.K. resultantly the company had huge loans, which even got beyond their capacity to make the repayment. To repay its accumulated debt of 1.5 million dollars, the company ultimately had to sell 60 percent of its business to Morgan Stanley (Das, 2017).
A majority of the insurance companies fail because of rapid expansion, unauthorized or unjustified delegation of duties and responsibilities underpricing and obviously mismanagement. If press reports are to be believed HIH’s management were warned by their actuarial advisor about the events that may lead to liquidation in the near future. The advisor had stated that the accounting practices adopted by the company could lead to “disastrous consequences”
HHI’s collapse was the most talked about ion the Australian economy. It was such a big corporate failure that the Liberal Federal Government had to establish a Royal Commission that would investigate the entire matter. The prime reason behind the failure was not liabilities but of issues regarding transparency and accountability. The attitude of the CEO resulted in a conservative corporate culture. The composition of the Board was not as it was supposed to be. The Board was short of independent directors. Out of the eleven members in the BOD, three were directors who were former partners of Arthur Andersen, the auditors of the company. The company failed to strike a balance between their objective of profit maximization and the adoption of corporate governance practices. It was so aggressive in its growth approach that any news that had the possibility of being perceived as bad by the stakeholders, was never made public. It was also reported that a number of fraudulent charges were imposed on the company. As a result of which, few members were also imprisoned (Farmer, 2018).
Before going for liquidation, One.Tel, with its presence in more than eight nations, was the fourth largest company in Australia in the telecommunication sector. The annual sales of the company stood at 653 million AUD, when it went for liquidation. This throws a lot of light on the fact that the reasons that lead to liquidation had nothing o very little to do with accounting figures. The main reason was a faulty corporate governance structure. This can be illustrated with the fact that the two CEOs exercised huge and undue influence on the board of directors. The intensity of this misused power was so strong, that the company never had a designated, full time chairman. Apart from these issues, another factor, that added fuel to the fire, was the low level of customer satisfaction. The customers were dissatisfied with the services of the call centers. The customers complained that they had to wait for a long period of time before they could get any help from the call centers. Cash flow was also a big problem for the company, may be, because of its sales promotion strategies of giving huge discounts and distributing free handsets to the subscribers (Jefferson, 2017).
Charges of breach of duty were also imposed on former managing directors Jodee Rich and Brad Keeling, former chairman John Greaves and chief finance official Mark Silbermann (Grenier, 2017)
Recommendation and Conclusion:
Having discussed the real reasons or events that lead to the liquidations of these three corporate giants, one thing becomes clear that the common thing between the three companies is the abuse of power or lack of corporate governance. While liabilities do play a role, it cannot be said to be the sole reason behind the corporate fall. In fact the inability of these companies to meet and repay the liabilities when they had fallen due can be clearly attributable to mismanagement; mismanagement of funds, operations and business, as a whole. In the case of ABC Learning, the company failed because of rapid expansion strategies, without being backed by proper risk analysis and planning. On the other hand, HHI Insurance failed mainly because of fraudulent practices adopted by the Directors and Management. Similarly, One.Tel phone company had a corporate death because of a corporate structure which was highly bureaucratic and dictating. Transparency, accountability and answerability were highly injured in all the___14 three companies. Had the companies had a sound and up to the mark corporate governance structure, the situation of going for liquidation wouldn’t have arose at all. The liquidation was not because of liabilities, but because of lack of corporate governance.
The APES 110 Code of Ethics is applicable to all professional accountants in Australia. This also includes members who are providing services in the form of honorarium services. The fundamental principles of the code are as follows:
Integrity: This principle requires the professional accountant to be honest with his approach in all the professional engagements. He should be straight forward in all the Business relationships that he has with other firms, companies or individuals.
Objectivity: While performing his duties, the professional accountant should be free from any sort of biasedness or conflict of interest. He should not be under the undue influence of others and should apply his own professional judgment.
Confidentiality: The professional Accountant should not disclose any information, acquired by him in the course of his professional relationship, unless mandated or required by law or statute.
Professional Competence and due care: The professional accountant should possess the requisite professional skill and knowledge required to provide competent service to his clients. He should be well versed with all the recent developments and amendments in the legislation and the recent practices and techniques in the accounting work.
Professional Behavior: This principle requires the professional accountant to abide by all the rules, regulations and statutes, governing his profession, at all times. He should not engage or do any act that brings disgrace to his profession (Sithole, et al., 2017).
The Australian public listed companies have to adhere to a myriad of rules and comply with a lot of legal requirements. The Australian Stock Exchange with a view to protect the interest of the public and to create a robust culture of corporate governance has laid down the listing rules. The corporate governance requirements of the ASX listing rules can be specifically understood by the help of the following categories.
Board Composition:
Appointment
Generally, the directors are appointed by the Board. However these appointments are valid only when an ordinary resolution is passed in the Annual general meeting following the appointment or at a meeting of the shareholders, as the situation may be (Werner, 2017). When more than two directors are proposed to be appointed at the same meeting, separate resolutions are required to be passed for each of the proposed individual.
Conflicts of interest
Any director having any material or pecuniary interest in the affairs of the company shall disclose the same by way of a notice given to all other directors. There are certain exceptions to the applicability of this rule.
Share Trading Policy
There should be a trading policy in place, which puts minimum restrictions, as laid out by the listing rules, on the trading of shares by the directors and key managerial personnel. this policy should specifically define a “closed period” during which trading should be constrained. Directors are also required to make appropriate disclosures of their share trading (Kim, et al., 2017).
Remuneration and performance
A remuneration report must accompany the director’s report for a particular financial year where certain details, as prescribed by the listing rules, shall be given out. These details are about the remuneration that was paid to each and every key managerial personnel.
Audit and risk management
ASX requires that a public listed company shall form an audit Committee that would be responsible to oversee the implementation of a system of internal audit. These members of this committee should be non-executive directors and should have the ability to understand financial statements. Moreover, the audit committee should have at least three members. There should be a clearly written document or charter where the responsibilities and duties of the members of the committee are expressly mentioned (Trieu, 2017). The audit committee shall review the risks associated with the size and nature of business and should see that the internal controls are sufficient and appropriate. They should also make recommendations for strengthening the internal controls.
Code of conduct and other stakeholders
The listing agreement gives utmost consideration to the interest of the public and investor protection. It therefore specifies the formation, drafting and implementation of a code of conduct so that the companies achieve the highest standards of fairness and ethical behavior, apart from merely complying with the regulatory obligations and standards.
Continuous Disclosure
The listing rules also mandate continuous disclosure of material events and instances, with a view to protect the interest of the shareholder’s and investors. Price sensitive information and events are to be immediately disclosed at the appropriate level of authority. The Consequences of not complying with these disclosure requirements can attract penalties as well as imprisonment for the people responsible for such noncompliance.
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.
Arnott, D., Lizama, F. & Song, Y., 2017. Patterns of business intelligence systems use in organizations. Decision Support Systems, Volume 97, pp. 58-68.
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.
Farmer, Y., 2018. Ethical Decision Making and Reputation Management in Public Relations. Journal of Media Ethics, pp. 1-12.
Grenier, J., 2017. Encouraging Professional Skepticism in the Industry Specialization Era. Journal of Business Ethics, 142(2), pp. 241-256.
Jefferson, M., 2017. Energy, Complexity and Wealth Maximization, R. Ayres. Springer, Switzerland. Technological Forecasting and Social Change, pp. 353-354.
Kim, M., Schmidgall, R. & Damitio, J., 2017. Key Managerial Accounting Skills for Lodging Industry Managers: The Third Phase of a Repeated Cross-Sectional Study. International Journal of Hospitality & Tourism Administration, , 18(1), pp. 23-40.
Sithole, S., Chandler, P., Abeysekera, I. & Paas, F., 2017. Benefits of guided self-management of attention on learning accounting. Journal of Educational Psychology, 109(2), p. 220.
Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, Volume 93, pp. 111-124.
Werner, M., 2017. Financial process mining – Accounting data structure dependent control flow inference. International Journal of Accounting Information Systems, Volume 25, pp. 57-80.
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