Discuss about the Corporate Governance Policies and Principles.
In the year 1988, ABC Learning was formed and with due passage of time, it pursued over 30 centers until the year 2000. In the year 2001, it achieved great heights and widespread across United Kingdom, Australia and United States with over 2238 centers. However, this extreme expansion and development was the key reason behind its downfall. Not only this, the company was encountering various accounting problems because it is observed that the assets and goodwill were extremely overvalued. Furthermore, various auditors that resulted in additional infringement of the issues put two varied opinions forward. From the year 2007, ABC Learning had to negotiate and finance again with its bankers when it started facing debt issues. Within a short span of time, some of the long-term loans payable by the company converted into short-term, thereby negatively affecting the company’s cash flow. Sooner, the share value of the company also diminished and as a result, the company liquidated.
OneTel considered as the fourth biggest telecommunication company in Australia. However, it also disintegrated with due passage of time because of inappropriate pricing strategies, uncontainable development, failed anticipations etc (Kruger, 2009). Furthermore, there also prevailed matters relating to failures of corporate governance practices such as financial reporting, ineffective audit and internal controls, management communication etc within the company that led to its downfall (Gilbert et. al, 2005).
Ray Williams founded HIH Insurance in the year 1968. The anticipated asset base of the company reported at $8.1 billion in the late 2000 that urged investors to believe it to be resilient and dependable. However, by the year 2001, HIH crumbled because of its debts and insurance liabilities. Actually, too much weightage on debts hampers the smooth performance of a company and the same prevailed in the case of HIH Insurance. Investigations have also stated that the company lacked appropriate interpretation and understanding in relation to relevant business risks and it acquired assets at a very high price. Furthermore, other issues like persuasion of stock markets, fraud, careless management etc also prevailed within the company. On a whole, the company disintegrated due to several immoral practices done by it (Kaplan, 2011).
ABC Learning was one of the few companies that achieved massive growth in a short period. It was the first childcare center and corporate day care in Australia whose prices of shares increased three times within five years from getting listed. The reason behind the downfall of ABC was because several macro-economic factors but the company gave prior concern to profit-making by compromising with the quality of services provided. This was one of the major reasons when the problems started accumulating within the company. Investigations state that the management and their work were not being looked after which was the key shock (Teen, 2012). Financial irregularities started occurring when the company started acquiring various businesses and the management overlooked it. Furthermore, due to high reliance on debts and irregularities in the financial information portrayed by the company, even the public neglected it. After the company’s downfall, people lost complete faith in it and viewed it with suspicion. ABC also ineffectively followed the corporate governance practices and it undertook related party transactions with a motive of advantage for Mr. Grooves (Teen, 2012). Queensland Maintenance Services had brother-in-law (Mr. Grooves) as the director and was paid a massive sum for ABC Learning Center’s maintenance. The company also provided massive sum for the Brisbane Basketball Team that was own by Mr. Grooves. Even after so many accusations, the company stated that the transactions undertaken were not for the directors or their relatives personal interest but as there was a lack of transparency because of poor practices of corporate governance, the confidence, and trust among investors deteriorated.
The business activities of HIH Insurance started on a very small level but with due passage of time, it established more than 200 subsidiaries so that its insurance activities can be covered both domestically and internationally. However, such extreme expansion and acquisition did not prove well for the company and as a result, it created many difficulties for it (Kruger, 2015).
HIH Insurance started operating in US markets because insurance activities and market is very competitive in nature and if entrants are capable of manipulating and aligning with the market shares, then it can achieve great heights (Westfield, 2003). As a result, many customers were attracted because the company initially offered lower premium amounts on its insurance activities (Brown et.al, 2006). But when the company tried to enter UK markets without prior knowledge of business risks, it encountered various legal problems. For instance, HIH Insurance acquired FAI at a cost of $300 million whose actual price was only $100 million. Furthermore, the company did not establish appropriate provisions to meet its future liabilities while it offered insurance at lower premiums. The actuary advisors of the company had also notified about the requirements of appropriate provisioning but the company neglected their advice and went for reinsurance strategy that also went wrong. Related Party Transactions took place with the external auditors of the company and bribe matters were also discovered that created generous issues on the auditor’s report.
In relation to OneTel, it can be seen that the quality of its financial reporting were extremely inappropriate because reports like trial balance, monthly reports, debtors aging etc were inappropriately checked by the appointed executives of the company. Investigations have stated that the finance director of the company had not observed the trial balances, journal, ledgers and other books of accounts of the company in an effective manner. This inefficacy clearly indicates the importance level provided by the higher authorities in relation to accounts and finance of the company. Furthermore, this also depicts the inefficiencies in the internal reporting and control activities of the company. The major reason behind the low earnings of OneTel could be justified by the usage of accrual concepts in an extreme conservative way. Moreover, the company introduced two different and relevant changes in its accounting policy. Firstly, that it did not account for its intangibles 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. Furthermore, even the report framed by the company’s auditors was inappropriate because there were several irregularities within the company and an unchartered opinion was issued. This clearly indicates of the fact that the auditors of the company provided a biased report that is against the ethical audit practices. When the financials of the company submitted to the ASC for the period 1998-1999, it was revealed that there were millions of deferred expenses and hidden losses in the company. The prevalence of customer billion and cash billing issues made the operating cash flows of the company very poor. Inappropriately priced acquisitions and extreme pricing policies also facilitated in the deviation from the goals of the company (Brown et. al, 2006).
Therefore, it is observe that ABC Learning initially emerged as a very strong company but the management was insufficient in handling the treasures of the company and as a result, it failed within a short span of five years. Although the company pursued an effective goal for growth and development, yet it failed to strengthen its base (CPA, 2012). On a whole, the financial and accounting inefficacies and variations in the government policies played a major role in the downfall of such a company that was once a ruler in the day care markets of Australia.
The various acquisitions made by HIH Insurance tried to depict its economical power and synergies but in reality, these acquisitions were of very weak corporations that significantly led to a poorer amalgamated entity. Furthermore, the supremacy of Ray Williams as the company’s CEO proved to be a big obstacle in the path of efficient corporate governance practices because his power could not be override by anyone, thereby increasing the risk of departure from the interest of the shareholders.
In relation to OneTel, is seen that the prevalence of inappropriate accounting policies and financial reporting within the company created hindrances in the company’s performance and becomes misguiding (Cook, 2001). The management took the accounting policy decisions but the company fixed its accrual percentages in such a way that it totally misguided about its situation (Fernando, 2009). The Management Discussion and Analysis made even focus on EBITDA but it also established a wrong impression on the investors’ minds. Furthermore, the financial statements of the company did not present a fair representation of its business and even the quality of audit and financial reporting were very low, thereby creating economical distress for the company (Baldwin, 2010).
Therefore, it can be seen that OneTel suffered from various significant problems such as earnings, creditors, debtors, cash balance etc, but still the management did not take appropriate initiatives to make way for transparency within the company (Heeler, 2009). As a result, the management provided an encouraging picture of the company taking into consideration the creation of several committees and EBITDA that was completely misguiding and was just for a formality.
The rules and regulations created by the government is not the only requirement that must be followed by companies. The Board of Directors of every company is morally or ethically responsible to operate in such a manner that does not hamper the society on a whole. When acquisitions and expansions are made, management must not overlook the finance, accounts, and other related provisions of the company. Even the base of the company should be very strong so that during financial pressures, it stands firm (Kruger, 2009). This is done through technical and fundamental evaluations when shares invested in the company. Furthermore, the Board of Directors are also greatly liable to give their best in maintaining high standards of corporate governance and ethics within the activities of the company so that its goodwill can be enhanced, thereby also leading to an enhancement in its shareholder value (Goodstein, 2011).
Conclusion
Effective and proper corporate governance practices are very vital for the smooth performance of a business enterprise and for its long-term development and survival in the market. This is evident from the case studies of OneTel, HIH Insurance Ltd and ABC Learning Ltd that lack of effective practices of corporate governance lead to the downfall of the companies, irrespective of the fact that these companies initially emerged as a very strong company. It must be noted that while these companies took several years to develop effectively, their downfall happened in a very short span of time. Not only did the directors disregard the relevance of effective corporate governance practices but they also did not give due prominence to regular assessment of these practices that led to a failure (Goodstein, 2011). The introduction of various procedures like voluntary self-regulatory code of effective practices and CLERP 9 have proven to be very effective in such a scenario as these mandates the Board of Directors of a company to evaluate the process in which they function.
References
Baldwin, S., 2010. Doing a content audit or inventory. Pearson Press.
Brown, J.W., Chasek, P. & Downie, D.L 2006, Global Environmental Politics, Boulder, CO:Westview Press.
Cook, T 2001, Collapse of Australia’s fourth largest telco adds to growing list of corporate failures viewed 12 September 2016, https://www.wsws.org/en/articles/2001/06/onte-j08.html
CPA 2012, ABC learning collapse case study, , viewed 12 September 2016, https://www.cpaaustralia.com.au/professional-resources/education/abc-learning-collapse-case-study.
Fernando, A C 2009, Corporate Governance Policies and Principles, Prentice Hall.
Gilbert, W. Joseph J & Terry J. E., 2005. The Use of Control Self-Assessment by Independent Auditors. The CPA Journal, 3, pp. 66-92
Goodstein, E 2011, Ethics and Economics, Economics and the Environment, Wiley
Heeler, D., 2009. Audit Principles, Risk Assessment & Effective Reporting. Pearson Press
Horngren, C., 2013. Financial accounting. Frenchs Forest, N.S.W, Pearson Australia Group.
Kaplan, R.S., 2011. Accounting scholarship that advances professional knowledge and practice. The Accounting Review, 86(2), pp. 367–383.
Kruger, C 2009, Lessons to be learnt from ABC collapse, viewed 12 September 2016, https://www.smh.com.au/business/lessons-to-be-learnt-from-abc-learnings-collapse-20090101-78f8.html
Kruger, C 2009, Numbers finally start to add up as operators go back to basics, viewed 12 September 2016, https://www.smh.com.au/business/numbers-finally-start-to-add-up-as-operators-go-back-to-basics-20110121-19zy6.html
Kruger, P., 2015, ‘Corporate goodness and shareholder wealth’, Journal of Financial economics, pp. 304-329
Manoharan, T.N., 2011, Financial Statement Fraud and Corporate Governance, The George Washington University.
Teen, M.Y., 2012, The ABC of a corporate collapse, viewed 12 September 2016, https://governanceforstakeholders.com/2012/12/28/the-abc-of-a-corporate-collapse/.
Westfield, M 2003, HIH : The Inside Story Of Australia’s Biggest Corporate Collapse, viewed 12 September 2016, https://www.smh.com.au/articles/2003/03/14/1047583693489.html
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