Question:
Disuses About The Accounting Finance Analysis Ethical Report?
Liquidation can be defined as an orderly process that is meant to shut down the company operations. It is basically a process of winding up a company operation because the company is considered to be unable to pay off its debt when due. The case arises when a particular company is unable to survive in the competitive market, and the owners or the shareholders decide to go for liquidation (Biondi, and Lapsley, 2014). In this case, after the company has gone into liquidation, all the assets and properties that the company owned are sold and the funds compensated to creditors, and if there are some surplus, the shareholders are entitled to the share.
Liquidation can be classified into three types; creditors voluntarily, member voluntarily and through court. When a particular creditor seeks court direction to liquidate the company, the court may grant the creditor right to initiate the process of liquidation for the company (Owen, 2003). A creditor voluntary winding up is considered to be the liquidation process in which the company by itself decides to wind up its business operations while a voluntary member liquidation is the winding up the process when members of the company feel that there is no reason for the company to continue in its operations because of certain circumstances.
According to CPA Australia, ethics and governance are considered to be a core element of the skills and knowledge based on the contemporary professional accountants (Mills, and Marjoribanks, 2011). Diverse professional accountants should basically contain the required skills and knowledge of the content of regulatory regimes and how the governance tool is being applied. In accounting, it is significantly vital for accountants to ensure that they are performing their activities in accordance with the set rules and ethics. CPA Australia (2012), suggests that when individuals combine the social ethics and moral norms with the standard and principles of business, this aspect can be referred to as Ethics in Financial Accounting. Furthermore, Clarke, Dean, and Oliver (2003 pp. 30) emphasize the significance of governance and ethics by providing examples of World Com and Enron companies which are often important in the day to day company operations.
ABC Learning is considered to be an institution that offers early childhood education services in Brisbane, Australia and was established in 1988. The learning institution grew up steadily in its first twelve years of business then after the child care benefit introduction in FY2000, the basic demand for the child care blew up (ABC Learning Centers, 2016). During the same year, the institution grew up to be the largest health care provider in the whole of Australia and the world. The company share price increased by 300% in the market price and the company made a profit of AU$50 Million in the financial period of 2004-2005.
In FY2001, the company stocks were floated on the Australia Stock Exchange at AU$2, and by 2006, its shares had a significant increase to AU$8.60. This aspect was chiefly because of the aggressive approach that the learning institution utilized to try to a dominant benefit in the child care business (Paul, 2007). Conversely, this growth strategy initiated the learning institution to pay extra for centers purchase thus resulted to huge debts from loans and other fund advances. A combination of intricate financial reports and doubtful business decisions for expansions were the key cause of the learning institution down fall (ABC Learning Centers collapse case study, 2011).
According to this aspect, quality of education offered by the center was another cause of downfall because there were several students in the center than the number of teachers. The key issue with the ABC Learning Center was the failure of the company accounting standards such as assets treatment. When the learning institution purchased new centers, they were prized at the value of the business and premises and the cost of the childcare authorization. In FY2007, the acquired licenses were prized at AU$58.5 Million, and conversely, they were basically reported to have worth AU$700 Million under the belief that these licenses would generate more cash flow.
Another unethical aspect was that thee reported good will was valued at AU$2.8 Billion while the actual value was AU$20.2 Million when purchasing other centers (Ashley and Daniel, 2008). This huge over valuation of assets fetched several question if fair value was a correct evaluation because the child care industry was already monopolized. Failure to emphasize on the main business capability to earn revenues during its growth was another problem. Proper ethics and governance should have been employed in this particular situation so as to ensure that the company carries out its business as per the set rules and regulations. The Government of Australian set up a directive on this aspect to ASIC. (Australian Securities and Investment Commission). ABC firm claimed that these particular authorizations were of high cost but in a real sense, the licenses had no value and when investors realized the accounting malpractice done by the ABC Company, its share prices decreased.
HIH Company was the largest insurance company in Australia that basically went bankrupt in 2001 with a significant loss of approximately AU$5.3 Billion. The company was founded in 1968 that introduced several types of insurance not only locally but also globally. According to its financial statements (FY2000), the company claimed that they had reached an approximately over AU$2.5 Billion in revenues and the value of its entire assets was about AU$8 Billion. In this case, poor management was considered to be the main reason that resulted in the downfall of the company where the company portfolio of about AU$8 Billion in assets was used to offset its debt and potential claims (Matten, and Moon, 2008). The portfolio dropped to only AU$133 Million as it was basically anticipated that even 1% variation in the assets cost would basically make the firm insolvent. HIH Insurance Company liquidation of was the largest surprise collapse of any particular corporate business. In 2001, NSW law court ordered for the interim insolvency of the firm so as a proper audit of the company financial condition to determine its capability to continue in its operations.
HIH Insurance Company failure resulted in a Royal commission that was established so as to determine the main reason that led to the collapse of the insurance company. The commission found out that the company was basically not following corporate governance standards set up so as to ensure that the company operations are done in accordance to the Australian Cooperate governance (Rush, and Downie, 2016). According to the pointed out report, HIH Insurance Company directors were not performing their ultimate duties in accordance with the standard, and consequently, there was no balance check for the corporate governance model system that basically indicates how the company is going on and offering proper guidelines to the management. Because HIH Insurance Company was victimized by its management, no system could check the aspect of corporate governance model if it is working correctly or not so the management could control the condition.
In this case, the role of ethics and governance in the company was that it had a responsibility to exercise their duties and powers with the diligence and care so all the resolutions must be taken with concern and they could be agreed by any rational individual. HIH Insurance Company culture was not that good because the senior management was unable to communicate vital facts in front of the board of management. The company board was not aware of the significant facts. Since the company initiation, it has been controlled by one CEO and that no individual member in the company could basically challenge the decisions of the CEO whether good or bad decisions were made (Tim, 2015). The company was not following its sound corporate model that basically caused the company downfall.
HIH Insurance Company management performance failed to be monitored by the company boards since the panels did not carry out its duties appropriately that had no enough independence and capability to see the aspects that should be done. The aspect of transparency was also not present at HIH Insurance Company. Customers and public shareholders were deceived by the issues that HIH Insurance Company had grieved from inability after inability in the US and UK operations besides FAI purchase. The facts were also not confined to the general public because the financial statements drafted by the company were not reliable as they did not show a true picture of the company financial statements.
One Tel Phone Company was one of the largest telecommunication firm in Australia from 1995. The company operated as an Optus services reseller where Optus compensated One Tel Phone Company AU$120 for each registered and signed up sim card. During the first year of operation, the company signed up about 60,000 customers and basically posted a profit before tax of about AU$65 Million (Daniel, 2010). In the FY1997, the company floated its shares for AU$2 per stoke and a market value of AU$208 Million with this amount rising to AU$3.8 Billion in the FY2000. Conversely, the aspect of over-confidence and an unconcerned attitude towards internal control methods and corporate systems resulted in poor accounting applications particularly the treatment of bad debts that accentuated the failure of One Tel Phone Company to take profits from customers.
One Tel Phone Company downfall was as a result of its inappropriate practices in its governance. When the company collapsed, its annual sales were about AU$650 and was operating in more than seven countries. The company had severe problems in their corporate governance structure since the company CEO had a significant influence on the company and that the chairman could not control anything in its business operations. Further research indicated that the other non-executive members did not have sufficient skills and knowledge to monitor the management and thus the company collapsed because of the two most influential CEOs who made wrong decisions.
The biggest issues that led to its demise was the fast growth that the company did not adjust its internal control so as to satisfy for the increasing size (Westfield, 2015). It is apparent by the company system of billing that was designed for at least 60,000 – 70,000 clients and when the company customers grew up to about 760,000 clients, the company systems failed because of overload. The GST introduction in the FY2000 meant for more composite charging policy that was not adjusted for also led to the company down fall. Furthermore, the conducted audit demonstrated that the company one-third of accounts receivables were over 330 days old and that only 20% of the customers were actually paying while the other 80% were unaccounted for bad debts. In the end, the aspect of poor credit checking on the customers was one major factor that led to poor cash flow and thus resulted in the fall of the company.
Basically the quality of the company financial statements usually enhances the credibility and customer’s confidence (Natasha, 2012). If the company annual report is made in accordance with the set guidelines, it can bring better facts and thus the report will be reliable as it shows a true and fair view of its operations. One Tel Phone Company financial statements were no doubts that it was full or malpractices, errors and contained a lot of missing core elements. The company had significant problems in its operations, financial reporting and inappropriate composition of board members. According to One Tel Phone Company financial statement (1998), the company had four members and John Greaves, and Rodney Adler were the two non-executive board members who ensured that no one challenged their authority and power that made them being the CEOs till the end of the business (Hamilton, 2016). The company collapsed because of its poor governance among its management team.
Conclusion and recommendation
Corporate governance and ethics were the key factors that basically resulted to the liquidation of ABC Learning Company, One Tel Phone Company, and HIH Insurance Company. The report indicates how significant the firms were before collapse because of not utilizing the set rules and regulations on proper ethics and governance. With the support of this particular research, I can simply recommend to all corporate operations that they must utilize the aspect of Company Act and the country accounting standards so they can shun diverse ethical concerns and thus improving the company culture and hence attains its targets and goals
References
ABC Learning Centers. (2016). Parliament of Australia. Available at: https://www.aph.gov.au/senate/committee/eet_ctte/child_care/report/c02.htm#anc2 (Accessed on 14th September, 2016)
Ashley, N, Daniel, E. (2008). Arthur Andersen Auditors and Enron: What happened to their Texas CPA licenses?, Journal of Finance and Accountancy, viewed 5th Sep 2015, https://www.aabri.com/manuscripts/11899.pdf
Biondi, L. and Lapsley, I., (2014). “Accounting, transparency and governance: the heritage assets problem”. Qualitative Research in Accounting & Management, 11(2), pp.146-164.
Case Study of ABC Learning Centers Collapse 2011, viewed 4th Sep 2015, https://rayanbaaqeel.blogspot.com.au/2011/06/case-study-of-abc-learning-centers.html
CPA Australia, (2012) Tel.All: An insight into the One.Tel collapse, 4th September 2015
History of the Company (2003). Authenticated U.S. Government Information, viewed 3rd Sep 2015, https://www.gpo.gov/fdsys/pkg/GPO-CPRT-JCS-3-03/pdf/GPO-CPRT-JCS-3-03-1-5-2-1.pdf
Clarke, F., Dean, G. and Oliver, K. (2003). Corporate Collapse: Accounting, Regulatory and Ethical Failure. Cambridge University Press, Cambridge. https://www98.griffith.edu.au/dspace/bitstream/handle/10072/42673/74746_1.pdf
Daniel, Hurst (2010). Failed ABC Learning wound up, BusinessDay.com.au. Fairfax Media. Viewed 4th September 2015.
Hamilton Murphy (2016). https://www.hamiltonmurphy.com.au/members-voluntary-winding-up.htmlb (Accessed on 14th September, 2016
Matten, D & Moon, J. (2008). ‘Implicit’ and ‘Explicit’ CSR: a conceptual framework for a comparative understanding of corporate social responsibility’, Academy of Management Review,February, Vol. 33, No. 2
Mills, M & Marjoribanks, G. (2011). ‘The HIH legacy: corporate governance and shareholder value’,Find Law Australia, https://www.findlaw.com.au/articles/1431/the-hih-legacy-corporate-governance-and-shareholde.aspx
Natasha, B. (2012). Five-year ban slapped on ABC Learning auditor, the Australian, viewed 4th Sep 2015, https://www.theaustralian.com.au/news/nation/five-year-ban-slapped-on-abc-learning-auditor/story-e6frg6nf-1226446258458
Owen, Neville (2003). ‘HIH Royal Commission Final Report’. https://www.academia.edu/1231656/HIH_Collapse
Paul, W (2007). Lessons from the Enron Debacle: Corporate Culture Matters!, INPM, viewed 5th Sep 2015, https://www.meaning.ca/archives/archive/art_lessons-from-enron_P_Wong.htm
Paul, R. (2014), Case Study: HIH, Ethical Obligations and the Manager: Case Studies, viewed 4th Sep 2015, https://www.thomsonreuters.com.au/product/AU/files/720502412/chapter_13.2_case_studies.pdf
Rush, E and Downie, C. (2016). ABC Learning Centers. Available at: https://docs.google.com/viewer (Accessed on 14th September, 2016)
Tim, W (2015). A Report on Corporate Governance at Five Companies that Collapsed in 2001, IA research, viewed 3rd Sep 2015, https://www.law.unimelb.edu.au/files/dmfile/Report_on_Governance_at_5_Failed_Companies_0310281.pdf
Westfield, M. (2015). HIH: The Inside Story of Australia’s Biggest Corporate Collapse. John Wiley & Sons Australia, viewed 4th September 2015
Yuhao, L. (2010). The Case Analysis of the Scandal of Enron, Huntsman School of Business,
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