Financial Accounting For Goodwill And Assets In ABC Learning, HIH Insurance And OneTel

Analysis

Discuss about the Financial Accounting for The Goodwill and Assets.

ABC Learning established in the year 1988 and had over 30 centers by the year 2000. It was listed in the year 2001 after which it grew from a baby to a monster with 660 centers in Australia and 2,238 centers in Australia, United States, and United Kingdom. As per CPA (2012) the over ambitious expansion and acquisition is considered one major reason for its downfall. Apart from this, there were accounting issues as the goodwill and assets recorded were grossly overvalued. Two different opinions by different auditors further contravened the issues. Debt became a major issue from 2007 wherein ABC had to refinance and renegotiate with the bankers CPA (2012) and a few long term loans also became payable in short term that affected the cash flows and the company was finally wound up amidst all these. The value of shares started falling drastically as the question of malpractices in financial front was raised.

Ray Williams founded HIH Insurance in 1968. It has an estimated asset base of $8.1 Billion by the end of the year 2000 that made investors believe it to be a robust and reliable company. The collapse of the company in March 2001 came as a rude shock to the entire Australian community. The initial investigations led to believe that insurance liabilities and company’s debt advantage were the reasons for its failure. It is a glaring fact that reliance on debt in heavy proportion leads to difficulties and this is one of the major point in this scenario. As states by Kaplan (2011) a few highly priced acquisitions, lack of proper understanding and interpretation of the business risks are cited as the reasons. In addition to all this, there were additional issues like frauds, false reports, stock market manipulation, reckless management, greed and self dealing. The management of the business could not be done in a prudent manner and due to immense lust; it ultimately landed into grave problem. In short, the unethical practices led to serious issue whereby the business slipped.

OneTel was Australia’s fourth largest telecommunications company that collapsed due to strategic mistakes, unbridled growth, failed expectations, and wrong pricing policies. The fall of the company is also cited due to serious corporate governance failures like deficiencies in internal controls, audit quality, management communication, financial reporting, poor executive pay-to-performance links, so on, and so forth. The accounting policies and procedures were also not in line with that of its competitors.

Research

ABC was the first corporate day care and childcare center in Australia that saw a massive growth in a very short span of time. The share price increased 300% in a span of five years from listing. Hence, it witnessed a tremendous growth in a very short span of time that can be attributed to the strong growth and ability to succeed in the challenging atmosphere. Though there are many macro economic factors that can be considered responsible for the company’s failure, there was mismanagement as ABC was becoming profit minded and compromising on the quality and the lack of adequate staff which raised a lot of complaints. This was the real time when the downfall began even before the company could realize it. As stated by Teen (2012) the company was not looking after the management and the work that was the major jolt. ABC kept concentrating on acquisitions, which also led to financial irregularities that were ignored by the management. Ultimately, all these economic and financial problems arose in the wake of the global financial crisis of 2008, which sealed the fate of the company. The high debts of the company and discrepancies in the financial information provided made ABC fall in the eyes of public as advocated by Gilbert et. al (2005) when there were news about malpractices done by companies. As the companies fell, people ultimately looked at it with suspicion and led to the loss of goodwill.  There was also a lapse in the following of corporate governance rules and related party transactions were undertaken with the pretext of benefit for Mr.Grooves. Queensland Maintenance Services, which had the brother-in-law of Mr.Grooves as the Director, was paid a whopping amount for the maintenance of ABC Centers. ABC paid for the Brisbane Basketball Team as it belonged to Mr.Grooves. The fall and failure of corporate governance war he major obstacle and even projected weak risk management tools and techniques.  Despite all this, the company claimed that these transactions were not for the personal interests of the directors or their relatives who show the lack of transparency and the frauds that killed the investor confidence due to poor corporate governance.

HIH Insurance started on a small scale, is believed to have expanded rapidly with the creation of more than 200 subsidiaries in a decade to cover almost all insurance segments for both domestic and global business. This aggressive business expansion strategy landed HIH in difficulties. Insurance business and market is highly competitive. If the market player is able to adapt and control the market share then in no time it leads to a major success.  Therefore, HIH entered into US markets by offering lower premiums. This was one of the vital strategies that led to attraction of the customers. It also entered the UK Market in areas where the business risks were not completely understood by HIH, this landed them into legal issues. The acquisition of FAI for $300 Million, which was believed to be only worth $100 Million, is supposedly the most controversial bid. The under pricing and Reserves problems can also be cited as the insurance was being offered at a very low cost but there was no adequate provision made for meeting the future liabilities. It is revealed by Lapsley (2012) that the actuary advisors had warned HIH about the provisioning at least a year before its collapse, but HIH did not add further capital and its decision to opt for reinsurance was proved wrong. Hence, it did not acted according to the view of the advisors and then it led to disturbance. Cases of bribes were discovered and there were related party transactions with the external auditors that raised serious issues on the reports provided by the auditor.

HIH Insurance and its operations

At OneTel, the issues of Quality of Financial Reporting was highly flawed as the various reports like debtor’s aging, un presented cheque listing, monthly reports, trial balances, so on and so forth were not suitably verified by the designated executives. It is claimed that the Finance Director had rarely seen the journals, ledgers, trial balances or other primary or secondary books of accounts. As per Fazal (2013), it clearly shows the level of importance the senior management had given for finance, accounts, and reveals the high weakness in internal control and reporting procedures. The accrual concepts used in an overly conservative manner that led to OneTel’s low earnings. Apart from this, OneTel made two significant accounting policy changes. The first one was that the company did not account for intangibles and in the immediate next year, it changed its policy regarding deferred expenditures. Thus the profits reported in the years prior to 2000 were due to the non-conservative accounting polices chosen by the company and the sudden decision to write off a few business operations and subscriber acquisition expenses landed the company in a loss. As per Baldwin (2010), the quality of audit done was also low since the auditors issued an unqualified opinion despite lot of irregularities. It implies that the auditor did not provide a report free from influence. The submission of financial for 1998-99 to ASC revealed that the company had deferred millions of expenditure and concealed losses. The operating cash flows were in a very pitiable stage as there were cash billing problems and customer billion issues. Hoffelder (2012) states that the aggressive pricing policies and costly customer acquisition campaigns also failed to fetch the desired results. In the arena of cutthroat competition, it is difficult to tame the future with ease and flexibility.  The pricing policies were excessively high that did not lead to the desired result.

As stated by Teen (2012) day care industry has witnessed a tremendous transformation in which ABC grew up like a phoenix. As it took 20 years to grow, it took less than five years to fall. This evidences the fact that the management could not handle the fortunes of the company. Though it had a targeted vision of expansion, acquisitions, and growth, it was considered inefficient in strengthening its base. As per IFAC (2015) the accounting and financial discrepancies and the changes in government policies led to fall of the giant that once ruled Australian day care market.

Quality of Financial Reporting issues

HIH’s acquisitions tried to reveal its financial strengths and synergies like 1+1=3. However, in reality, it was acquiring weaker corporations and itself distressed, which potentially led to a weaker combined entity.  The dominance of the CEO, Ray Williams is seen as a big threat in the effective functioning of the corporate governance model as nobody could override him and the company’s risk of departing from the shareholder interests kept on increasing.

At OneTel, it can be observe that there is no stability in the selection of accounting policies and subsequent financial reporting becomes misleading. Hoffelder (2012) states that the Management Discussion and Analysis also focused on EBITDA that tends to create a wrong illusion on the minds of the investors. As per Kruger (2015) accounting policy decisions are made by the management, the accrual percentages were fixed by the company in such a way to keep it in a favorable situation irrespective of what the reality of the company might be. The financial statements did not certainly represent the true and fair view of the business. Low quality of financial reporting coupled with low quality of audit has all contributed to the financial distress. Thus, OneTel had cash balance problems, debtors, creditors, and earnings problems but not all this made transparent by the management. A rosy picture was shown to the shareholders by highlighting the EBITDA and formation of various committees for a formality.

It is highly recommended by Heeler (2009) that apart from the laws and regulations drafted by the Government, it is the moral responsibility of the Board of Directors of every company to function in an ethical and be aware of the finance, accounts, and related provisions while keeping an eye on acquisitions. It is for this reason that while investing in the shares of any company, fundamental and technical analysis is done to ensure that the base of the company is strong enough to withstand economic pressures. The Board of Directors have to give the highest importance to ethics and corporate governance which also helps in building a positive image and enhance shareholder value to a great extent and even advocated by Christensen (2011).

Conclusion

 Manoharan (2011) states that good corporate practices are essential for the long-term growth and survival of any company. The cases of ABC Learning, HIH Insurance and One Tel prove that corporate governance is much more then the tick box guidelines. Despite having robust profits, ABC Learning and others saw the downfall due to its disregard for corporate governance and ethical practices. Apart from this, the directors disregarded the importance for periodic assessment of the corporate governance practices that led to failed effectiveness. According to Cappelleto (2010) the introduction of mechanisms like CLERP 9 and voluntary self-regulatory code of practices made it mandatory for the Board of Directors to assess the way in which they are operating. Good corporate governance requires exercising of authority with absolute probity.

References

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Cappelleto, G., 2010. Challenges Facing Accounting Education in Australia. AFAANZ, Melbourne

Christensen, J., 2011. Good analytical research. European Accounting Review, 20(1), pp. 41-51

CPA 2012.  ABC learning collapse case study. [online] Available at: <https://www.cpaaustralia.com.au/professional-resources/education/abc-learning-collapse-case-study> [Accessed 5 September 2016]

Fazal, H., 2013. What is Intimidation threat in auditing? [Online] Available at <https://pakaccountants.com/what-is-intimidation-threat-in-auditing/> [Accessed 5 September 2016]

Gilbert, W. Joseph J & Terry J. E., 2005. The Use of Control Self-Assessment by Independent Auditors. The CPA Journal, 3,  pp. 66-92

Heeler, D., 2009. Audit Principles, Risk Assessment & Effective Reporting. Pearson Press

Hoffelder, K., 2012. New Audit Standard Encourages More Talking. Harvard Press.

Horngren, C., 2013. Financial accounting. Frenchs Forest, N.S.W, Pearson Australia Group.

IFAC 2015. Strengthening organizations, Advancing Economies. [online] Available at: <https://www.ifac.org/auditing-assurance/clarity-center/clarified-standards> [Accessed 5 September 2016]

Kaplan, R.S., 2011. Accounting scholarship that advances professional knowledge and practice. The Accounting Review, 86(2), pp.  367–383.

Kruger, P., 2015. Corporate goodness and shareholder wealth. Journal of Financial economics, pp. 304-329

Lapsley, I., 2012. Commentary: Financial Accountability & Management. Qualitative Research in Accounting & Management, 9(3),  pp. 291-292.

Manoharan, T.N., 2011. Financial Statement Fraud and Corporate Governance. The George Washington University.

Teen, M.Y., 2012. The ABC of a corporate collapse. [online] Available at: <https://governanceforstakeholders.com/2012/12/28/the-abc-of-a-corporate-collapse/> [Accessed 5 September 2016]