The Effectual Functions Of Corporation And The Implications Of Inadequate Corporate Governance

Effectual Functions of Corporation

Question:

Discuss About The Effectual Functions Corporation Normally?

Winding up that is also referred to as liquidation of the corporation is essentially related to the proceedings by which all the different dealings of the company are wound up. Essentially, rights as well as liabilities are differentiated and the claims of different creditors are resolved either entirely or are extent since it might be warranted by different assets/resources of the corporation. Again, huge number of corporations operates at particularly at the judgment of different board of directors. Again, the board of directors is also the vital part of the administration of the corporation. The decisions are normally assumed after taking into consideration interests of different shareholders as well as stakeholders of the corporation. As such, decision making is essentially the effectual tool that can help in the process of determination of the prolonged existence of the corporation since it forms the essence of survival of the corporation.

Effectual functions of any corporation are normally considered as the corporate governance of the firm. Fundamentally, the effectiveness of the overall performance of a particular corporation is founded on main principles, guidelines as well as provisions of several statutes that are existent in a country (Deegan 2013). However, failure to adhere to the principle of governance can reflect inability to stock to the principles of effective governance. Essentially, the study is founded on ascertaining the winding up of the business concerns that include ABC Learning, HIH Insurance as well as One Tel. The current study necessarily concentrates on the primary cause behind liquidation of the given corporations along with the guidelines of ethics as well as corporate governance (Williams 2014).

ABC Learning in the previous years was observed as one of the largest corporations operating in Australia and serving in the area of educational field. The business entity was listed on the Australian Stock Exchange (ASX) and has a market capitalisation of nearly AUD 2.5 billion. Nevertheless, the business concern went into professional receivership after the encountering the outcomes of the subprime mortgage crisis and the pay off of the debt in order to devastate the corporation (Weil et al. 2013). Essentially, the assessors also failed to detect the issues from the pecuniary assertions of the business entities. In particular, the corporation was established during the year 1988 and situated in Queensland. However, from the time of inception of the business entity, it was successful in introducing over and above nine hundred units across Australia as well as New Zealand by 2006 (Edwards 2013). Again, during 2006, t ABC Learning acquired the second largest provider of child care situated in the nation United States for approximately AUD 330 million along with the acquirement of Busy Bees Group that is necessarily the fifth largest supplier in the UK. Excessive acquisition policies helped the company to expand into the markets of both UK and USA with essentially a market share of approximately 1%.

Case Study: ABC Learning

One Tel is considered as a group of Australian based Telecommunication Corporation that was instituted during the year 1995 soon after deregulation of the entire Australian telecommunications segment. However, majority of the corporations are presently under the external administration by liquidators appointed by the court. However, fundamental business purpose of the corporation was essentially to put more focus on essentially the delivery of enhanced service to satisfy the needs as well as desires of the customers (Henderson et al. 2015). Essentially, One Tel attempted to institute a youth oriented representation to market the mobile phone along with the One.Net service of internet. However, prior to the fall down, the corporation One Tel became the fourth largest corporation operating in the segment of telecommunication. The unique through procedure of the corporation commenced from a very easy initiative of starting a novel mobile phone corporation. In essence, this corporation primarily concentrated on the people along with the residential market as opposed to that of the commercial business (May 2013). The business entity required the consumer or people on a regular basis to acquire accessibility to the entire group of telephone products that finally led to high marketing of the corporation.

The business concern HIH Insurance started its operations in the area of insurance and was considered as one of the major players in the insurance industry of Australia. During the year 1997 and 1998, HIH Winterthur got hold of a large number of corporations both in Australia as well as throughout the world. During the year 1992, the company HIH was listed on particularly on the Australian Stock Exchange. However, during the year 1995 the corporation sold stake to the insurer founded in Switzerland and finally altered the name of the corporation to HIH Winterthur. Primarily, this consists of the Colonial Ltd General Insurance functions both in Australia as well as New Zealand (Dutta and Patatoukas 2016).

The liquidators have approximated that the firm HIH incurred a huge amount of loss of approximately $5.3 billion. Examination of the cause of the collapse of the corporation led to both conviction as well as imprisonment of huge number of members of HIH management on numerous charges associated to fraud (Bazley et al. 2013). Essentially, the fall of HIH is considered as a large business collapse in the Australian history.

The below mentioned events have necessarily led to the liquidation of the corporation:

• Management of HIH acquired the entire business of FAI Insurance that involves more amount of investment that is risky to the insurance business. Owing to this, the corporation incurred a substantial amount of damage.
• Yet another risky incident led to the downfall of the corporation HIH was the business in financing films that eventually led to huge amount of loss of approximately over and above one hundred million dollar (Newberry and Brennan 2013)
• HIH suffered a considerable amount of financial loss at the time when the natural disaster hit the company at Florida. Essentially, this led to the occurrence of large amount of debt that again contributed to the loss of the business.
• Important cause of downfall of the HIH was the abrupt alteration in the compensation policy of workers operating in Californian segment. However, this led to the contribution of large amount of monetary loss and finally downfall of the company HIH (Carnegie and O’Connell 2014).
• The conditional liquidators have approximated that the HIH has incurred a loss of more than $800 million within a span of around six months. Essentially, this can be attributed to quicker expansion, unmonitored delegation of different authorities and intricate framework of operations (Sun and Farooque 2017).

• One Tel has been persistently reporting superior amount of profit and deferred the overall expenses over a time period of around three years. The important exercises adopted in the process of reporting financial assertions was essentially against the accounting standards along with the policies of bookkeeping
• The emergence of difficulties since the year 2000, especially at the time when the firm One Tel reported a loss of around $291 million led to the fall in the price of share below $1.
• The corporation began running out of finances by the period of April 2001. This started when the director of the company Rodney Adkler sold nearly 5 million shares for approximately $2.5 million.
• The phase of liquidation followed a declaration that required a compensation of approximately $92 million from essentially the director of the firm One Tel. This is mainly because the corporation did not exercise the available power with proper care as well as diligence.
• Yet another cause that led to the decline of the corporation One Tel is that the corporation in effect charged a certain price of essentially one seventh from essentially the customers under consideration provided that the company will recover the purchase cost in the upcoming period that essentially did not occur (Heemskerk et al. 2016).

• ABC Learning unpredictably suffered a decrease of around 42% in the profit particularly during the second half of the year 2007 that stood at $37 million. In addition to this, company’s liability to service necessarily had a debt of approximately $1.8 billion that finally triggered a decrease in the overall price of the company’s share (Tricker and Tricker 2015).
• The combined effect of fall in the share price led to the decrease of around 43%. However, during the end of the period of selling the founder of ABC Learning, the founder of the corporation ABC Learning sold the stakes worth $20 million as well as $6 million respectively for a sum of 2.7 million. Finally, this led to the trade suspension of ABC after the failure of the company to essentially release all the income during the financial period 2007 and 2008.
• Despite marketing all the assets of the corporation, the management of the firm assumed receivership particularly during the financial year 2008 that is after a massive increase in the debt servicing requirement (Sun and Farooque 2017).
• The corporation also adopted an incorrect means of accounting and registering all the intangible assets of the firm for example, goodwill. The value of the goodwill of business entity ABC Learning was recorded to be around $2.4 billion. This included valuation of licenses along with other intangible assets, however only charged for the impairment at $8.4 million. Consequently, the amount of cash flow in the future period that was considered for appropriate valuation of company’s intangibles were essentially discovered to be incorrect that eventually led to loss of gains by nearly 42%.

HIH:

• The company got hold of FAI Insurance without gaining approval from the board and immediately Winterthur disposed all the shares and resigned from position. Thus, it can be hereby inferred that HIH suffered from poor corporate governance
• The company made poor decisions of entering into risky ventures that included financing of films, administration of marine and natural disaster (Carnegie and O’Connell 2014)
• The company failed to provide adequate consideration towards their functions and it was observed that there was a constant alteration in the managerial position. This can be considered as an ethical issue that led to the downfall of the corporation.
• There were charges of inappropriate management of the corporation that referred to issuance of erroneous prospectus and overstatement of gains in the financial assertions during the year 1998 and 1999 (Tricker and Tricker 2015). 

One Tel:

• Company violated rules as well as regulations of accounting that in turn affected the compliance ethics
• The management of the corporation failed to detect and analyse the financial health and ignored areas of investment that contained higher level of risk
• Failure to adopt strong pricing policy by the directors that directed towards decrease in earnings and dearth of liquidity can be regarded as one of the main reasons for liquidation of then firm (Tricker and Tricker 2015). 

ABC Learning:

• Adoption of inappropriate accounting strategies that directed the way towards fraudulent accounting exercises can be regarded as one of the main reasons for liquidation  
• Yet another ethical issue that led to liquidation of the firm was connected to delivering of service to specific consumers. Essentially, both the customers as well as governing bodies concerned regarding delivery of service sued against the corporation (Tricker and Tricker 2015). 

Based on the above discussion it can be said that the weak corporate forms lead to losses of the corporation. It is not only the monetary facets that contributed to the overall liquidation of the corporation but also ethical factors for instance, inappropriate management exercises that have led to the ruin of the firm. Essentially, it is supposed that there needs to be suitable management exercises that can help the serving the interests of all the stakeholders of the firm.

Conclusion

In conclusion, it can be said that the primary cause of liquidation of the above mentioned corporations was essentially inadequate corporate governance as well as erroneous detection of risk in expansion of business. However, these corporations have been unsuccessful in adopting both true as well as fair accounting exercises for locating specific areas of risk and comprehending financial position. Thus, hereafter, business entities need to strive to serve the interests of all their stakeholders.

References

Bazley, M., Hancock, P., Fisher, C., Lovell, A., Berk, J., DeMarzo, P., Berk, J. and DeMarzo, P., 2013. Financial Accounting: An Integrated. Thomson Pty Ltd, South Melbourne.

Carnegie, G.D. and O’Connell, B.T., 2014. A longitudinal study of the interplay of corporate collapse, accounting failure and governance change in Australia: Early 1890s to early 2000s. Critical Perspectives on Accounting, 25(6), pp.446-468.

Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.

Dutta, S. and Patatoukas, P.N., 2016. Identifying Conditional Conservatism in Financial Accounting Data: Theory and Evidence. The Accounting Review.

Heemskerk, E.M., Fennema, M. and Carroll, W.K., 2016. The global corporate elite after the financial crisis: evidence from the transnational network of interlocking directorates. Global Networks, 16(1), pp.68-88.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

May, G.O., 2013. Financial accounting. Read Books Ltd.

Newberry, S. and Brennan, D., 2013. The marketisation of early childhood education and care (ECEC) in Australia: A structured response. Financial Accountability & Management, 29(3), pp.227-245.

Sun, L. and Farooque, O.A., 2017. An Exploratory Analysis of Earnings Management Before and after the Governance and Disclosure Regulatory Changes in Australia and New Zealand.

Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.

Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning.

Williams, J., 2014. Financial accounting. McGraw-Hill Higher Education.