ACC701 Accounting for Managers | Led up to the Liquidation

Introduction:

ABC Learning was a company in Australia. It was the biggest operator of child care being listed publicly in the world. This company was listed on the Australian Securities Exchange and had capitalization of market of AUD2.5 billion. It recorded a profitability of net profit after tax $52.3 million on the aggregate income of $292.7 million in FY 2004/05. ABC Development Learning Centres (ABC Learning) also possessed the Brisbane Bullets (of Australian National Baseketball League) and were the big financer of the Adelaide 36ers. However ABC Company willingly dissolved in 2008 and was bought in December 2009 by GoodStart Childcare.

Analysis

Events that led up to liquidation along with the ethics and governance in financial stress:

There were a lot of criticism for ABC Learning. It was said that the huge profits were due to the money of Australian tax payers, who subsidized the use of child care by various means adopted for tax rebates. This was probably the first reason that led to the downfall of this Company. Followed by this, there were other factors that paved the way towards the winding up of the company. Further, Community Child Care Co-operative (NSW), stated that the reason behind maximum profits was because of cost-cutting, low wages to staff, etc. which led to low standard of education and awareness (Boghossian, 2017). The model of the business would not be viable due to these drawbacks. It was also said, that the reason behind high profitability was that in some areas ABC Learning by acquiring more and more child care centres, had developed monopoly for providing child care services. Further, there were instances that ABC Learning used its available wealth to meet problems for regulating child-care, thereby imposing high debt on the company. In 2006, a fine of $200 was imposed by Victorian Magistrate because of carelessness of its personnel, who did not properly looked after a 2 year old child, escaping the centre in suburban Melbourne, later been found with the help of a neighbor and taken back. Similar, incident occurred in August 2006, and a fine of $1300 been imposed for being misconduct to “Failing to Enclose” in the Fremantle Magistrates Court. In Lynwood, in Western Australia, a 3 year kid ran past a broken boundary and later a personnel located him in a nearby park (Chron, 2017). Also enquiry was made against the company by the (ASIC) Australian Securities and Investments Commission. The liquidation of the company was a very great event that had affected the overall profitability of the company and had caused immence loss to the shareholders of the company and the people who had invested in the company.

It was in the second half of 2007, that a sudden fall to $37.1 million, i.e. of 42% in gain and its incapacity to repay the debt of $1.8 billion resulted in the drop of the price of the share. Also the company’s directors were bound to dispose millions shares after collecting minimum calls. Both these affects thereafter caused the share price to fall till $2.15 after being dealt lowest of $1.15.

Were Liabilities a major factor that led to liquidation?

It is truly said that the liabilities were a major factor that led to liquidation of the company. In spite of selling off its assets, the company was handed to the official receiver in November 2008. It was because of increasing the debt service obligations that the auditors were not able to sign off the accounts. Furthermore, the company was provided $22 million by the federal government for carrying on the child-care services till the last of 2008. The company thereafter was removed from the stock exchange of S&P/ASX 200 (Standard & Poor/Australian stock exchange 200). Also the suppliers/debtors appealed to liquidate the company in 2010, June (Coate & Mitschow, 2017).

HIH Insurance

Introduction:

Being Australia’s 2nd biggest company of insurance, this company had assets of $8 billion. It was established in 1968 by Ray Williams and Michael Payne. It was bought in 1971, by British company CE Health PLC., which were afterwards moved to “CE Health International Holdings Ltd”. Later on, CE Health International Holdings Ltd”, modified its name to HIH Winterthur. HIH Winterthur (through 1997-1998) owned a large number of companies in Australia and across globe, including the Colonial Ltd General Insurance operations in New Zealand alongwith Australia. The large Australian insurance company was acquired by the HIH. The chief executive whose named was Rodney Adler was appointed the director in 1999 (Delone & Mclean, 2004).

Analysis:

Events that led up to liquidation along with the ethics and governance in financial stress:

The former director Rodney Alder had criminal charges due to an enquiry held by Australian Securities and Investments Commission (ASIC) in manipulation of stock market. Alder also strived to drive shareholders, lender, depositer, contrarian, shareowner and bondholder, to purchase by informing a reporter that he expected the price of the share of HIH was less valued and attracted a chance for a high gain. There was also an instance in November 2000, that he had interest in a company, and because of intentional dishonest act, the HIH board approved investment of $2 million in the Business Thinking Systems (BTS), and Alder did not disclose the fact that he had financial interest in that business (Anon., 2017).

It was Sydney businessmen Brad Cooper, who was punished in the Supreme court in June 2006, that a jury held him misconduct of 13 accusation, the reason having been bribed a senior official to push incorrect demands in the time before the collapse of insurer. Further, Alder also pleaded guilty of criminal accusations which included; spreading data knowing it to be incorrect, taking cash and showing ambigious declaration, inability to discharge responsibilitis in true faith and in the favour of the company’s interest (Ghofiqi, 2018).

Were Liabilities a major factor that led to liquidation?

Yes. The liabilities have a major factor that led to liquidation. With the help of compensating the assets with indebtness and probable claims of insurance against the company, the company had remaining net assets that amounted to $133 million. Also the reports of McGrath & Riddell, mentioned that a minor low shift in the value of assets can shift the balance sheet towards deficiency in net asset. It means, even a smallest movement will lead HIH Insurance company towards become insolvent. The interim liquidator, McGrath attributed the companies failure to fraud, greed, self-dealing, under pricing, false reports, reckless management, incompetence, rapid expansion, reserve problems, complex insurance arrangements, unsupervised delegation of authority. The liquidators of HIH calculated that the company failed with losses aggregating $5.3 billion. Detailed enquiry with regards to winding up of company have resulted in declaration and custody of members of HIH Management based on accusation of fraud. It is said that in the background of Australia, the failure of HIH Insurance company was the biggest corporate collapse (Iggers, 2018).

One.Tel Company

Introduction:

One-Tel Company was setup by Jodee Rich and Brad Keeling. It was an association of Australian based telecommunications companies. It became Australia’s 4^th biggest telecommunications company before failing in 2001. To trade its mobile phones and One.Net internet services, this company attempted by creating a youth oriented image. The most crucial part of the companies early success was the relationship with Optus, Australia’s 2^nd biggest telecommunications company. This agreement resulted in a profitable deal deal to the One.Tel but not for Optus. In this contract, the company needed any customer to receive a sim card inorder to achieve $120 by Optus. Gradually, it was speculated later on that this contract originated a pump and dump operation (i.e. without a long run business). Later on Optus decided to end the contract and sold its shares back at $4 million + payment of $19.75 million for cancelling the contract of $120 million.

Analysis:

The founder of this company wished to setup an organisation that the middle class people would understand. It mainly focused on residential basis. The very important day in the background of this company happened to be on 23^rd November 1999, that Lucent Technologies said it would setup and fund a European GSM Mobile network for One.Tel that would priced upto US$ 10 billion. Thereafter, the capitalization of the company’s market, achieved A$5.3 billion , by taking it to the postition of Australia’s biggest 30 companies (Iggers, 2018). The emergence of problems that led to liquidation of One.Tel Company was not a sudden action, rather it was a steady process.By the year June, 2000, the company showed a loss of $291 million. The price of the share fell less that $1. It was revealed in the Annual report that the remuneration received by Rich and Keeling, both of them earned a basic salary of $560000 + bonus of $6.9 million.

A Bank of Macquarie stated that the company had worth of $3.5 billion and thereafter the price of share became two times higher in few days.It was forcated by Merill Lync that by April, the company would run out of money. The report of the administrator, Ferrier Hodgson, appointed by the director on 29^th May 2001 mentioned that the company was bankrupt by March 2001. It then started dismissing the 1400 personnels by 8^th June 2001 (Kusolpalalert, 2018).

Were Liabilities a major factor that led to liquidation?

Yes. The liabilities played a major factor and that’s the reason this company led to liquidation. Because of the inability to pay the debts, the company had to bear downfall. There were litigation proceeding against the Jodee. On 14^th October, 2005 the Sydney Morning Herald asked to present the individual diaries of James Parker to be presented in order to assist ASIC for the proceeding against Jodee. Penalty of $92 million was imposed on Jodee Rich alongwith Mark Silbermann, on the ground that they did not exercise due skill and care and did not act in good faith. However, after a 4 year trail that lasted 232 days of hearing, it was held that ASIC was unable to justify its part opposed to the securing directors.When a company liquidates all its operatiosn are closed and the company faces a major loss and the investors losses on their share of profits and hence it is important that as much as it is possible it must be tried to not liquidate a company. A company must get enough chances and even after that it is not possible then the process of liquidation should be carried forward. Through the analysis of all the above companies we see how liquidation can affect a company and what are the necessary steps that a company can take in order to prevent it (Grundy, et al., 2017).

References

Anon., 2017. Explaining auditors’ propensity to issue going-concern opinions in Australia after the global financial crisis. Accunting and Finance, pp. Carson,E;Fargher,N;Zhang,Y;.

Boghossian, P., 2017. The Socratic method, defeasibility, and doxastic responsibility. Educational Philosophy and Theory, 50(3), pp. 244-253.

Chron, 2017. five-common-features-internal-control-system-business. [Online]
Available at: https://smallbusiness.chron.com/five-common-features-internal-control-system-business-430.html
[Accessed 07 december 2017].

Coate, C. & Mitschow, M., 2017. Luca Pacioli and the Role of Accounting and Business: Early Lessons in Social Responsibility. s.l.:s.n.

Delone, W. & Mclean, E., 2004. Measuring e-Commerce Success: Applying the DeLone & McLean Information Systems Success Model. International Journal of Electronic Commerce, 9(1).

Ghofiqi, M., 2018. FORMATION OF VIEWS AND INTERESTS TO THE ACCOUNTANTS PROFESSION IN MASTER OF ACCOUNTING STUDENTS OF JEMBER UNIVERSITY FORCE OF 2016 USING STRUCTURATION THEORY ANALYSIS. THE 3RD INTERNATIONAL CONFERENCE ON ECONOMICS, BUSINESS, AND ACCOUNTING STUDIES.

Grundy, Q., Held, F. & Bero, L., 2017. A Social Network Analysis of the Financial Links Backing Health and Fitness Apps. American Journal of Public Health.

Iggers, J., 2018. Good News, Bad News: Journalism Ethics And The Public Interest. s.l.:s.n.

Kusolpalalert, A., 2018. The relationships of financial assets in financial markets during recovery period and financial crisis. AU Journal of Management, 11(1).